The Price Dispersion of Consumer Products

Abstract

Presented is an analytic dynamic model of the price dispersion of consumer products. The theory is based on the idea that sellers offer product units for a profit maximizing price, denoted p_m. Product units not sold at p_m are called excess units. Based on the conservation equation of offered units, it can be shown that the stationary price distribution of consumer products consists of a Dirac-delta peak at p_m surrounded by a fat-tailed Laplace distribution from the excess units. A good quantitative agreement with empirical data can be obtained with a fit of the two free parameters of the theory.