Multiple Equilibria in a Simple Model of Search with Entry

Sugato Dasgupta

Associate Professor, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi 110067, India, Tel: +91-1126704499, Fax: +91-11-26717586 sugatodasgupta@rediffmail.com

JEL Classfication: L11, L13

Abstract

Diamond (1971) analyzed a goods market wherein identical buyers with unitary demand searched sequentially over identical monopolistically competitive firms. The equilibrium market price was shown to be the monopoly price. Suppose, now, that to participate in a “Diamond-market,” prospective buyers are charged a small but positive entry fee. Since the market price fully extracts consumer surplus from entering buyers, no one finds it worthwhile to pay this entry fee. To study the non-trivial implications of consumer entry, I modify the Diamond-model slightly. The modified model displays two interesting features: buyers with strictly positive entry fees enter the goods market, and the goods market generates multiple equilibrium prices.

Keywords:

Search, Market entry, Multiple equilibria

Acknowledgments

This paper, which is based on a chapter of my dissertation at the Massachusetts Institute of Technology, has benefited from the guidance of Daron Acemoglu and Peter Diamond. An anonymous referee suggested changes that improved the paper’s expositional quality. Of course, the usual disclaimer applies.

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