Market equilibrium with search and computational costs

Pedro Vieira

FEP Working Papers from Universidade do Porto, 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.

Keywords: Computational limitations; Optimisation; Search; Market equilibrium (search for similar items in EconPapers)
JEL-codes: D43 D83 (search for similar items in EconPapers)
Pages: 10 pages.
Date: 2005-04
New Economics Papers: this item is included in nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:por:fepwps:173

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