Heterogeneous beliefs, price dispersion, and welfare-improving price controls (Q5955110)

A search market model (SMM) is developed, where Guyers and sellers make heterogeneous mistakes about the distribution of prices. An ad hoc exogeneous structure of beliefs (the observation map) is introduced into the simplest SMM where buyers and sellers are otherwise identical. A temporary equilibrium is defined to be a price profile that induces a distribution of price such that all agents make best responses against their beliefs. The existence of the equilibrium is proved, based on the results from \textit{M. A. Khan} and \textit{Y. Sun} [J. Math. Econ. 31, 455--492 (1999; Zbl 0940.91006] on the existence of pure-strategy equilibria in non-cooperative games and using a small amount of nonstandard analysis, see \textit{N. J. Cutland} [Bull. Lond. Math. Soc. 15, 529--589 (1983; Zbl 0529.28009)]. An example is considered where the observation maps take a special function form, and it is shown that a price ceiling above marginal cost can reduce price dispersion and improve welfare without decreasing quantity supplied. These results are consistent with the empirical evidence.