The Economics of Learning: Price Formation when Acquisition of Information is Possible but Costly

This paper presents some analyses of what would be the outcome of a price formation process in the presence of information costs. First, we examine the equilibria which obtain in search markets where consumers are uninformed about prices but informed about the distribution of prices. Second, we examine the case when consumers are not informed about the distribution of prices, and conclude that the equilibrium might differ considerably. Third, we show that in the case when firms are not informed about their profit opportunities, and therefore have to undertake experiments to find these out, a price dispersion equilibrium is locally stable, given reasonably rational experimental procedures.