LEARNING IN AN EQUILIBRIUM SEARCH MODEL

This paper explores the role of learning in an equilibrium search model with asymmetric information. Firms with identical but privately observed marginal cost sell a homogeneous good to heterogeneously informed consumers. A reservation-price equilibrium exists if the uninformed consumers' search cost is sufficiently large. In this equilibrium the amount of price dispersion is inversely related to the realization of marginal cost. Also, the average price level is less responsive to cost changes than when cost is observable. Finally, uncertainty about firms' marginal cost increases the expected price level.