DP10456 Asymmetric Price Effects of Competition
In markets where price dispersion is prevalent the relevant question is not what happens to the
price when the number of firms changes but, instead, what happens to the whole distribution of
equilibrium prices. Using data from the gasoline market in the Netherlands, we find, first, that
markets with a given number of competitors have price distributions that first-order stochastically
dominate the corresponding price distributions in markets with one more firm. Second, the
competitive response varies along the price distribution and is stronger at prices in the medium
to upper part of the distribution. Finally, simulations of the consumer gains from competition
reveal that they depend on how well informed consumers are and would be larger for relatively
attentive consumers. A generalisation of Varian's (1980) model allowing for richer heterogeneity
in consumer price information along the lines of Burdett and Judd's (1983) model can account
for these empirical patterns.
