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Heterogeneous beliefs, price dispersion, and welfare-improving price controls

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  • Michael T. Rauh

    ()
    (Department of Economics and Finance, Brunel University, Uxbridge Middlesex UB8 3PH, UK)

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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Bibliographic 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.;

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Cited by:
  1. Breton, Régis & Gobillard, Bertrand, 2011. "Robustness of equilibrium price dispersion in finite market games," TSE Working Papers 11-308, Toulouse School of Economics (TSE).
  2. Ralph Bradburd & Stephen Sheppard & Joseph Bergeron & Eric Engler, 2006. "The Impact Of Rent Controls In Non-Walrasian Markets: An Agent-Based Modeling Approach," Journal of Regional Science, Wiley Blackwell, Wiley Blackwell, vol. 46(3), pages 455-491.
  3. Rauh, Michael T., 2007. "Nonstandard foundations of equilibrium search models," Journal of Economic Theory, Elsevier, vol. 132(1), pages 518-529, January.
  4. Leung, Charles Ka Yui & Zhang, Jun, 2011. "“Fire Sales” in housing market: is the house-searching process similar to a theme park visit?," MPRA Paper 29127, University Library of Munich, Germany.
  5. Charles Ka Yui Leung & Jun Zhang, 2011. "¡§Fire Sales¡¨ in Housing Market: Is the House- Search Process Similar to a Theme Park Visit?," International Real Estate Review, Asian Real Estate Society, vol. 14(3), pages 311-329.
  6. Rauh, Michael T., 2004. "Wage and price controls in the equilibrium sequential search model," European Economic Review, Elsevier, vol. 48(6), pages 1287-1300, December.
  7. C. Yiu & S. Wong & K. Chau, 2009. "Transaction Volume and Price Dispersion in the Presale and Spot Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 38(3), pages 241-253, April.

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