Economists have become increasingly interested in analyzing the economic effects of price dispersion. This interest has been motivated by numerous empirical studies that have found that even the prices of ''identical products'' tend to be dispersed. For example, \textit{J. Carlson} and \textit{D. Pescatrice} [J. Econ. Business 33, 21-27 (1980)] obtained the prices of 34 identical products from different stores in New Orleans and found that roughly half of the items in the sample had a price dispersion of over 10 per cent. \textit{J. Pratt, D. Wise} and \textit{R. Zeckhauser} [Q. Rev. Econ. 93, 189-211 (1979)] report similar findings. The effects of price dispersion have been analyzed in many economic contexts, including search theory and spatial economics. The purpose of the present paper is to examine the ramifications of price dispersion on the construction and interpretation of price or ''cost of living'' indices.