Price Dispersion in Competitive Markets: A Real Options Explanation

Abstract

This paper employs a real option model to analyze price dispersion in highly competitive markets. Explanations of price dispersion typically assume monopolistic competition, so these fail to explain price ranges in markets closely approximating the conditions of perfect competition. Here the price is a real option given by the producer to consumers to demonstrate how price dispersion is possible under minimal conditions: stochastic prices; price rigidity; and differential cost structures.