Market Equilibrium with Search and Computational Costs

Abstract

Although it is an empirical regularity that in the trading of homogeneous goods there are persistent price dispersion and competition between sellers, it is theoretically derived that when buyers are optimisers, in market equilibrium, there are neither price dispersion nor competition (the Diamond's paradox). This undesirable theoretical result induces the growth of doubt in the relevance of using optimisation in the study of human behaviour (the Hey's critique). In this work I demonstrate that it is not necessary to abandon the optimisation framework to overturn this pitfall if assumed that economic agents have computational restrictions. That is, I demonstrate that when optimiser buyers have search and computational costs in market equilibrium there is price dispersion, search and competition between sellers.