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from Asad Zaman

Varian start his intermediate micro text by stating the maximization and equilbrium are the core principles of micro. Krugman recently stated that I am a “maximization and equilibrium” kind of guy. The goal of this lecture is to show that these two principles fail completely to help us understand behavior is a very simple model of a duopoly.

In last lecture (AM03), we introduced a simple duopoly model. Two ice-cream vendors buy ice-cream wholesale and can sell at any chosen price in the park. If they have matching prices, they split customers. Under Perfect Competition assumptions, with Full Information and Zero Transaction Costs, if they have different prices, then all customers go to the lower price vendor. Straightforward analysis of this duopoly model leads to the following conclusions:

  1. There is a huge amount of genuine uncertainty – probability calculations required for expected utility cannot be made. We cannot know how many people will come to the park on any given day. We cannot forecast the weather conditions, which influence the demand for ice-cream, with any degree of reliability. This means that vendors will adopt rules-of-thumb to make decisions, rather than maximize anything. This leads to the use of evolutionary Agent Based Models as the preferred modeling technique.  read more
  1. November 3, 2017 at 2:09 pm

    May I throw another difficulty on this fine piece, which ought to be over my head technically, but I did find readable?

    The further difficulty I would add is – context: in this case, the ethnic/religious identity of the sellers, and the nature of those factors in their local market. These might be completely unstated in the transactions, but real based on appearance and social clues that don’t show up in micro-equations. Far fetched, you say? Well, I just finished reading Amitava Kumar’s piece in the “Future of Food” issue of the Nation magazine, entitled “Confessions of a Beefeater,” about the religious, now political tensions in India under PM Modi, spilling over into restaurant menus. You get the drift. Here at:

    Back in the good old United States, at the height of urban rioting in the mid-to-late 1960’s, there were many small Jewish owned shops in or at the edge of the black ghetto. Depending on whom they hired and what they sold, a few survived, many went under from boycotts or were looted and fire-bombed during the rioting. Success or failure didn’t have much to do with prices, in my sense of the old dynamics. Doesn’t apply across the board: this is situational and local…context. Tough to put context into math equations.

    Or one might have been a Muslim street vendor or store owner in New York City in the wake of 9/11.

    Let’s keep the econometric gurus on their toes.

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