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Law of One Price and Optimal Consumption-Leisure Choice Under Price Dispersion

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  • Sergey MALAKHOV

    (Pierre-Mendès-France University, Grenoble, France)

Abstract

If the demand under price dispersion is formed by consumers with zero search costs and consumers with positive search costs, the law of one price holds at the equilibrium price level, where the lowest willingness to pay between consumers with zero search costs meets the willingness to accept or to sell of consumers with positive search costs. Consumers with positive search costs maximize their utility with respect to their optimal decisions when marginal losses in labor income during the search are equal to marginal savings on purchase. Optimal decisions move their willingness to accept to the equilibrium price level. Suboptimal decisions of consumers with positive search costs result in willingness to accept below the lowest willingness to pay of consumers with zero search costs and arbitrage takes place. Arbitrage drops down the equilibrium price to the level where willingness to accept of consumers with positive search costs meets the new lowest willingness to pay of consumers with zero search costs and where purchasing decisions of consumers with positive search costs become optimal.

Suggested Citation

  • Sergey MALAKHOV, 2016. "Law of One Price and Optimal Consumption-Leisure Choice Under Price Dispersion," Expert Journal of Economics, Sprint Investify, vol. 4(1), pages 1-8.
  • Handle: RePEc:exp:econcs:v:4:y:2016:i:1:p:1-8
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    References listed on IDEAS

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    Cited by:

    1. repec:exp:econcs:v:5:y:2017:i:2:p:71-79 is not listed on IDEAS
    2. Sergey MALAKHOV, 2017. "Moral Hazard, Optimal Healthcare-Seeking Behavior, and Competitive Equilibrium," Expert Journal of Economics, Sprint Investify, vol. 5(2), pages 71-79.

    More about this item

    Keywords

    propensity to search; propensity to produce at home; consumption-leisure choice; Veblen effect;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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