Price dispersion in a model of identical agents with perfect information

Abstract. The objective of this paper is to demonstrate that price dispersion is possible even in a world of perfect information and identical consumers and firms. The driving force in the model is service capacity and congestion cost. Each firm chooses a service capacity. Customers of a firm bear a congestion cost which, for a fixed service capacity, is an increasing function of the number of customers served by this firm. We demonstrate that under certain conditions the combined profit of two firms and the total surplus are higher in a price-dispersion equilibrium than in a single-price equilibrium.