Pricing under Imperfect Awareness

Abstract

The study of price determination in markets has been a defining element of the science of economics. In this dissertation, I have developed models of strategic pricing under imperfect awareness. Imperfect awareness in this context means that decision makers are not aware of every trader operating in the market, instead, trading is constrained to the set of traders which the decision maker is aware of. The degree of trader's awareness can evolve over time. I study pricing dynamics in such markets. I show that prices and allocations approximate perfect competition as awareness increases in a variety of environments. In Chapter 2, I study pricing in a dynamic duopoly. Buyers may be imperfectly aware of operating sellers, but they can gain awareness regarding sellers through a word-of-mouth matching mechanism. I show that there is a unique subgame perfect equilibrium. The unique equilibrium features price dispersion with asymmetric price posting strategies. I show that, depending on the parameters, the distribution of prices of one seller first order stochastically dominates the prices posted by the other seller. I also show that the price posting strategies of each seller depend on his or her relative degree of market experience. In Chapter 3, I extend the model developed in Chapter 2 to an infinite horizon environment with a continuum of sellers. I show that a Markov perfect equilibrium exists, is unique, and features asymmetric price posting strategies. In this equilibrium entrants post prices that are strictly lower than prices posted by more mature competitors, average markups decline over time as the market for the product matures, and the distribution of prices features substantial price dispersion at both the individual and aggregate levels. This model explains a several deviations from competitive conditions that are empirically observed in product markets as being caused by imperfect awareness. In Chapter 4, I study a market with a continuum of buyers and sellers (such as the model of Chapter 3). In this case, I focus on a static setting and introduce differentiated products. Consumers have imperfect awareness regarding product varieties. Even in this market with differentiated products, I show that the equilibrium approximates perfect competition when consumers are aware about a high number of product varieties. It concludes that, when unawareness about product varieties exist, markups increase when the degree of product differentiation is higher, but for any degree of product differentiation, markups vanish when unawareness about varieties vanish.