This preview shows pages 1–8. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: 14.127 Lecture 5 Xavier Gabaix March 4, 2004 0.1 Welfare and noise. A compliment Two firms produce roughly identical goods Demand of firm 1 is D 1 = P ( q p 1 + 1 > q p 2 + 2 ) where 1 , 2 are iid N (0 , 1) . Thus D 1 = P ( p 2 p 1 > ( 1 2 )) = P p 2 p 1 > 2 p 2 p 1 2 > = = P p 2 p 1 2 where is N (0 , 1) and = 1 , with cdf of N (0 , 1) Unlike in case, here the demand is not dramatically elastic Slope of demand at the symmetric equilibrium p 1 = p 2 2 p 2 p 1 1 p 2 p 1 = 2 2 p 1 D 1 = p 1 1 = (0) 2 and modified elasticity 1 1 = D 1 p 1 D 1 = (0) 2 = because D 1 = 1 2 . When then . Even though the true elasticity is the measured elasticity is lower < true . Open question: how to correct that bias? 0.2 How to measure the quantity of noise ? Give people n mutual funds and ask them to pick their preferred and next preferred fund. Assume that all those funds have the same value q A = q B People do max q i p i + i = s i Call A the best fund, B the second best fund, s A s B all other funds. Increase p A by p . At some point the consumer is indifferent between A and B . q A p A + A p = q B p B + B If p A = p B then p = ( A B ) or p = (1: n ) (2: n ) Proposition. For large n p = B n where B n is the parameter of Gumbel attraction, B n = 1 1 nf F n 0.3 Could the fees be due to search costs? Ali Hortacsu and Chad Syverson, QJE 2004, forthcoming. Suppose you have x = $200 , 000 and you keep it for 10 years. You pay 1 . 5% / year and thus lose 200 , 000 1 . 5% = 3 , 000 a year....
View
Full
Document
This note was uploaded on 12/26/2011 for the course ECON 14.127 taught by Professor Staff during the Fall '10 term at MIT.
 Fall '10
 staff

Click to edit the document details