<p>As a starting point, you might take a look at Stigler's model of price dispersion. Quoting from a <a href="http://vita.mcafee.cc/Bin/Pricing/Handout4.pdf" rel="nofollow noreferrer">resource I found online</a>,</p>

<blockquote>
  <p>George Stigler’s 1961 “The Economics of Information” begins with: </p>
  
  <p>"One
  should hardly have to tell academicians that information is a valuable
  resource: knowledge is power. And yet it occupies a slum dwelling in
  the town of economics." </p>
  
  <p>Stigler documents the existence of price
  dispersion empirically, and proceeds to sketch various theories that
  might be applicable to price dispersion. Stigler is careful to
  distinguish price dispersion, which results from imperfect information
  on the part of consumers, from price discrimination, which involves
  distinct prices for different types of consumer preferences</p>
  
  <p>There are various reasons that price dispersion might arise. Clearly
  some consumers must be willing to pay higher prices than others, that
  is, distinct consumers have distinct reservation prices. (Note that a
  reserve price – the minimum bid in an auction – is a very different
  concept.) Differences in reservation prices can arise because of
  differences in knowledge – some consumers have access to price lists,
  others don’t – or search costs. If some consumers have lower search
  costs, then these consumers will search for lower prices.</p>
</blockquote>

<p>You might also check out the Wikipedia articles on <a href="https://en.wikipedia.org/wiki/Price_dispersion" rel="nofollow noreferrer">Price Dispersion</a> and <a href="https://en.wikipedia.org/wiki/Search_theory" rel="nofollow noreferrer">Search Theory</a>.</p>

CC BY-SA 3.0
2017-04-25T09:00:51.607Z
Thanks! I was not aware of such paper. Looks quite interesting. So basically, by departing from homogeneous good or perfect information, we can have perfect competition with price heterogeneity. I got a better picture now.
luchonacho
CC BY-SA 3.0
2017-04-24T16:32:16.930Z
2017-04-24T16:32:16.930Z
jmbejara
<p>I do not want to put many constraints on the structure of the problem, except by defining a competitive equilibrium as such where firms are price takers in the factor and good(s) market, and, perhaps (?), that firms make no profits.</p>

<p>For example, is it possible to have something like "competitivistic" competition, where consumers have love for variety and firms produce differentiated goods, yet, instead of monopolistic competition, firms do not charge a markup, because there is free entry, so that firms end up producing at zero profit?</p>

<p>Or for example, a model of consumers geographically immobile, and where differentiated transportation costs across regions mean firms need to charge a markup to pay for that cost, and where, again, free entry deter firms from exploiting consumers?</p>

CC BY-SA 3.0
2017-04-24T16:29:48.393Z
In monopolistic competition there is free entry and firms do end up making zero profit in the long run equilibrium. From [wikipedia](https://en.wikipedia.org/wiki/Monopolistic_competition): "The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. [...] A firm making profits in the short run will nonetheless only break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit."
Giskard
CC BY-SA 3.0
2017-04-24T23:56:16.557Z
A standard General Equilibrium model with production has all the properties you listed. Producers and Consumers are price takers. Consumers love variety - so all the varieties appear in their utility functions. Consumers supply inputs and demand output. Producers demand inputs and supply output.
Amit
CC BY-SA 3.0
2017-04-25T08:58:37.907Z
@denesp Very true. Thanks for pointing that out.
luchonacho
<competitive-equilibrium><price><heterogeneity>
Can heterogeneous prices be consistent with competitive equilibrium?
luchonacho
# Can heterogeneous prices be consistent with competitive equilibrium?

(Asked by: username_0 on 2017-04-24)

I do not want to put many constraints on the structure of the problem, except by defining a competitive equilibrium as such where firms are price takers in the factor and good(s) market, and, perhaps (?), that firms make no profits.

For example, is it possible to have something like "competitivistic" competition, where consumers have love for variety and firms produce differentiated goods, yet, instead of monopolistic competition, firms do not charge a markup, because there is free entry, so that firms end up producing at zero profit?

Or for example, a model of consumers geographically immobile, and where differentiated transportation costs across regions mean firms need to charge a markup to pay for that cost, and where, again, free entry deter firms from exploiting consumers?

**Tags:** competitive-equilibrium, price, heterogeneity

> **Comments:**
> **username_1**: In monopolistic competition there is free entry and firms do end up making zero profit in the long run equilibrium. From [wikipedia](https://en.wikipedia.org/wiki/Monopolistic_competition): "The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. [...] A firm making profits in the short run will nonetheless only break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit."  
> **username_2**: A standard General Equilibrium model with production has all the properties you listed. Producers and Consumers are price takers. Consumers love variety - so all the varieties appear in their utility functions. Consumers supply inputs and demand output. Producers demand inputs and supply output.  
> **username_0**: @denesp Very true. Thanks for pointing that out.  

---

## 1 answers

### Answer by username_3 on 2017-04-24. Score: 1

As a starting point, you might take a look at Stigler's model of price dispersion. Quoting from a [resource I found online](http://vita.mcafee.cc/Bin/Pricing/Handout4.pdf),

> George Stigler’s 1961 “The Economics of Information” begins with:
>
> "One
> should hardly have to tell academicians that information is a valuable
> resource: knowledge is power. And yet it occupies a slum dwelling in
> the town of economics."
>
> Stigler documents the existence of price
> dispersion empirically, and proceeds to sketch various theories that
> might be applicable to price dispersion. Stigler is careful to
> distinguish price dispersion, which results from imperfect information
> on the part of consumers, from price discrimination, which involves
> distinct prices for different types of consumer preferences
>
> There are various reasons that price dispersion might arise. Clearly
> some consumers must be willing to pay higher prices than others, that
> is, distinct consumers have distinct reservation prices. (Note that a
> reserve price – the minimum bid in an auction – is a very different
> concept.) Differences in reservation prices can arise because of
> differences in knowledge – some consumers have access to price lists,
> others don’t – or search costs. If some consumers have lower search
> costs, then these consumers will search for lower prices.

You might also check out the Wikipedia articles on [Price Dispersion](https://en.wikipedia.org/wiki/Price_dispersion) and [Search Theory](https://en.wikipedia.org/wiki/Search_theory).

> **Comments:**
> **username_0**: Thanks! I was not aware of such paper. Looks quite interesting. So basically, by departing from homogeneous good or perfect information, we can have perfect competition with price heterogeneity. I got a better picture now.  

---

