Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
7.2.2 Searching for the Lowest Price:
There will be price dispersion in the market at any time even 
for a homogeneous product. Unless the consumer knows that the 
price quoted by the first seller is the lower price in the market, he or 
she should continue the search for lower prices as long as the MB 
from continuing the search exceeds the MC of additional search. In 
general, the MB from searching declines as the time spent 
searching for lower prices continues. Even if the MC of additional 
search is constant, a point is reached where MB = MC. At that 
point, the consumer should end the search. 
For example, suppose that a consumer wants to purchase 
an LCD of a given brand and knows the prices of different sellers 
range from $800 to $1200. All sellers are identical in location, 
service, and so on, so that price is the only consideration. Suppose 
also that sellers are equally divided into five classifications: Sellers 
of type I charge a price of $800 for the LCD, type II sellers charge 
$900, type III charge $1000, type IV charge $1100 and type V 
charge $1200. For a single search, the probability of each price is 
1/5, and the expected price is the weighted average of all prices, or 
$1000. The consumer can now purchase the LCD at the price of 
$1000, or she can continue the search for lower prices. With each 
additional search the consumer will find a lower price, until the 
lowest price of $800 is found. The reduction in price with each 

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search gives the marginal benefit of the search. The consumer will 
end the search when the MB from the search equals the MC. 
We can use a simple formula to obtain the approximate lowest 
price expected with each additional search. This is 
Expected 
Price 
= Lowest Price + 
Range of Prices 
Number of Searcher + 
1 
For example, the lowest LCD price expected from one search is
Expected 
Price 
= $800 
+ 
$400 
= 
$1000 (as found 
earlier) 
1 + 1 
The approximate lowest expected price from two searchers 
is $800 + ($400/3) = $933.33. Thus, the approximate marginal 
benefit from the second search is $1000 - $933.33 = $66.67. The 
lowest expected price with three searches is $800 + ($400/4) = 
$900, so MB = $33.33. The lowest expected price with four 
searches is $800 + ($400/5) = $880, so MB = $20. The lowest 
expected price with five searches is $800 + ($400/6) = 866.67, so 
MB = $13.33 
From the above example one can see how the marginal 
benefit from each additional search declines. MB = 66.67 for the 
second search, $33.33 for the third search, $20 for the fourth 
search, $13.33 for the fifth search, and so on.
If the marginal cost of each additional search for the 
consumer is $20, the consumer should, therefore, conduct four 
searches, because only with the fourth search is the MB = MC. For 
fewer searches, MB>MC, and it pays for the consumer to continue 
the search. For more than four searches, MBpay for the consumer to conduct that many searches.
Finally as the consumers face different marginal costs of 
search, they will end the search at different points and end up 
paying different prices for the product. This allows different 
producers to charge different prices. Producers selling the product 
at a higher price will only to those consumers who have less 
information because they stop searching for lower prices.