The Role of Demand in Price Cycles

Abstract

We study the effect of consumer search frictions on dynamic price equilibria in a posted price mechanism for pharmaceutical products in Denmark and the role of consumer search frictions herein. We observe widespread price cycles across 1791 markets. Demand is characterized by search: pharmacies must inform consumers about the cheapest product, resulting in a sharp demand discontinuity at the lowest price, but also non-negligible demand at higher prices from loyal consumers. We revisit observed empirical regularities from price cycles in retail gasoline markets and confirm a similar relationship with competition.

Anders Munk‑Nielsen

Associate Professor of Economics

I do research in Empirical Industrial Organization