Strategic Complementarities and Search Market Equilibrium
2009, Games and Economic Behavior
Michael T. Rauh
In this paper, we apply supermodular game theory to the equilibrium search literature with sequential search. We identify necessary and sufficient conditions for the pricing game to exhibit strategic complementarities and prove existence of equilibrium. We then show that price dispersion is inherently incompatible with strategic complementarities in the sense that the Diamond Paradox obtains when firms are identical and is robust within the class of search cost densities that are small near zero and support strategic complementarities. We also show that a major criticism of the literature, that agents act as if they know the distribution of prices, can be justified in the sense of convergent best response dynamics.
Rauh, Michael T. (2009), "Strategic Complementarities and Search Market Equilibrium,'' Games and Economic Behavior, Vol. 66, No. 2, pp. 959-978.
Diamond Paradox; Price dispersion; Search; Strategic complementarities