Endogenizing The Price Distribution
Studying optimal search from a given distribution of prices led economists to ask why the same good should ever be sold, in equilibrium, at more than one price. After all, this is by definition a violation of the law of one price. However, when buyers do not have perfect information about where to find the lowest price (that is, whenever search is necessary), not all sellers may wish to offer the same price, because there is a trade-off between the frequency and the profitability of their sales. That is, firms may be indifferent between posting a high price (thus selling infrequently, only to those consumers with the highest reservation prices) and a low price (at which they will sell more often, because it will fall below the reservation price of more consumers).
Read more about this topic: Search Theory
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