In this paper we consider a simple search market model where firms produce an identical product and buyers search sequentially for the lowest price.
Buyers have heterogeneous search costs and firms have heterogeneous production costs.
As a result, the unique Nash equilibrium of the model is characterized by price dispersion. We show that a price ceiling can increase output and improve welfare. The price ceiling reduces prices and price dispersion by constricting the range of feasible prices. This has three effects. First, the reduction in price dispersion induces buyers to search less so society gains from the forgone search costs.