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Law of one price and optimal consumption-leisure choice under price dispersion

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  • Malakhov, Sergey
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. The equilibrium price level is provided by the individual equality of marginal losses in labor income during the search with marginal savings on purchase. Suboptimal decisions of consumers with positive search costs create an opportunity of arbitrage with willingness to pay at the zero costs search level that results in a new equilibrium price and in optimal consumption-leisure choices of all consumers.

Suggested Citation

  • Malakhov, Sergey, 2015. "Law of one price and optimal consumption-leisure choice under price dispersion," MPRA Paper 65273, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:65273
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    References listed on IDEAS

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    Cited by:

    1. Malakhov, Sergey, 2018. "Limits to the «theorem of lemons»: demand for good cars under equilibrium price dispersion," MPRA Paper 88594, University Library of Munich, Germany.
    2. Malakhov, Sergey, 2020. "Law of nature or invisible hand: when the satisficing purchase becomes optimal," MPRA Paper 99158, University Library of Munich, Germany.
    3. Sergey MALAKHOV, 2017. "Moral Hazard, Optimal Healthcare-Seeking Behavior, and Competitive Equilibrium," Expert Journal of Economics, Sprint Investify, vol. 5(2), pages 71-79.

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    More about this item

    Keywords

    equilibrium price; consumption-leisure choice; cost of search; price dispersion; willingness to pay; willingness to accept;
    All these keywords.

    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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