Price dispersion in Malta : intra and inter comparisons

Abstract

Classical micro economic theory, as supported by the law of one price (LOOP), affirms that in equilibrium there is only one price. However, both international and country-specific studies found evidence that price dispersion exists within segmented markets. Therefore, suppliers are able to charge different prices to customers, and therefore benefit from higher mark-ups. Such a condition is viable only in an imperfectly competitive market, where the firms have some degree of market power which enables them to set the price. This market is conditioned with certain features which enable the producer to discriminate amongst consumers, such as heterogenous product attributes, diverse store characteristics, location, customers' tastes, transport and search costs, where the latter results in asymmetric information. However, although the introduction of websites reduced the dispersion in prices, such differentials tended to persist in the long run. In fact, although economic theory states that the monopolistic competitive industry loose any supernormal profit in the long run due to few barriers to entry, certain studies support price dispersion in equilibrium.