The Economics of Internet Search

This lecture provides an introduction to the economics of Internet search engines. After a brief review of the historical development of the technology and the industry, I describe some of the economic features of the auction system used for displaying ads. It turns out that some relatively simple economic models provide significant insight into the operation of these auctions. In particular, the classical theory of two-sided matching markets turns out to be very useful in this context.

Advertising Costs and Product Prices

How does a change in the cost of advertising affect product prices? On the one hand, advertising increases costs, but on the other hand, advertising is expected to generate more sales, so the impact on product prices and profits depends on the magnitude of these two effects. In this article I describe some recent trends in online and offline advertising and build a simple model of an online merchant. In this model when advertising becomes more costly, the merchant cuts back on ad spending, but it does not necessarily change product prices

Are there Psychological Barriers in the Dow-Jones Index?

The popular press attaches particular significance to certain numerical values of the Dow-Jones index. These magic numbers are referred to as `resistance levels' or `psychological barriers.' We examine 38 years of closing values of this index to see if it is of any help in predicting future stock market returns.Dow-Jones index, psychological barriers, resistance levels, market efficiency

Contidioning Prices on Purchase History

Many transactions are now computer mediated, making it possible for sellers to condition their pricing on the history of interactions with individual consumers. This paper investigates conditions under which price conditioning will or will not be used. Our simplest model involves rational consumers with constant valuations for the good being sold and a monopoly seller who can commit to a pricing policy. In this framework, the seller will not find it profitable to condition pricing on past behavior. We consider various generalizations of this model, such as allowing the seller to offer enhanced services to previous customers, making the seller unable to commit to a pricing policy, and allowing competition in the marketplace. All of these generalizations have equilibria with price conditioning.Price discrimination, Price conditioning, Privacy, Ecommerce

Monitoring Agents with Other Agents

I investigate the multiple agency problem when agents can monitor the performance of other agents. A particularly interesting incentive scheme of this sort has been used by the Grameen Bank of Bangladesh and I use this example to motivate some general questions involving group incentive schemes. For example, I show that a principal prefers a monitor who can reduce the cost of desirable actions rather than increase the cost of undesirable actions. I also consider when it is beneficial to the principal for agents to mutually insure each other. Finally, I examine a sequential incentive plan in which agents form a group and first serve as monitors and later are monitored by other agents.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/101029/1/ECON467.pd

A Solution to the Problem of Externalities and Public Goods when Agents are Well-Informed

I consider economic environments involving externalities and public goods where agents have full information but the regulator does not. For these environments I present a class of simple two-stage games whose subgame perfect equilibria are efficient allocations. In the case of two-party externalities, the equilibria involve compensation for the party upon whom the externality is inflicted. In the case of public goods, the equilibria are Lindahl allocations.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/101019/1/ECON458.pd

Goodness-of-Fit Optimizing Models

Conventional econometric tests of optimizing models typically involve embedding the optimizing model in a parametric specification and then examining the parametric restrictions imposed by the optimization hypothesis. The optimization hypothesis is rejected if the estimated parameters are significantly different, in the statistical sense, from the values implied by optimization. I argue that a more fruitful approach to testing optimizing behavior is to measure the departure from optimization using the estimated objective function, and see whether this departure is significant in an econimic sense. I discuss procedures for doing this than can be used in several sorts of optimizing models, and give a detailed illustration in the case of aggregate demand estimation.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/101027/1/ECON465.pd

Price Discrimination

This is a survey of the literature on price discrimination and related practices for the Handbook of Industrial Organization.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/101032/1/ECON469.pd

Sequential Provision of Public Goods

I consider the private provision of public goods when agents are able to make sequential contributions rather than simultaneous contributions. In the case of two agents with quasilinear utility, a quite complete analysis is possible. If the agent who likes the public good least gets to move first, the amount of the public good supplied will be the same as in the Nash equilibrium, but if the agent who likes the public good most moves first, less of the public good may be supplied. If the agents bid for the right to move first, the agent who values the public good least will always outbid the other agent. In general, each agent would prefer to subsidize the other agent's contributions. If each agent chooses the rate at which they subsidize the other agent, the subsidizes that support the Lindahl allocation are the unique equilibrium subsidies. For general utility functions, I show that the subgame perfect quilibrium always results in less of the public good being supplied than does the Nash equilibrium.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/101035/1/ECON472.pd

What Use is Economic Theory?

I examine how neoclassical economic theory is useful to the understanding of economic policy. I also describe what I view as the role of economic theory in economics. This talk was prepared for the conference "Is Economics Becoming a Hard Science?" 29-30 October, 1992, Paris, FranceCenter for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/101038/1/ECON475.pd