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The Effect of Price Dispersion on Cost of Living Indexes

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  • Reinsdorf, Marshall

Abstract

Single good search models imply that mean-preserving increases in the amount of price dispersion reduce expected costs of living of searching consumers. Yet when many goods are consumed, commodity substitution may create a de facto form of fixed sample size search. This leads to the paradoxical result that an increase in price dispersion may reduce nonsearchers' average costs of living more than it does searchers' even--in the fixed sample size search case--if the searchers search only a little. Moreover, mean-and-support-preserving increases in price dispersion may make it optimal to forgo fixed sample size search. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Reinsdorf, Marshall, 1994. "The Effect of Price Dispersion on Cost of Living Indexes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 137-149, February.
  • Handle: RePEc:ier:iecrev:v:35:y:1994:i:1:p:137-49
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    Cited by:

    1. Wynne, Mark A & Sigalla, Fiona D, 1996. " A Survey of Measurement Biases in Price Indexes," Journal of Economic Surveys, Wiley Blackwell, vol. 10(1), pages 55-89, March.
    2. Rachel Griffith & Ephraim Leibtag & Andrew Leicester & Aviv Nevo, 2009. "Consumer Shopping Behavior: How Much Do Consumers Save?," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 99-120, Spring.
    3. Robert A. Pollak, 1998. "The Consumer Price Index: A Research Agenda and Three Proposals," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 69-78, Winter.
    4. John K. Dagsvik & Leif Brubakk, 1998. "Price Indexes for Elementary Aggregates Derived from Behavioral Assumptions," Discussion Papers 234, Statistics Norway, Research Department.

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