competition and the number of firms in a market are duopolies more competitive than atomistic markets this paper uses a variant of the standard search model to examine market equilibrium and the consequences for market equilibrium of an increase in the number of firms if marginal search costs increase with the number of searches then the demand curve facing any firm will be kinked with the elasticity of demand with respect to price decreases being less than with respect to price increases prices may not change in response to changes in marginal costs as the number of firms increases the maximum price that is consistent with equilibrium increases to the monopoly price but the minimum price decreases on the other hand if marginal search costs decrease with the number of searches equilibrium if it exists is characterized by a

buyer search costs and endogenous product design buyer search costs for price are changing in many markets through a model of buyer and seller behavior i consider the effects of changing search costs on prices both when product differentiation is fixed and when it is endogenously determined in equilibrium if firms cannot change product design lower buyer search costs for price lead to increased price competition however if product design is a decision variable lower search costs for price may also lead to higher product differentiation which decreases price competition in this case the overall effect of lower buyer search costs for price may even be higher prices lower social welfare and higher industry profits the result is especially interesting because recent technological changes such as internet shopping can affect the market structure through lowering buyer search costs

product variety informative advertising and price competition abstract in many product categories consumer tastes are diverse and firms use finely targeted advertising to inform consumers about their products this article proposes a model of informative advertising that allows for diverse consumer tastes and multiple competing firms using this framework the authors analyze how diversity in consumers tastes informative advertising and improvements in advertising technology may influence prices first informative advertising can lead to lower prices if consumer valuations are high however if consumer valuations are low informative advertising can lead to higher prices second when consumer valuations are high price increases with greater diversity in tastes though this result reverses if consumer valuations are low third improvements in advertising technology lead to higher levels of advertising when consumer valuation is high but the opposite effect can occur when consumer valuation is low the authors relate these theoretical findings to previous e

optimal constrained interest rate rules we show that if policymakers compute the optimal unconstrained interest rate rule within a taylor type class they may be led to rules that generate indeterminacy and or instability under learning this problem is compounded by uncertainty about structural parameters since an optimal rule that is determinate and stable under learning for one calibration may be indeterminate or unstable under learning under a different calibration we advocate a procedure in which policymakers restrict attention to rules constrained to lie in the determinate learnable region for all plausible calibrations and that minimize the expected loss computed using structural parameter priors subject to this constraint

cost benefit models for explaining consumer choice and information seeking behavior while it provides excellent descriptions of behavior existing consumer research on information seeking and processing largely fails to explain why consumers engage in various types of activities this paper presents an economic framework for measuring costs benefits of search behavior which can help to resolve these questions this work shows how such a framework can lead to testable hypotheses about information seeking and discusses how operational measures of economic incentives to search can be developed and employed

the principle of minimum differentiation holds under sufficient heterogeneity the so called principle of minimum differentiation stated by hotelling has been challenged by many authors this paper restores the principle by showing that n firms locate at the center of the market and charge prices higher than the marginal cost of production when heterogeneity in consumers tastes is large enough

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

two stage discrete choice models for scanner panel data an assessment of process and assumptions discrete choice models such as the multinomial logit assume that consumers choose from the full set of alternatives available to them however because i consumers may not be able to recall or recognize available brands ii consumers may not have the cognitive capacity or mental energy to process information pertaining to all available brands or iii careful consideration of all available brands might be suboptimal from an economic standpoint given the cost of information search consumers tend to make choices from a relatively small subset of the available brands this study assesses the process assumptions of existing two stage models for scanner panel data and their consistency with the actual processes believed to be used by consumers in forming choice sets after reviewing what is known from two stage models in scanner data applications we highlight issues in need of research

experimental evidence on the persistence of output and inflation this article presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation rational inflation expectations do not allow for persistent deviations of output and inflation following a monetary shock in the experimental sessions however output and inflation display considerable persistence and regular cyclical patterns

expectations and the stability problem for optimal monetary policies eine auf den fundamentaldaten beruhende regelbindung der geldpolitik ohne selbstverpflichtung die bei vollkommen rationalen erwartungen der privaten akteure optimal ware ist instabil wenn diese akteure de facto den ublichen regeln des adaptiven lernens folgen dieses problem lasst sich dadurch beheben dass die erwartungen privater akteure berucksichtigt und in geeigneter weise in die optimale geldpolitik einbezogen werden diese eindeutige schlusfolgerung gilt auch dann wenn sich der geldpolitische entscheidungstrager und die privaten akteure in einem simultanen lernprozess befinden unsere ergebnisse zeigen wie wichtig es ist die geldpolitik angemessen zu gestalten und dabei nicht nur die fundamentaldaten sondern auch direkt die beobachteten erwartungen privater haushalte und unternehmen zu berucksichtigen

the value of interest rate stabilization policies when agents are learning we examine the expectational stability e stability of rational expectations equilibrium under optimal interest rate rules in the context of the standard new keynesian model of the monetary transmission mechanism we focus on the case where the monetary authority adds interest rate stabilization to its other objectives of inflation and output stabilization we consider both the case where the monetary authority lacks a commitment technology and as well as the case of full commitment we show that for both cases optimal interest rate rules yield rational expectations equilibria that are e stable for a wide range of empirically plausible parameter values this finding stands in contrast to the findings of evans and honkapohja 2002 2003ab for optimal monetary policy rules in environments where interest rate stabilization is not part of the central bank s objective function

learning about monetary policy rules abstract we study macroeconomic systems with forward looking private sector agents and a monetary authority that is trying to control the economy through the use of a linear policy feedback rule we use stability under recursive learning a la evans and honkapohja learning and expectations in macroeconomics princeton university press princeton new jersey 2001 as a criterion for evaluating monetary policy rules in this context we find that considering learning can alter the evaluation of alternative policy rules

inflation dynamics and the cost channel of monetary transmission evidence from vector autoregressions indicates that the impact of interest rate shocks on macroeconomic aggregates can substantially be affected by the so called cost channel of monetary transmission in this paper we apply a structural approach to examine the relevance of the cost channel for inflation dynamics in g7 countries we augment the so called hybrid new keynesian philips curve by letting firms costs for external funds rise with the short run nominal interest rate our estimates reveal that the magnitude of this cost channel strongly varies between countries including member countries of the emu in accordance with differences in their financial systems simulations of a new keynesian model further show that the presence of the cost channel substantially affects the transmission of monetary policy shocks in particular the inflation response

on non uniqueness in rational expectations models an attempt at perspective abstract many macroeconomic models involving rational expectations give rise to an infinity of solution paths even when the models are linear in all variables some writers have suggested that this non uniqueness constitutes a serious weakness for the rational expectations hypothesis one purpose of the present paper is to argue that the non uniqueness in question is not properly attributable to the rationality hypothesis but instead is a general feature of dynamic models involving expectations it is also argued that there typically exists in a very wide class of linear rational expectations models a single solution that excludes bubble or bootstrap effects one that occur only because they are arbitrarily expected to occur a systematic procedure for obtaining solutions free from such effects is introduced and discussed in addition this procedure is used to interpret and reconsider several prominent examples with solution multiplicities including ones developed by fischer black and john b taylor

economic literacy and inflation expectations evidence from a laboratory experiment we present experimental evidence of a link between economic literacy and inflation forecast accuracy the experiment investigates two channels through which economic literacy may enable better forecasts i choice of information and ii use of information more literate subjects choose more relevant information and use the given information more effectively starting from a 10th percentile score the boost in literacy from taking an economics course predicts a 0 64 standard deviation decline in mean absolute forecasting error our findings suggest that a significant portion of demographic heterogeneity in inflation expectations observed in survey data may be driven by heterogeneity in economic literacy

determinacy learnability and monetary policy inertia we show how monetary policy inertia can help alleviate problems of indeterminacy and non existence of stationary equilibrium observed for some commonly studied monetary policy rules we also find that inertia promotes learnability of equilibrium the context is a simple forward looking model of the macroeconomy widely used in the rapidly expanding literature in this area we conclude that this might be an important reason why central banks in the industrialized economies display considerable inertia when adjusting monetary policy in response to changing economic conditions

consideration set formation with multiproduct firms the case of within firm and across firm evaluation costs we consider a theoretical setting in which firms carry multiple products and consumers incur evaluation costs not only across firms but also within firms consumers judiciously decide the number of firms to include in their consideration sets as well as how many products from those firms this decision depends on the relative trade offs of evaluating an additional product and whether it is from a firm already included in the consideration set or from an entirely new firm the composition of consumers consideration set affects how firms compete in prices and in the number of products to offer contrary to previous literature we find that firm differentiation can reduce firms product lines and within firm evaluation costs have either a positive or a negative effect on firms prices interestingly we show that within firm evaluation costs and across firm evaluation costs are different constructs the number of products firms offer in equilibrium can exceed the socially optimal level if within firm evalua

the price is right updating inflation expectations in a randomized price information experiment abstract using a unique randomized information experiment embedded in a survey this paper investigates how consumers inflation expectations respond to new information we find that respondents on average update their expectations in response to certain types of information and do so sensibly in a manner consistent with bayesian updating as a result of information provision the distribution of inflation expectations converges toward its center and cross sectional disagreement declines we document heterogeneous information processing by gender and present suggestive evidence of respondents forecasting under asymmetric loss our results provide support for expectation formation models in which agents form expectations rationally but face information constraints

optimal monetary policy when agents are learning abstract we derive optimal monetary policy in a sticky price model when private agents follow adaptive learning we show that this slight departure from rationality has important implications for policy design the central bank faces a new intertemporal trade off not present under rational expectations it is optimal to forego stabilizing the economy in the present in order to facilitate private sector learning and thus ease the future intratemporal inflation output gap trade offs the policy recommendation is robust the welfare loss entailed by optimal policy under learning if the private sector actually has rational expectations is much smaller than if the central bank mistakenly assumes rational expectations when in fact agents are learning

search for information on multiple products we develop a framework for continuous search for information on a choice set of multiple alternatives and apply it to consumer search in a product market when a consumer considers purchasing a product in a product category the consumer can gather information sequentially on several products at each moment the consumer can choose which product to gather more information on and whether to stop gathering information and purchase one of the products or to exit the market with no purchase given costly information gathering consumers end up not gathering complete information on all the products and need to make decisions under imperfect information under the assumption of constant informativeness of search we solve for the optimal search switch and purchase or exit behavior in such a setting which is characterized by an optimal consideration set and a purchase threshold structure this paper shows that a product is only considered for search or purchase if it has a sufficiently high expected utility

product variety and endogenous pricing with evaluation costs one important decision firms must make is to select the product line characteristics and number of products to offer consumers this paper explores the effect of the interaction between consumer evaluation costs and pricing on the optimal product line length to offer consumers before deciding to buy a product among all products offered a consumer learns the product line length given the product line length a consumer decides whether to evaluate the products available and their prices this decision to evaluate depends on the expected consumer surplus after the evaluation being greater than the evaluation costs when the firm offers few products the firm may not attract many consumers because of lack of product fit and may be forced to offer low prices when the firm offers many products all consumers will find a great product fit that is the variance of consumer valuations per product chosen is lower this allows the firm to charge high prices to extract ex post consumer surplus resulting in lower ex ante expected consumer surplus which may lead consumers not to evaluate the products in the first place that is by offering fewer products a firm can commit not to extract all possible consumer surplus these two forces may then lead to the existence of an interior optimal number of products to offer the optimal number of products offered is decreasing in the evaluation costs

competitive promotional strategies this article analyzes the equilibrium pricing strategies of brands engaged in a pricing game each brand has a monopoly market loyal consumers and competes with others in a common market called brand switchers in the case of a duopoly it is shown that the behavior of the brand switchers characterizes the equilibrium behavior of the duopolists this article focuses on two key comparative statics namely the depth of discounts away from a regular high price and the probability of giving a deal or the frequency of deals how these properties vary with the size of the loyal markets and the behavior of the brand switching population is discussed copyright 1988 by the university of chicago

is there a cost channel of monetary policy transmission an investigation into the pricing behavior of 2 000 firms the paper exploits a unique panel covering some 2 000 italian manufacturing firms and 14 years of data on individual prices and individual interest rates paid on several types of debt to address the question of the existence of a channel of transmission of monetary policy operating through the effect of interest expenses on the marginal cost of production it has been argued that this mechanism may explain the dimension of the real effects of monetary policy give a rationale for the positive short run response of prices to interest rate increases the price puzzle and call for a more gradual monetary policy response to shocks we find robust evidence in favor of the presence of a cost channel of monetary policy transmission proportional to the amount of working capital held by each firm the channel is large enough to have non trivial monetary policy implications

monetary policy indeterminacy and learning abstract forward looking monetary models with taylor type interest rate rules are known to generate indeterminacies with a potential dependence on extraneous sunspots for some structural and policy parameters we investigate the stability of these solutions under adaptive learning focusing on common factor or resonance frequency representations in which the observed sunspot has a suitable time series structure we consider specifications incorporating both lagged and expected inflation in the phillips curve and both expected and inertial elements in the policy rule we find that some policy rules can indeed lead to learnable sunspot solutions and we investigate the conditions under which this phenomenon arises

optimal monetary policy with the cost channel in the standard new keynesian framework an optimizing policy maker does not face a trade off between stabilizing the inflation rate and stabilizing the gap between actual output and output under flexible prices an ad hoc exogenous cost push shock is typically added to the inflation equation to generate a meaningful policy problem in this paper we show that a cost push shock arises endogenously when a cost channel for monetary policy is introduced into the new keynesian model a cost channel is present when firms marginal cost depends directly on the nominal rate of interest besides providing empirical evidence for a cost channel we explore its implications for optimal monetary policy we show that its presence alters the optimal policy problem in important ways for example both the output gap and inflation are allowed to fluctuate in response to productivity and demand shocks under optimal monetary policy

testing the rationality of price forecasts new evidence from panel data this paper tests the rationality of individual price forecasts in a panel of professional forecasters here unlike in most previous studies rationality is not rejected the results here differ because 1 using individual forecasts avoids aggregation bias 2 comparison of forecasts to initial data avoids bias due to data revision 3 the professional forecasters have economic incentives to state their expectations accurately and 4 a new covariance matrix estimator consistent when forecast errors are correlated across individuals is used copyright 1990 by american economic association

inflation targeting should it be modeled as an instrument rule or a targeting rule abstract the paper discusses how current inflation targeting should be modeled and argues that it is better represented as a commitment to a targeting rule a rule specifying operational objectives for monetary policy or a condition for the target variables than as a commitment to a simple instrument rule like a taylor rule

signaling low margin through assortment oftentimes close competitors carry partially overlapping assortments in seeming contradiction to the principle of maximum differentiation one of the justifications of such practice is that an overlapping assortment with competitive prices on the common products may prevent further consumer search and therefore could be useful even when profits from the overlapping products do not justify the costs of carrying them in this paper we examine the validity of this intuition and show that such strategy may indeed be optimal when consumers are uncertain about prices they might find elsewhere and face shopping costs for discovery of all prices specifically we show that the larger assortment with product overlap may signal a competitive price of the relatively unique product and prevent further consumer search for a lower price on it an implication of this finding is that a consumer may rationally behave as if she likes a larger assortment even if the assortment is enlarged by adding products the consum

does inflation increase after a monetary policy tightening answers based on an estimated dsge model abstract this paper estimates the importance of the cost channel of monetary policy in a new keynesian model of the business cycle a model with nominal and real rigidities is extended by assuming that a fraction of firms need to borrow money to pay their wage bill hence a monetary policy tightening increases effective unit labor costs of production and might imply an increase in inflation the paper examines the conditions under which the model can generate a positive response of inflation to a monetary contraction and estimates the model s parameters using bayesian methods the paper shows that the estimated demand side effects of monetary policy dominate the estimated supply side effect even if restrictions are imposed that make occurrence of a positive inflation response to a monetary contraction more likely

pricing product diversity and search costs a bertrand chamberlin diamond model we study price competition in the presence of search costs and product differentiation the limit cases of the model are the bertrand paradox the diamond paradox and chamberlinian monopolistic competition market prices rise with search costs and decrease with the number of firms prices may initially fall with the degree of product differentiation because more diversity leads to more search and more competition equilibrium diversity rises with search costs while the optimum level falls so entry is excessive the market failure is most pronounced for low preference for variety and high search costs

optimal monetary policy under learning and structural uncertainty in a new keynesian model with a cost channel and inflation inertia abstract we investigate whether expectations based optimal monetary policy rules under discretion and under commitment can enforce a determinate and least squares learnable rational expectations equilibrium ree in a new keynesian model with inflation inertia and a cost channel of monetary policy transmission our numerical results show that commitment rules can enforce a determinate and learnable ree for all parameter constellations considered whereas discretionary rules are not always able to enforce the same desirable outcome in the economy we also examine different types of misapprehensions in policy making and find that an incorrect assessment of the economy s true structure by the central bank greatly affects its capability to enforce a determinate and learnable although suboptimal ree thus our numerical results highlight the relevance of this type of analysis for the design and conduct of monetary policy

learning about monetary policy rules when the cost channel matters abstract we study how monetary policy may affect determinacy and expectational stability e stability of rational expectations equilibrium when the cost channel of monetary policy matters focusing on instrumental taylor type rules and optimal target rules we show that standard policies can induce indeterminacy and expectational instability when the cost channel is present a naive application of the traditional taylor principle could be misleading and expectations based reaction function under discretion does not always induce determinate and e stable equilibrium this result contrasts with the findings of bullard and mitra 2002 learning about monetary policy rules journal of monetary economics 49 1105 1129 and evans and honkapohja 2003 expectations and stability problem for optimal monetary policies review of economic studies 70 807 824 for the standard new keynesian model the ability of the central bank to commit to an optimal policy is an antidote to these problems

european inflation dynamics abstract we provide evidence on the fit of the new phillips curve npc for the euro area over the period 1970 1998 and use it as a tool to compare the characteristics of european inflation dynamics with those observed in the u s we also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs as well as that of its two main components namely labor productivity and real wages some of the findings can be summarized as follows a the npc fits euro area data very well possibly better than u s data b the degree of price stickiness implied by the estimates is substantial but in line with survey evidence and u s estimates c inflation dynamics in the euro area appear to have a stronger forward looking component i e less inertia than in the u s d labor market frictions as manifested in the behavior of the wage markup appear to have played a key role in shaping the behavior of marginal costs and consequently inflation in europe

macroeconomic expectations of households and professional forecasters economists have long emphasized the importance of expectations in determining macroeconomic outcomes yet there has been almost no recent effort to model actual empirical expectations data instead m acroeconomists usually simply assume that expectations are rational this paper shows that while empirical household expectations are not rational in the usual sense expectational dynamics are well captured by a model in which households views derive from news reports of the views of professional forecasters which in turn may be rational the model s estimates imply that people only occasionally pay attention to news reports this inattention generates stickyness in aggregate expectations with important macroeconomic consequences

lowering customer evaluation costs product differentiation and price competition when match uncertainty is resolved via costly evaluation the first product sampled by a customer is more likely to make the sale this prompts firms to lower their products evaluation costs to attract customers to sample their products first such efforts by firms are called customer learning investment cli when product quality is freely observable but horizontal match is not we examine how cli choices interact with quality and price competition in a duopoly cli has a competition effect in that a higher cli of a firm increases its demand but decreases that of its rivals in the market covered duopoly both qualities will decrease increase when the high end low end firm invests more in customer learning and remain unchanged when they invest equally relative to when neither firm invests we further show that the firm with a higher relative production efficiency invests more in customer learning than the competitor in the market not covered duopoly cli by the low end firm also creates a market

has euro area inflation persistence changed over time this paper analyzes the stability over time of the econometric process for euro area inflation since 1970 focusing in particular on the behavior of the so called persistence parameter the sum of the coefficients on the lagged dependent variables perhaps surprisingly in light of the lucas critique our principal finding is that there appears to be relatively little instability in the parameters of the euro area inflation process full sample estimates of the persistence parameter are generally close to 1 and we fail to reject the hypothesis that this parameter has been stable over time we discuss how these results provide some indirect evidence against rational expectations models with strong forward looking elements such as the new keynesian phillips curve

experimental evidence on inflation expectation formation using laboratory experiments within a new keynesian sticky price framework we study the process of inflation expectation formation we focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40 of subjects more than 20 of subjects are also best described by adaptive learning models where they behave like econometricians and update their model estimates every period however rather than using a single forecasting model switching between models describes their behavior better switching is more likely to occur when experimental economy is in a recession

what is wrong with taylor rules using judgment in monetary policy through targeting rules it is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule e ither ageneral targeting rule explicit objectives for monetary policy or a specific targeting rule a criterion for the forecasts of the target variables to be fulfilled essentially the equality of the marginal rates of transformation and substitution between the target variables targeting rules allow the use of judgment and extramodel information are more robust and easier to verify than optimal instrument rules and they can nevertheless bring the economy close to the socially optimal equilibrium

when more alternatives lead to less choice this paper shows that when the alternatives offered to consumers span the preference space as it would be chosen by a firm search or evaluation costs may lead consumers not to search and not to choose if too many or too few alternatives are offered if too many alternatives are offered then the consumer may have to engage in many searches or evaluations to find a satisfactory fit this may be too costly and result in the consumer avoiding making a choice altogether if too few alternatives are offered then the consumer may not search or choose fearing that an acceptable choice is unlikely these two forces result in the existence of a finite optimal number of alternatives that maximizes the probability of choice

foreign exchange futures prices under fixed exchange rates abstract this paper develops three models for the determination of foreign exchange futures prices under fixed exchange rates and expectations of devaluation these models show that certain characteristics of futures prices behavior that have been used as proof of inefficiency may be present even if the market is efficient they also have several implications that are consistent with the observed behavior of mexican pesos futures prices

price uncertainty and consumer search a structural model of consideration set formation we offer an econometric framework that models consumer s consideration set formation as an outcome of her costly information search behavior because frequently purchased products are characterized by frequent price promotions of varying depths of discounts a consumer faces significant uncertainty about the prices of the brands the consumers engage in a fixed sample search strategy that results in their discovering the posted prices of a subset of the available brands this subset is referred to as the consumer s consideration set the proposed model is estimated using the scanner data set for liquid detergents our key empirical results are i consumers zincur significant search costs to discover the posted prices of the brands ii whereas in store displays and feature ads do not influence consumers quality perceptions of the brands they significantly reduce search costs for observing the prices of the brands iii per capita income of consumer s household significantly increases her search costs and iv the consumers price sensitivity is seriously underestimated if we were to assume that consumers get to know all the posted prices at zero cost the proposed model is also estimated for the ketchup category to enable us to do cross category comparisons of consumers price search behavior

are perceptions of inflation rational some evidence for sweden this survey paper argues that walrasian markets and monetary exchan ge are alternative not complementary arrangements for coordinating economic activity that if one realizes this many informational anomalies and price rigidities that appear irrational in a walrasia n context can be understood as the outcome of maximizing behavior in a monetary economy and that the precautionary approach to modelin g the demand for money takes on a particular importance in this way of looking at things empirical evidence on the demand for money is cite d in support of this point of view which tends to reinstate the quantity of money as an important economic variable in contrast to the new classical vision of the economy whi ch downgrades money s importance this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

multiple product firms a nested logit approach this paper proves the existence of a symmetric equilibrium with multiproduct firms using a nested logit model of demand the demand model is parameterized by two variables that characterize different dimensions of preference for variety these reflect intragroup heterogeneity and intergroup heterogeneity a group or nest being the set of products produced by a firm there are then two dimensions to market performance the total number of firms and the range of products produced per firm it is shown that the market equilibrium involves an excessive number of firms but each firm provides too few products copyright 1992 by blackwell publishing ltd

equity and tradeoffs in a tax based incomes policy a tax based incomes policy tip is a tax incentive that tries to induce employers and or workers to reduce wage and or price increases it is intended as a complement to the basic anti inflation policy of gradual monetary deceleration and fiscal restraint its purpose is to reduce the capital stock and output loss that would otherwise accompany such a policy see my 1978 1979a articles this article is divided into two sections section i examines the capital stock and output loss under monetary deceleration that is uncomplemented by tip this loss is due primarily to wage growth inertia a central feature of modern capitalist economies such inertia provides not only the rationale for a tip on wage increases but also implies that special effort is required to assure that the design of a complete tip package is fair to labor section ii analyzes the tradeoffs confronting two alternative methods of making tip more equitable to labor profit and or price restraint insurance and a tip on price increases of the largest firms the original tip limited to wage increases at first glance is often perceived as unbalanced and inequitable this section tries to contribute to the development of a balanced equitable tip

tests of the rational expectations hypothesis this paper reviews evidence on the structure of anticipation from a number of empirical studies jack muth s rational expectations hypothesis is compared with a variety of alternative models including ferber s law the implicit expectations model of edwin mills and muth s new errors in the variables model the cumulative evidence is of such strength as to compel the suspension of belief in the concept of rational expectations this implies that it is a mistake to proceed under the maintained hypothesis that expectations are rational instead it is necessary to test the sensitivity of empirical and theoretical results to alternative assumptions about the structure by which anticipations are generated copyright 1986 by american economic association

monetary policy expectations and commitment commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies a number of interest rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy we assess these rules in terms of whether they lead to a rational expectations equilibrium that is both locally determinate and stable under adaptive learning by private agents a reaction function that appropriately depends explicitly on private sector expectations performs particularly well on both counts

on the effects of consumer search and firm entry in a multiproduct competitive market this paper studies a model in which consumers search among multiple competing firms for products that match their preferences at a reasonable price we focus on how easier search possibly due to the adoption of search facilitating technologies such as the internet influences equilibrium prices assortments firm profits and consumer welfare conventional wisdom suggests that easier search creates a competition intensifying effect that puts pressure on firms to lower their prices and reduce assortments however in our model we demonstrate that search also exhibits a market expansion effect that encourages firms to expand their assortment easier search means that each firm is searched by more consumers because of broader assortments consumers are more likely to find products that better match their ideal preferences improving the efficiency of the market in fact we demonstrate that the market expansion effect can even dominate the competition intensifying effect potentially leading to higher prices broader assortments more profits and expanded welfare

frequency bias in consumers perceptions of inflation an experimental study we investigate whether the perception of economy wide inflation is affected by the frequency with which various goods prices are observed we provide novel experimental evidence that consumers perceptions of aggregate inflation are systematically biased toward the perceived inflation rates of the frequently purchased items this frequency bias may affect consumers consumption and investment decisions and thus have important macroeconomic consequences it may also explain why consumers typically over estimate inflation in surveys during periods where frequently purchased non durable goods are inflating faster than durables