Difference between revisions of "Baye Morgan Scholten (2006) - Information Search and Price Dispersion"
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*A continuum of price-setting firms with unit measure compete selling an homogenous product | *A continuum of price-setting firms with unit measure compete selling an homogenous product | ||
*A mass <math>\mu</math> is interested in purchasing the product | *A mass <math>\mu</math> is interested in purchasing the product | ||
− | *Consumers have quasi-linear utility: | + | *Consumers have quasi-linear utility: <center><math>u(q) + y\,</math> where <math>y\,</math> is a numeraire good</center> |
− | <center><math>u(q) + y\,</math> where <math>y\,</math> is a numeraire good</center> | + | *The indirect utility of consumers is: <center><math>V(p,M) = v(p) + M\,</math></center> |
− | *The indirect utility of consumers is: | ||
− | <center><math>V(p,M) = v(p) + M\,</math></center> | ||
<center>where <math>v(\cdot)\,</math> in nonincreasing in <math>p\,</math>, and <math>M\,</math> is income.</center> | <center>where <math>v(\cdot)\,</math> in nonincreasing in <math>p\,</math>, and <math>M\,</math> is income.</center> | ||
*By [http://en.wikipedia.org/wiki/Roy%27s_identity Roy's identity]: | *By [http://en.wikipedia.org/wiki/Roy%27s_identity Roy's identity]: | ||
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*There is a search cost <math>c\,</math> per price quote | *There is a search cost <math>c\,</math> per price quote | ||
*The customer purchases after <math>n\,</math> price quotes | *The customer purchases after <math>n\,</math> price quotes | ||
− | *The final indirect utility of the customer is | + | *The final indirect utility of the customer is: <center><math>V(p,M) = v(p) + M - cn\,</math></center> |
− | <center><math>V(p,M) = v(p) + M - cn\,</math></center> | ||
'''A note on the derivation of demand''' | '''A note on the derivation of demand''' | ||
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Recall that <math>M=e(p,u)\,</math>, | Recall that <math>M=e(p,u)\,</math>, | ||
so that <math>v(e(p,u),p)=u\,</math> when the expenditure function is evaluated at <math>p\,</math> and | so that <math>v(e(p,u),p)=u\,</math> when the expenditure function is evaluated at <math>p\,</math> and | ||
− | <math>u\,</math>. Taking the derivitive with respect to <math>p\,</math>: | + | <math>u\,</math>. |
+ | |||
+ | Taking the derivitive with respect to <math>p\,</math>: | ||
− | |||
<math>\frac{d(v(M,p))}{dp} = \frac{dv(M,p)}{dm} \cdot \frac{dM}{dp} + \frac{dv}{dp} = 0,\,</math> where | <math>\frac{d(v(M,p))}{dp} = \frac{dv(M,p)}{dm} \cdot \frac{dM}{dp} + \frac{dv}{dp} = 0,\,</math> where | ||
<math>\frac{dM}{dp} = \frac{de(p,u)}{dp}\,</math>. | <math>\frac{dM}{dp} = \frac{de(p,u)}{dp}\,</math>. | ||
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<math>\therefore q(m,p) = -\frac{d}{dp(v(p))}\,</math>\\ | <math>\therefore q(m,p) = -\frac{d}{dp(v(p))}\,</math>\\ | ||
− | + | ||
<math></math> | <math></math> |
Revision as of 20:40, 25 January 2010
- This page is part of a series under PHDBA279B
Key Reference(s)
Introduction
Baye et al. (2006) provides a survey of models of search and clearing-house that exhibit price dispersion. The survey is undertaken through two specializable frameworks, one for search and one for cleaning-houses, which are then adapted to show the key results from the literature. There are a number of equivalent results across the two frameworks.
Search Theoretic Models of Price Dispersion
The general framework used through-out is as follows:
- A continuum of price-setting firms with unit measure compete selling an homogenous product
- A mass [math]\mu[/math] is interested in purchasing the product
- Consumers have quasi-linear utility:
[math]u(q) + y\,[/math] where [math]y\,[/math] is a numeraire good - The indirect utility of consumers is:
[math]V(p,M) = v(p) + M\,[/math]
- By Roy's identity:
- There is a search cost [math]c\,[/math] per price quote
- The customer purchases after [math]n\,[/math] price quotes
- The final indirect utility of the customer is:
[math]V(p,M) = v(p) + M - cn\,[/math]
A note on the derivation of demand
Recall that [math]M=e(p,u)\,[/math], so that [math]v(e(p,u),p)=u\,[/math] when the expenditure function is evaluated at [math]p\,[/math] and [math]u\,[/math].
Taking the derivitive with respect to [math]p\,[/math]:
[math]\frac{d(v(M,p))}{dp} = \frac{dv(M,p)}{dm} \cdot \frac{dM}{dp} + \frac{dv}{dp} = 0,\,[/math] where [math]\frac{dM}{dp} = \frac{de(p,u)}{dp}\,[/math].
[math]\therefore q(m,p) = \frac{de(p,u)}{dp} = -\frac{\frac{dv}{dp}}{\frac{dv(M,p)}{dm}}\,[/math]
[math]\therefore q(m,p) = -\frac{d}{dp(v(p))}\,[/math]\\
[math][/math]
[math][/math]
[math][/math]
[math][/math]