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On the Welfare Gains of Price Dispersion

Authors

  • RICHARD DUTU,

  • BENOIT JULIEN,

  • IAN KING


  • We thank an editor and two anonymous referees for very helful suggestions. We also would like to thank Nejat Anbarci, Mark Holmes, Stella Huangfu, Timothy Kam, Philip McCann, Guillaume Rocheteau, Pasquale Sgro, Ching-jen Sun, Xueli Tang, John Tressler, Mehmet Ulubasoglu, Chris Waller, Liang Wang, and Randall Wright for very helpful discussions. We also thank the seminar participants at the Econometric Society, the Federal Reserve Bank of Cleveland, the Society for Advancement of Economic Theory Meeting, the Canadian Economics Association Meeting, the Workshop on Macroeconomic Dynamics in Melbourne, Georgetown University, the Bank of Canada, Deakin University, the University of New South Wales, and the universities of Cergy-Pontoise, Melbourne, Paris X-Nanterre, Sydney, and Victoria in Wellington.

  • Richard Dutuis at World Bank and Deakin University (E-mail: rdutu@deakin.edu.au). Benoit Julienis at University of New South Wales (Email: benoit.julien@unsw.edu.au). Ian Kingis at University of Melbourne (Email:ipking@unimelb.edu.au).

Abstract

Can price dispersion be associated with higher levels of welfare? To answer we compare two economies that differ only in the way prices are formed. In the first, sellers post a unique price–quantity pair, with no price dispersion. In the second, sellers post a quantity only and let prices be determined ex post by realized demand, resulting in price dispersion. We show that while agents trade lower quantities when prices are dispersed (an intensive margin effect), they also trade more often (an extensive margin effect). At low inflation, the extensive margin dominates making agents better off with price dispersion.

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