THE EFFECT OF PRICE DISPERSION ON COST-OF-LIVING INDEXES

Single good search models imply that mean-preserving increases in the amount of price dispersion reduce expected costs of living of searchin g consumers. Yet when many goods are consumed, commodity substitution may create a de facto form of fixed sample size (FSS) search. This lea ds to the paradoxical result that an increase in price dispersion may reduce nonsearchers' average costs of living more than it does searche rs' even-in the FSS search case-if the searchers search only a little. Moreover, mean-and-support-preserving increases in price dispersion m ay make it optimal to forgo FSS search.