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Welfare Analysis of Imperfect Information Equilibria

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  • Peter A. Diamond

Abstract

Most analyses of equilibrium with imperfect information have assumed that individuals know the distribution of possibilities in the market. When individuals do not know the distribution, marginal cost pricing is not generally optimal. In a two-price example it is shown that individuals with correct Dirichlet priors tend to search too little when they adjust their beliefs in response to observations. In a fairly general static partial equilibrium model, the derivatives of social welfare with respect to pricing and advertising are related to market characteristics. Different situations are described where there are social gains from increases or decreases in both the price and the level of selling effort.

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  • Peter A. Diamond, 1978. "Welfare Analysis of Imperfect Information Equilibria," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 82-105, Spring.
    • Handle: RePEc:rje:bellje:v:9:y:1978:i:spring:p:82-105
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    Cited by:

    1. Peter Diamond, 2011. "Unemployment, Vacancies, Wages," American Economic Review, American Economic Association, vol. 101(4), pages 1045-1072, June.
    2. Daniel McFadden & Carlos Noton & Pau Olivella, "undated". "Remedies for Sick Insurance," Working Papers 620, Barcelona School of Economics.

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