Buyer Search and Price Dispersion: A Laboratory Study by Timothy Cason Department of Economics, Purdue University and Daniel Friedman Department of Economics, UCSC January 31, 2000 Abstract: Posted offer markets with costly buyer search are investigated in 18 laboratory sessions. Each period sellers simultaneously post prices. Then each buyer costlessly observes one or (with probability 1-q) two of the posted prices, and either accepts an observed price, drops out, or pays a cost to search again that period. The sessions vary q, the search cost, and the number and kind of buyers. Equilibrium theory predicts a unified very low (very high) price for q=0 (q=1) and predicts specific distributions of dispersed prices for q=1/3 and 2/3. Actual transaction prices conform rather closely to the predictions, especially in treatments with many robot buyers. Individual buyer and seller behavior, however, differs systematically from the equilibrium predictions: buyers’ reservation prices are biased away from the extremes and sellers’ posted prices have positive autocorrelation and cross sectional correlation. Learning models can account for a portion of these deviations from equilibrium behavior. Acknowledgements: We thank the NSF for funding the work under grants SBR-9617917 and SBR-9709874; Brian Eaton for programming assistance, and Garrett Milam, Alessandra Cassar, Sujoy Chakravarty and Sharad Barkataki for research assistance; and Jim Cox, Peter Diamond, Daniela DiCagno, David Easley, Andy Muller, Charles Plott, and audiences at LUISS, DePaul, UCSB, HKUST, the Economic Science Association and the Latin American Econometric Society Conferences for helpful suggestions. We retain all downside and residual upside responsibility. Timothy N. Cason e-mail: cason@mgmt.purdue.edu Associate Professor http://www.mgmt.purdue.edu/faculty/cason/ Department of Economics voice: (765) 494-1737 Krannert School of Management fax: (765) 494-9658 Purdue University West Lafayette, IN 47907-1310 Daniel Friedman (408) 459-4981 (fax 459-5900) Professor of Economics http://cash.ucsc.edu/Friedman/ 212 Social Sciences I dan@cash.ucsc.edu University of California Santa Cruz, CA 95064