14127_lec5_c_a_c

14127_lec5_c_a_c - 14.127 Lecture 5 Xavier Gabaix March 4,...

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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....
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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.

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14127_lec5_c_a_c - 14.127 Lecture 5 Xavier Gabaix March 4,...

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