Market equilibrium with search and computational costs
AbstractAlthough it is an empirical regularity that in the trade of homogeneous goods there is persistent price dispersion and buyers search for low-priced items, theoretically we find that in market equilibrium, when buyers are optimisers (the neo-classical framework), these regularities do not occur. Summing this undesirable theoretical result to the fact that the computation of optimal strategies is demanding, the relevance of using optimisation models in rationalising human behaviour is put in question. Even so, Lucas (1981) claims that optimisation models should not be abandoned because only these are “able to isolate those aspects of behaviour that remain invariant to policy shifts from those that do not”. In this work, following Lucas’ claim, we introduce economic agents as having computational limitations in the neo-classical optimisation model, which is new in the literature. As a result of this alteration to the model, in market equilibrium, we observe both price dispersion and search when buyers have information and computational limitations.
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Bibliographic InfoPaper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 173.
Length: 10 pages.
Date of creation: Apr 2005
Date of revision:
Computational limitations; Optimisation; Search; Market 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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