LEARNING IN AN EQUILIBRIUM SEARCH MODEL

This paper explores the role of learning in an equilibrium search mode l with asymmetric information. Firms with identical but privately obse rved marginal cost sell a homogeneous good to heterogeneously informed consumers. A reservation-price equilibrium exists if the uninformed c onsumers' search cost is sufficiently large. In this equilibrium the a mount of price dispersion is inversely related to the realization of m arginal cost. Also, the average price level is less responsive to cost changes than when cost is observable. Finally, uncertainty about firm s' marginal cost increases the expected price level.