Minimum Price in Search Model

Abstract

This paper investigates the effects of a low bound price. To do so, a popular and empirically proven model (Stahl (89') \cite{Stahl89}) is used. The model is extended to include an exogenously given bound on prices sellers can offer, excluding prices below such bound. The finding are rather surprising - when the bound is set sufficiently high expected price offered (EPO) by sellers drops significantly. The result seem to be robust in the parameters of the model, and driven by the information provided to consumers by such legislation step: when the limitation is set at sufficiently high levels all consumers anticipate the bound price, and searchers reject any price above it. As a result sellers offer the bound price as a pure strategy.