The Price Distribution and Technological Shocks in Markets with Endogenous Search Intensity

Abstract

We provide a simple model that relates the search intensity of households for products to the price distribution and the wage. Households decide how much time to spend on work and on search for finding better deals in a market where firms charge different prices. Thus, the equilibrium price distribution and the wage depend on the endogenous search intensity and labor supply. Moreover, we show that positive technological shocks, which reduce price posting costs for firms, lead to an increase in labor supply, wages and to the average price, while they lead to a decrease in search effort. These results are consistent with recent empirical findings.

Keywords: price distribution, random-search models, real rigidities, search intensity, technological shocks

JEL Classification: E24, E31