Search and Market Equilibrium

This paper presents an answer, not found in the literature, to Rothschild's criticism that search models are unsatisfactory until they provide an explanation of price dispersion. The search models of Stiler and McCall are closed by explaining the firm's optimal decision-making problem. The...

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Bibliographic Details
Published in:The Journal of political economy 1980-04, Vol.88 (2), p.308-327
Main Author: MacMinn, Richard D.
Format: Article
Language:English
Subjects:
Consumer behavior
Consumer equilibrium
Consumer prices
Cost allocation
Cost functions
Distribution
Economic models
Economic theory
Equilibrium
Equilibrium prices
Market equilibrium
Market prices
Political economy
Prices
Production costs
Profit maximization
Sample size
Searches
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Summary:This paper presents an answer, not found in the literature, to Rothschild's criticism that search models are unsatisfactory until they provide an explanation of price dispersion. The search models of Stiler and McCall are closed by explaining the firm's optimal decision-making problem. Then the existence of an equilibrium distribution of prices is established for both models. The analysis shows that price dispersion is supported and explained by a dispersion of production costs. The Stigler model shows that the variance of the price distribution increases while the McCall model shows that the variance eventually decreases with the intensity of search.
ISSN:0022-3808
1537-534X
DOI:10.1086/260867