TY - JOUR
T1 - Price dispersion and increasing returns to scale
AU - Levy, David M.
AU - Makowsky, Michael D.
N1 - Funding Information:
The authors thank Sandra Peart, Steven Durlauf, Yew-Kwang Ng, Omar Al-Ubaydli, participants from the Society for Economic Science with Heterogeneous Interacting Agents 2007 meeting, and two anonymous referees for helpful comments. Levy thanks the Pierre F. and Enid Goodrich Foundation and Makowsky thanks the Earhart foundation for its generous funding.
Copyright:
Copyright 2010 Elsevier B.V., All rights reserved.
PY - 2010/3
Y1 - 2010/3
N2 - We present a model in which price dispersion allows the market to remain competitive in the long run amidst increasing returns to scale. The model hinges upon turnover in the productive technology-leading firm, price dispersion resultant of Stigler's logic of rational search, and limited excludability of knowledge. Price dispersion, traditionally viewed as an efficiency loss derivative of imperfect information in the market protects competition from being destroyed by innovation and increasing returns to scale. Bankruptcy occurs in a form similar to the gambler's ruin. The model requires no entry or replacement of failed firms. The number of active firms in a market reaches a stationary state increasing with, and contingent on, search costs.
AB - We present a model in which price dispersion allows the market to remain competitive in the long run amidst increasing returns to scale. The model hinges upon turnover in the productive technology-leading firm, price dispersion resultant of Stigler's logic of rational search, and limited excludability of knowledge. Price dispersion, traditionally viewed as an efficiency loss derivative of imperfect information in the market protects competition from being destroyed by innovation and increasing returns to scale. Bankruptcy occurs in a form similar to the gambler's ruin. The model requires no entry or replacement of failed firms. The number of active firms in a market reaches a stationary state increasing with, and contingent on, search costs.
KW - Increasing returns to scale
KW - Price dispersion
KW - Search
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U2 - 10.1016/j.jebo.2009.10.004
DO - 10.1016/j.jebo.2009.10.004
M3 - Article
AN - SCOPUS:77249104441
SN - 0167-2681
VL - 73
SP - 406
EP - 417
JO - Journal of Economic Behavior and Organization
JF - Journal of Economic Behavior and Organization
IS - 3
ER -