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Economic Brief

July 2015, No. 15-07

Buyers' Ability and Willingness to Shop Around: An Explanation for Price Dispersion

Karl Rhodes and Nicholas Trachter

For many years, economists have observed substantial and pervasive price dispersion — wide variations in price for the same product. Some economists have attributed price dispersion to "ignorance in the market," a lack of information among buyers and sellers. More recently, economists at the Richmond Fed and the University of Pennsylvania have developed a model that combines price dispersion theory with intertemporal price discrimination theory to suggest that buyers' differing ability and willingness to shop around might explain price dispersion.

Additional Resources

Burdett, Kenneth, and Kenneth L. Judd, "Equilibrium Price Dispersion," Econometrica, July 1983, vol. 51, no. 4, pp. 955-969.

Kaplan, Greg, and Guido Menzio, "The Morphology of Price Dispersion," National Bureau of Economic Research Working Paper No. 19877, January 2014.

Menzio, Guido, and Nicholas Trachter, "Equilibrium Price Dispersion Across and Within Stores," Federal Reserve Bank of Richmond Working Paper No. 15-01, January 2015.

Pesendorfer, Martin, "Retail Sales. A Study of Pricing Behavior in Supermarkets," Journal of Business, January 2002, vol. 75, no. 1, pp. 33-66. (A previous version is available online.)

Stigler, George J., "The Economics of Information," Journal of Political Economy,” June 1961, vol. 69, no. 3, pp. 213-225.

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