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research article : Heterogeneous beliefs, price dispersion, and welfare-improving price controls

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Author Info
Michael T. Rauh () (Department of Economics and Finance, Brunel University, Uxbridge Middlesex UB8 3PH, UK)

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Abstract

We consider a search market model where agents have heterogeneous beliefs about the distribution of prices. A suggestive example shows that Jevon's Law of One Price and standard welfare results are not robust to small heterogeneous errors in beliefs. In particular we show that a price ceiling above marginal cost can reduce price dispersion and improve welfare (by lowering aggregate search costs) without decreasing quantity supplied. These results are broadly consistent with the empirical evidence.

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Publisher Info
Article provided by Springer in its journal Economic Theory.

Volume (Year): 18 (2001)
Issue (Month): 3 ()
Pages: 577-603
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Handle: RePEc:spr:joecth:v:18:y:2001:i:3:p:577-603

Note: Received: July 27, 1999; revised version: May 24, 2000
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Related research
Keywords: Heterogeneous beliefs; large games; nonstandard analysis; price controls; price dispersion; temporary equilibrium.;

Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information

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