Working Paper Series
James W. Albrecht and Bo Axell
General Search Market Equilibrium
Abstract: In this paper we extend models of “search market
equilibrium” to incorporate general equilibrium considerations. The model
we treat is one with a single product market and a single labor market.
Imperfectly informed individuals follow optimal strategies in searching for
a suitably low price and high wage. For any distribution of price and wage
offers across firms these optimal strategies generate product demand and
labor supply schedules. Firms then choose prices and wages to maximize
expected profits taking these schedules as given, and the resulting profits
are paid out to individuals as dividends.
An equilibrium distribution
of prices and wages is one which results from optimal price and wage
setting behavior by firms given individuals optimal search strategies.
There are two possible equilibrium configurations, a degenerate equilibrium
in which all firms charge the same price and wage and a price and wage
dispersion equilibrium. We show that there exists a degenerate equilibrium
at the monopoly-monopsony price-wage combination. We also show some of the
properties of a price-wage dispersion equilibrium, conditional on
Keywords: General equilibrium; Singel product and labor market; Consumers; Firms; (follow links to similar papers)
JEL-Codes: D40; D50; (follow links to similar papers)
23 pages, April 1982
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