Buyer search and price dispersion: a laboratory study

We study markets with costly buyer search in which sellers simultaneously post prices. Buyers costlessly observe one or (with probability 1 q) two of the posted prices, and can accept one or pay to search again. The experiment varies q, the search cost, and the number of buyers. Equilibrium theory predicts a unified very low (high) price for q=0 (q=1) and predicts specific distributions of dispersed prices for q=1/3 and 2/3. Actual prices conform closely to the predictions in some treatments. Buyers’ reservation prices are biased away from the extremes, however, and sellers’ prices have positive autocorrelation and cross-sectional correlation. r 2003 Elsevier Science (USA). All rights reserved. JEL classification: D43; D83; L13