On asymmetric Bertrand duopoly with price uncertainty

• Published date: 01 December 2016
• Author: Maciej Łatek,Bogumił Kamiński
• DOI: http://doi.org/10.1111/ijet.12097
• Date: 01 December 2016

doi: 10.1111/ijet.12097

On asymmetric Bertrand duopoly with price uncertainty

Bogumił Kami´

nski∗and Maciej Łatek†

We examine a market where consumers are compelled to rely on noisy price signals to choose

among homogeneous products. The noise originates from price uncertainty due, for example,

to an unknown currency exchange rate used in a transaction, or demand uncertainty due to

consumers’ not being sure of the structure of their future demand. Standard theoretical models

and empirical research of markets with noisy prices show that they are detrimental to consumers’

welfare. This paper identifies conditions under which opposite results can be obtained. In par-

ticular, it shows that in a market with a cost leader moderate noise levels can be beneficial to

consumers’ welfare.

Key wor ds noisy pricing, Bertrand oligopoly, cost leader

JEL classification C72, D43, L13

Accepted 10 March2015

1 Introduction

As an empirical phenomenon persistent price dispersion for homogeneous goods contradicts text-

book microeconomic theory. Some markets thick with dozens of firms offering similar goods do not

converge to one price. For example, Thompson and Thompson (2006) present evidence for unex-

plained variation in prices and super-marginal profits for web hosting companies. Garrod (2008)

and Clemons et al. (2002) find similar patterns in data from travel agencies, as do Ancarani and

Shankar (2004) for the retail industry. This empirical evidence is supported by experimental studies,

for example by Kalayci and Potters(2011).

In general, if consumers are assumed to want to minimize prices, price dispersion for homoge-

neous goods must be linked to distortion in their price perceptionw hen they aredeciding to purchase

the goods: the price that consumers believe they will pay is not equal to the price they are billed after

deciding to purchase the good.

A vast body of work is devoted to explaining price dispersion for homogeneous goods by noise

in consumers’ price perception introduced by firms that actively obfuscate prices. For instance,

Clay et al. (2001), Baye and Morgan (2004), and Ellison and Ellison (2009) use data from price

comparison websites for consumer electronics to argue that retailers actively obfuscate prices and

frustrate consumers’ search for lower prices. For example,fir ms can deterconsumers from searching

by using fictitious price comparisons or false sale signs.

∗WarsawSchool of Economics, Warsaw, Poland.Email: bkamins@sgh.waw.pl

†Scensei LLC, Alexandria, VA, USA.

International Journal of Economic Theory 12 (2016) 303–316 © IAET 303

International Journal of Economic Theory