Heterogeneous beliefs, price dispersion, and welfare-improving price controls

Michael Rauh ()

Economic Theory, 2001, vol. 18, issue 3, 577-603

Abstract: We consider a search market model where agents have heterogeneous beliefs about the distribution of prices. A suggestive example shows that Jevon's Law of One Price and standard welfare results are not robust to small heterogeneous errors in beliefs. In particular we show that a price ceiling above marginal cost can reduce price dispersion and improve welfare (by lowering aggregate search costs) without decreasing quantity supplied. These results are broadly consistent with the empirical evidence.

Keywords: Heterogeneous beliefs; large games; nonstandard analysis; price controls; price dispersion; temporary equilibrium. (search for similar items in EconPapers)
JEL-codes: D43 D83 (search for similar items in EconPapers)
Date: 2001-06-11
Note: Received: July 27, 1999; revised version: May 24, 2000
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Citations: View citations in EconPapers (12)

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