Search and Market Equilibrium

This paper presents an answer, not found in the literature, to Rothschild's criticism that search models are unsatisfactory until they provide an explanation of price dispersion. The search models of Stiler and McCall are closed by explaining the firm's optimal decision-making problem. Then the existence of an equilibrium distribution of prices is established for both models. The analysis shows that price dispersion is supported and explained by a dispersion of production costs. The Stigler model shows that the variance of the price distribution increases while the McCall model shows that the variance eventually decreases with the intensity of search.