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Market equilibrium with search and computational costs

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  • Pedro Cosme Costa Vieira

    ()
    (Faculdade de Economia do Porto)

Abstract

Although 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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File URL: http://www.fep.up.pt/investigacao/workingpapers/05.04.02_WP173_pedro.pdf
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Bibliographic Info

Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 173.

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Length: 10 pages.
Date of creation: Apr 2005
Date of revision:
Handle: RePEc:por:fepwps:173

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Keywords: Computational limitations; Optimisation; Search; Market equilibrium;

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  1. Tesfatsion, Leigh S., 2002. "Agent-Based Computational Economics: Growing Economies from the Bottom Up," Staff General Research Papers 5075, Iowa State University, Department of Economics.
  2. Axel, Bo, 1977. " Search Market Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(1), pages 20-40.
  3. Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug..
  4. Lippman, Steven A & McCall, John J, 1976. "The Economics of Job Search: A Survey," Economic Inquiry, Western Economic Association International, vol. 14(3), pages 347-68, September.
  5. Hey, John D., 1981. "Are optimal search rules reasonable? and vice versa? (And does it matter anyway?)," Journal of Economic Behavior & Organization, Elsevier, vol. 2(1), pages 47-70, March.
  6. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
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