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Countercyclical Price and Price Dispersion in Customer Market

We examine a customer market of a homogeneous good and show that the equilibrium average price may be countercyclical by two reasons: (i) sellers’ increased reputational concern, and (ii) buyers’ increased price sensitivity. The model developed is a two-period extension of Reinganum’s model. Our explanation nests two previous hypotheses in the literature and raises the possibility that multiple forces jointly generate countercyclical price movement. Also, it is shown that while the average price falls, the fall may be different across sellers according to their types. In particular, high-price sellers tend to reduce their prices by larger amounts than low-price sellers during peak demand periods.