PRICE DYNAMICS IN REPEAT-PURCHASE MARKETS

A retail market in which customers repeat purchase is modelled. When c ustomer movement between firms is sluggish, price overshooting charact erizes firms' optimal response to demand or cost shocks. Thus retail p rices would be predicted to be more variable than wholesale prices, a prediction at variance with empirical evidence. Uncertainty in demand and customer imperfect information are introduced into the model to at tempt to reconcile this inconsistency between theory and evidence. The introduction of demand uncertainty actually increases the magnitude o f price overshooting. By contrast, the introduction of imperfect custo mer information reduces the variability in retail prices.