Prices rise like rockets but fall like feathers. This stylized fact of many markets is confirmed by many empirical studies. In this article, I develop a model with competitive firms and rational partially informed consumers where the asymmetric response to costs by firms emerges naturally. In contrast to public opinion and past work, collusion is not necessary to explain such a result. Copyright (c) 2009, RAND.

This article studies the role of imperfect information in explaining price dispersion. We use a new panel data set on the U.S. retail gasoline industry and propose a new test of temporal price dispersion to establish the importance of consumer search. We show that price rankings vary significantly over time; however, they are more stable among stations at the same street intersection. We establish the equilibrium relationships between price dispersion and key variables from consumer search models. Price dispersion increases with the number of firms in the market, decreases with the production cost, and increases with search costs.

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We model the decision to travel across an international border as a trade-off between benefits derived from buying a range of products at lower prices and the costs of travel. We estimate the model using microdata on Canada-United States travel. Price differences motivate cross-border travel; a 10% home appreciation raises the propensity to cross by 8% to 26%. The larger elasticity arises when the home currency is strong, a result predicted by the model. Distance to the border strongly inhibits crossings, with an implied cost of 87 cents per mile. Geographic differences can partially explain why American travel is less exchange rate responsive.

We study the relationship between prices and market structure in geographically isolated markets that are exposed to large demand shocks. The temporal variation in market size allows us to overcome the classical endogeneity bias in standard concentration-performance regressions. We find evidence of local market power in petrol markets due to product differentiation. Additionally, the high margins that characterise concentrated markets dissipate quickly with the number of competitors. Ignoring market structure endogeneity leads to underestimating the effect of market concentration on prices between 55 and 70%.