Stable Price Dispersion: A New Framework for Persistent Price Heterogeneity
Myatt & Ronayne: "Stable Price Dispersion under Heterogeneous Buyer Consideration" RAND Journal of Economics, Volume 57 (2026)
Academic models of market competition often struggle to reconcile theoretical predictions with observed commercial reality. Canonical models, such as Bertrand competition, typically predict marginal-cost pricing, while extensions incorporating heterogeneous buyer consideration usually resort to mixed strategies, resulting in randomised prices that are inherently unstable - firms regret their price choice upon observing their rivals’ choices at which point they prefer to immediately revise their price downwards to undercut them. Yet, across diverse markets, prices for homogeneous products are persistently different and exhibit significant stickiness.
David P. Myatt (London Business School) and David Ronayne (ESMT Berlin, Project A04) offer a novel theoretical framework to bridge this gap, predicting prices that are both dispersed and stable. Their core mechanism relies on recognising sellers’ capacity to rapidly adjust prices downwards through special deals or flash sales in response to competitors raising their prices. This credible threat disciplines pricing and forms the basis of stable price predictions from which no firm can profitably undercut a cheaper rival and no firm gains from an upward price adjustment, given rivals’ ability to quickly counter with special deals.
A necessary consequence of this approach is that strictly positive stable prices must be entirely distinct; that is, prices are dispersed. The authors demonstrate the applicability of the approach by showing how the structure of heterogeneous buyer consideration in several settings significantly influences the resulting price hierarchy in natural ways. Firstly, in markets where firms have asymmetric captive customer shares (but otherwise randomly drawn customer bases), the resulting stable prices feature higher prices set by those with larger captive customer bases. Secondly, where buyers’ awareness of firms independently distributed, stable prices ensure the highest price is set by the firm enjoying the greatest awareness.
Furthermore, the framework yields distinct implications for buyer behaviour. When applying this concept to endogenous buyer search, the authors find that stable prices diverge as search increases, generating strategic complementarities in search—meaning greater search activity by others encourages individual buyers to search more. This finding contrasts sharply with predictions from conventional (mixed-strategy) predictions, which instead exhibit strategic substitutability.
Link: Stable Price Dispersion under Heterogeneous Buyer Consideration
