Inflation, price dispersion, and market structure

Official URL: http://dx.doi.org/10.1016/j.euroecorev.2008.01.003

In this paper, we use a unique micro-level data set to test some basic predictions of equilibrium search models and the theoretical literature on inflation and dispersion. A novel aspect of our data is that it contains price observations from the bazaar in Istanbul, where competition is relatively strong and search and menu costs low compared with the other store types in our data set. Consistent with the theory, we find that dispersion is lowest and prices change more frequently in the bazaar. We also find comprehensive support for several predictions of the theoretical literature on inflation and dispersion.