competition and the number of firms in a market are duopolies more competitive than atomistic markets this paper uses a variant of the standard search model to examine market equilibrium and the consequences for market equilibrium of an increase in the number of firms if marginal search costs increase with the number of searches then the demand curve facing any firm will be kinked with the elasticity of demand with respect to price decreases being less than with respect to price increases prices may not change in response to changes in marginal costs as the number of firms increases the maximum price that is consistent with equilibrium increases to the monopoly price but the minimum price decreases on the other hand if marginal search costs decrease with the number of searches equilibrium if it exists is characterized by a

consumer search incomplete exchange rate pass through and optimal interest rate policy this paper studies utility maximizing monetary policy in a two country economy with consumer search frictions search frictions provide a microfoundation for incomplete exchange rate pass through and international deviations from the law of one price lop i show that optimal interest rate policy targets deviations from the lop and acts to mitigate the effect of search frictions in a quantitative setting with internationally correlated technology and preference shocks optimal policy generates positive cross country correlation of nominal interest rates

a theory of sticky rents search and bargaining with incomplete information abstract this paper offers the first theoretical explanation of housing rent stickiness and differential stickiness by housing structure type key features of rental markets worldwide previous theoretical work on the subject is sparse and explains why some landlords charge below market rents not stickiness apart from its interest for understanding housing markets and overall inflation rent stickiness is intriguing because it shows that stickiness can emerge in markets where the typical menu cost logic does not apply and where market participants typically engage in repeated bargaining over contracts our model involves search and bargaining with incomplete information in a two period game and generates stickiness in a novel manner the key decision is the landlord s choice of whether to renegotiate or not crucially landlords do not know tenant perceptions of unit quality the key force generating stickiness is that offering the identical contract preempts tenant search thus limiting tenants outside options and resolves uncertainty early risk aversion reinforces this mechanism and yields differential stickiness by landlord type renegotiation risk for large landlords disappears because the different outcomes rent increase rent decrease and vacancy average out landlords who manage only one unit loathe vacancy and are highly motivated to avoid renegotiation

equilibrium price dispersion with sequential search abstract the paper studies equilibrium pricing in a product market for an indivisible good where buyers search for sellers buyers search sequentially for sellers but do not meet every seller with the same probability specifically a fraction of the buyers meetings lead to one particular large seller while the remaining meetings lead to one of a continuum of small sellers in this environment the small sellers would like to set a price that makes the buyers indifferent between purchasing the good and searching for another seller the large seller would like to price the small sellers out of the market by posting a price that is low enough to induce buyers not to purchase from the small sellers these incentives give rise to a game of cat and mouse whose only equilibrium involves mixed strategies for both the large and the small sellers the fact that the small sellers play mixed strategies implies that there is price dispersion the fact that the large seller plays mixed strategies implies that prices and allocations vary over time we show that the fraction of the gains from trade accruing to the buyers is positive and nonmonotonic in the degree of market power of the large seller as long as the large seller has some positive but incomplete market power the fraction of the gains from trade accruing to the buyers depends in a natural way on the extent of search frictions

job search with bidder memories this paper revisits the no recall assumption in job search models with take it or leave it offers workers who can recall previously encountered potential employers in order to engage them in bertrand bidding have a distinct advantage over workers without such attachments firms account for this difference when hiring a worker when a worker first meets a firm the firm offers the worker a sufficient share of the match rents to avoid a bidding war in the future the pair share the gains to trade in this case the diamond paradox no longer holds

competitive search equilibrium in this paper i construct an equilibrium for markets with frictions which is competitive in the sense that all agents are price takers and maximize utility subject to a set of market parameters i show that the equilibrium allocation is socially optimal i also show how the competitive search equilibrium can be achieved if employers with vacancies can advertise publicly the wages they pay

price dispersion and the border effect abstract cross country price differences could reflect regional market segmentation within countries or national segmentation at the border in a search based model of price setting identifying national versus regional segmentation requires data on regional trade flows a calibration to u s and canadian data implies predominantly regional frictions u s producers are three times more likely to sell in their home region than another u s region and canadian producers are seven times more likely to sell in their home region than another canadian region frictions vis a vis foreign regions are only slightly higher models that ignore regional segmentation can misstate the severity of frictions at the border

intra firm bargaining under non binding contracts we present a new methodology for studying the problem of intra firm bargaining based on the notion that contracts cannot commit the firm and its agents to wages and employment we develop and analyse a general non cooperative multilateral bargaining framework between the firm and its employees and consider outcomes which are immune to renegotiations by any party equilibrium firm profits are characterizable as both a weighted average of a neo classical non bargaining firm s profits and a generalization of shapley value for a corresponding cooperative game furthermore the resulting payoffs induce economically significant distortions in the firm s input and organizational design decisions

an equilibrium model of search unemployment this paper develops a simple general equilibrium model with sequential search in which a nondegenerate wage offer distribution is endogenously determined we use this model to analyze the comparati

the morphology of price dispersion this paper is a study of the shape and structure of the distribution of prices at which an identical good is sold in a given market and time period we find that the typical price distribution is symmetric and leptokurtic with a standard deviation between 19 and 36 only 10 of the variance of prices is due to variation in the expensiveness of the stores at which a good is sold while the remaining 90 is due in approximately equal parts to differences in the average price of a good across equally expensive stores and to differences in the price of a good across transactions at the same store we show that the distribution of prices that households pay for the same bundle of goods is approximately normal with a standard deviation between 9 and 14 half of this dispersion is due to differences in the expensiveness of the stores where households shop while the other half is mostly due to differences in households choices of which goods to purchase at which stores we find that households with fewer employed members pay lower prices and do so by visiting a larger number of stores rather than by shopping more frequently

optimal timing of decisions a general theory based on continuation values abstract by extending a methodology dating back to jovanovic 1982 we develop a comprehensive theory of optimal timing of decisions based on continuation value functions and operators that act on them rewards can be bounded or unbounded one advantage of this approach over standard bellman methods is that continuation value functions are smoother than value functions another is that for a range of problems the continuation value function exists in a lower dimensional space than the value function we exploit these advantages to obtain a range of new results on optimality optimal behavior and efficient computation

equilibrium price distributions equilibrium price distributions for a homogeneous product consistent with individual incentives are investigated they arise in informationally imperfect markets in which the only primitive datum is the distribution of search costs it is shown that single multi and continuous price distributions are all viable long run phenomena depending on the nature of search costs a method for computing equilibrium price distributions is also provided jevons law of one price has long been an accepted dictum in economic theory in a classroom presentation it still serves sometimes implicitly as a major premise in many micro models of market interaction much of the descriptive theory as well as welfare analysis hinges on this assumption yet one s day to day experience reveals that price differentials are a viable phenomenon and that looking for lower prices may very well be a rewarding activity the prospects of eventually hitting a bargain and the resulting price reduction would more than compensate for the cost incurred during the search process moreover the existence of price dispersions appear to be an empirically stable phenomenon snapshots of markets for relatively homogeneous products reveal substantial and recurring price differentials stigler 1961 and pratt wise and zeckhauser 1979 for example report some evidence supporting this claim an important article by stigler 1961 focused economists attention on the crucial role played by the informational structure of markets it gave rise to the study of the

will affirmative action policies eliminate negative stereotypes a key question concerning affirmative action is whether the labor market gains it brings to minorities can continue without it becoming a permanent fixture in the labor market the authors argue that this depends on how the policy affects employers beliefs about the productivity of minority workers they study the joint determination of employer beliefs and worker productivity in a model of statistical discrimination in job assignments the authors prove that even when identifiable groups are equally endowed ex ante affirmative action can bring about a situation in which employers correctly perceive the groups to be unequally productive ex post copyright 1993 by american economic association

oligopolistic pricing with sequential consumer search n identical stores compete by choosing prices for a homogeneous good with constant marginal costs consumers search sequentially with perfect recall for the lowest price one class of consumers called shoppers have zero search costs while all other consumers have a positive search cost c there is a unique symmetric nash equilibrium price distribution with the property that it changes smoothly from marginal cost pricing when all consumers are shoppers and or c 0 and monopoly pricing when no consumers are shoppers remarkably as the number of stores increases the nash equilibrium becomes more monopolistic copyright 1989 by american economic association

declining reservation wages and learning empirical studies of job search strongly suggest that the reservation wages of unemployed job seeking individuals decline with the length of their respective unemployment spells previous explanations of this behaviour based on age effects liquidity constraints and limited unemployment benefits are not adequate we provide a new answer to this question based on the reasonable assumption that workers do not have precise knowledge of the distribution of the prevailing wages an individual model of job search and learning is formulated it is shown that the declining trend of reservation wages naturally arises due to the selection process when search costs are not too small the example of a normal wage offer distribution is analysed and the implications are discussed

corporate transparency cream skimming and fdi abstract we develop a simple information based model of foreign direct investment fdi flows on the one hand the relative abundance of intangible capital in specialized industries in the source countries which presumably generates expertise in screening investment projects in the host countries enhances fdi flows on the other hand host country relative corporate transparency diminishes the value of this expertise thereby reducing the flow of fdi the model also demonstrates that the gains for the host country from fdi over foreign portfolio investment fpi are reflected in a more efficient size of the stock of domestic capital and its allocation across firms these gains are shown to depend crucially and positively on the degree of competition among fdi investors we provide also some evidence on the effects of corporate transparency indicators such as accounting standards on bilateral fdi flows from a panel of 24 oecd countries over the period of 1981 1998

equilibrium price dispersion in retail markets for prescription drugs this study seeks to establish the empirical importance of price dispersion due to costly consumer search by examining retail prices for prescription drugs posted prices in two geographically distinct markets are shown to vary considerably across pharmacies within the same market even after one controls for variation due to pharmacy differences pharmacy heterogeneity accounts for at most one third of the observed price dispersion the empirical analysis hinges on the observation that consumers incentives to price shop depend on characteristics of the drug therapy cross sectional patterns in price distributions across drugs are consistent with the predictions of a search model prices for repeatedly purchased prescriptions for which the expected benefits of search are highest exhibit significant reductions in both dispersion and price cost margins

a pecking order of capital inflows and international tax principles abstract even though financial markets today show a high degree of integration the world capital market is still far from the textbook story of high capital mobility the purpose of this paper is to highlight key sources of market failure in the context of international capital flows and to provide guidelines for efficient tax structure in the presence of capital market imperfections the analysis distinguishes three types of international capital flows foreign portfolio debt investment foreign portfolio equity investment and foreign direct investment the paper emphasizes the efficiency of a non uniform tax treatment of the various vehicles of international capital flows

search price setting and inflation a model of monopolistic competition in an inflationary environment is developed which embodies optimal sequential search price dynamics and entry on the part of consumers and firms respectively equilibrium price strategies are s s these bounds increase continuously with consumer search costs and so does price dispersion indeed the whole equilibrium varies smoothly from the competitive bertrand to the monopolistic diamond 1971 end of the spectrum the latter s paradoxical result is explained as a limiting case where frictions on firms side of the market price adjustment costs but not on buyers search costs tend to zero a positive relationship between smooth and perfectly anticipated inflation and price dispersion or uncertainty is established

a general equilibrium model of statistical discrimination we study a general equilibrium model with endogenous human capital formation in which ex ante identical groups may be treated asymmetrically in equilibrium the interaction between an informational externality and general equilibrium effects creates incentives for groups to specialize discrimination may arise even if the corresponding model with a single group has a unique equilibrium the dominant group gains from discrimination rationalizing why a majority may be reluctant to eliminate discrimination the model is also consistent with reverse discrimination as a remedy against discrimination since it may be necessary to decrease the welfare of the dominant group to achieve parity

brand extension as informational leverage the marketing literature refers to the concept of brand capital and provides empirical evidence that firms with a large stock of well established brands have an advantage in introducing new products this paper develops a theory of brand extension as a mechanism for informational leverage in which a firm leverages off a good s reputation in one market to alleviate the problem of informational asymmetry encountered in other markets it is shown that brand extension helps a multi product monopolist introduce a new experience good with less price distortion thus the paper provides a theoretical foundation for the concept of brand capital

pricing and matching with frictions suppose that n buyers each want one unit and m sellers each have one or more units of a good sellers post prices and then buyers choose sellers in symmetric equilibrium similar sellers all post one price and buyers randomize hence more or fewer buyers may arrive than a seller can accommodate we call this frictions we solve for prices and the endogenous matching function for finite n and m and consider the limit as n and m grow the matching function displays decreasing returns but converges to constant returns we argue that the standard matching function in the literature is misspecified and discuss implications for the beveridge curve

the q s s pricing rule we introduce menu costs in the search theoretic model of imperfect competition of burdett and judd when menu costs are not too large the equilibrium is such that sellers follow a q s s pricing rule according to the rule a seller lets inflation erode the real value of its nominal price until it reaches some point s then the seller pays the menu cost and resets the real value of its nominal price to a point randomly drawn from a distribution with support s q where s s q a q s s equilibrium differs with respect to a standard s s equilibrium 1 in a q s s equilibrium sellers sometimes keep their nominal price constant to avoid paying the menu cost other times because they are indifferent to changes in the real value of their price an exploratory calibration reveals that menu costs account less than half of the observed duration of nominal prices 2 in a q s s equilibrium higher inflation leads to higher real prices as sellers pass onto buyers the cost of more frequent price adjustments and to lower welfare

alternative theories of wage dispersion abstract we analyze labor market models where the law of one price fails i e models with equilibrium wage dispersion we begin considering ex ante heterogeneous workers but highlight a problem with this approach if search is costly the market shuts down we then assume homogeneous workers but ex post heterogeneous matches this model is robust to search costs and delivers equilibrium wage dispersion however we prove that the law of two prices holds equilibrium implies at most two wages we explore other models including one combining ex ante and ex post heterogeneity which is robust and delivers more realistic wage dispersion

lending booms sharp reversals and real exchange rate dynamics abstract emerging markets in the 1990s experienced periods of booms followed by collapses in gross domestic product consumption traded and non traded sector output and real exchange rate movements alongside unprecedented movements in foreign investor participation in these economies an important feature of these episodes is the asymmetry in the pattern of booms and collapses we introduce a natural search friction into the foreign investment decision in a small open economy and demonstrate that this can generate the asymmetry observed in the data the magnitude of the reversals predicted by the model can be quantitatively large and empirically relevant

self confirming price dispersion in monetary economies abstract in a monetary economy we show that price dispersion arises as an equilibrium outcome without the need for costly simultaneous search or any heterogeneity in preferences production costs or search technologies a distribution of money holdings among buyers makes sellers indifferent across a set of posted prices leading to a non degenerate price distribution this price distribution in turn makes buyers indifferent across a range of money balances rationalizing the non degenerate distribution of money holdings we completely characterize the distribution of posted prices and money holdings in any equilibrium equilibria with price dispersion admit higher maximum prices than observed in any single price equilibrium and feature an increasing density of prices in contrast to existing theories price dispersion reduces welfare by creating mismatch between posted prices and money balances inflation exacerbates this welfare loss by shifting the distribution towards higher prices

price dispersion and demand uncertainty evidence from u s scanner data i use the prescott 1975 hotels model to explain variations in price dispersion across items sold by supermarkets in chicago the effect of demand uncertainty on price dispersion is highly significant and quantitatively important my estimates suggest that more than 40 of the cross sectional standard deviation of log prices is due to demand uncertainty i also find that price dispersion measures are negatively correlated with the average price but are not negatively correlated with the revenues from selling the good across stores and weeks and with the number of stores that sell the good temporary sales are modeled as a reaction to unwanted inventories that are accumulated when the realization of demand is low the effect of demand uncertainty on the frequency of temporary sales is also highly significant and quantitatively important items with more demand uncertainty tend to accumulate unwanted inventories more often and tend to have temporary sales more often

price setting price dispersion and the value of money or the law of two prices abstract we study models combining search money price posting and preference shocks we show how these features interact to influence the price level and price dispersion first price posting equilibria exist with valued fiat currency second although both are possible price dispersion is more common than a single price third we prove that generically there cannot be more than two prices we provide intuition for this law of two prices show it also holds in some nonmonetary search models and discuss variations of the assumptions under which it may not hold

wage differentials employer size and unemployment the unique equilibrium solution to a game in which a continuum of individual employers choose permanent wage offers and a continuum of workers search by sequentially sampling from the set of offers is characterized wage dispersion is a robust outcome provided that workers search while employed as well as when unemployed the unique nondegenerate equilibrium distribution of wage offers is constructed for three cases 1 identical workers and employers 2 identical employers and an atomless distribution of worker supply prices and 3 identical workers and an atomless distribution of job productivities copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association