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Simulating Sequential Search Models with Genetic Algorithms: Analysis of Price Ceilings, Taxes, Advertising and Welfare

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Author Info
Ian McCarthy () (Indiana University Bloomington)
Abstract

This paper studies advertising, price ceilings and taxes in a sequential search model with bilateral heterogeneities in production and search costs. We estimate equilibria using a genetic algorithm (GA) applied to over 100 market scenarios, each differing based on the number of firms, number of consumers, existence of price ceilings or taxes, costs of production, costs of advertising, consumers' susceptibility to advertising and consumers' search costs. We compare our equilibrium results to those of the standard theoretical consumer search literature and analyze the welfare effects of advertising, price ceilings and sales taxes. We find that price ceilings and uninformative advertising can improve welfare, especially if search costs are sufficiently high.

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Paper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2008-010.

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Length: 29 pages
Date of creation: Apr 2008
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Handle: RePEc:inu:caeprp:2008-010

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Related research
Keywords: Sequential Search Models; Genetic Algorithms; Price Ceilings; Taxes; Advertising; Welfare;

Find related papers by JEL classification:
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising

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References listed on IDEAS
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  1. Benabou Roland, 1993. "Search Market Equilibrium, Bilateral Heterogeneity, and Repeat Purchases," Journal of Economic Theory, Elsevier, vol. 60(1), pages 140-158, June. [Downloadable!] (restricted)
    Other versions:
  2. Rauh, Michael T., 2004. "Wage and price controls in the equilibrium sequential search model," European Economic Review, Elsevier, vol. 48(6), pages 1287-1300, December. [Downloadable!] (restricted)
  3. Holland, John H & Miller, John H, 1991. "Artificial Adaptive Agents in Economic Theory," American Economic Review, American Economic Association, vol. 81(2), pages 365-71, May. [Downloadable!] (restricted)
  4. Tony Curzon Price, 1997. "Using co-evolutionary programming to simulate strategic behaviour in markets," Journal of Evolutionary Economics, Springer, vol. 7(3), pages 219-254. [Downloadable!] (restricted)
  5. Andreoni, J. & Miller, J.H., 1990. "Auctions With Adaptive Artificially Intelligent Agents," Working papers 90-32, Wisconsin Madison - Social Systems.
  6. Ali Hortaç Su & Chad Syverson, 2004. "Product Differentiation, Search Costs, And Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 403-456, May. [Downloadable!] (restricted)
  7. MacMinn, Richard D, 1980. "Search and Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 308-27, April. [Downloadable!] (restricted)
  8. Robert Marks, 2007. "Validating Simulation Models: A General Framework and Four Applied Examples," Computational Economics, Springer, vol. 30(3), pages 265-290, October. [Downloadable!] (restricted)
  9. Han Hong & Matthew Shum, 2006. "Using Price Distributions to Estimate Search Costs," RAND Journal of Economics, The RAND Corporation, vol. 37(2), pages 257-275, Summer.
  10. Riechmann, Thomas, 2001. "Two Notes on Replication in Evolutionary Modelling," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-239, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
  11. Keenan, Donald C. & O'Brien, Mike J., 1993. "Competition, collusion, and chaos," Journal of Economic Dynamics and Control, Elsevier, vol. 17(3), pages 327-353, May. [Downloadable!] (restricted)
  12. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-93, June. [Downloadable!] (restricted)
  13. Robert, Jacques & Stahl, Dale O, II, 1993. "Informative Price Advertising in a Sequential Search Model," Econometrica, Econometric Society, vol. 61(3), pages 657-86, May. [Downloadable!] (restricted)
  14. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
  15. Matteo Richiardi & Roberto Leombruni & Nicole J. Saam & Michele Sonnessa, 2006. "A Common Protocol for Agent-Based Social Simulation," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 9. [Downloadable!]
    Other versions:
  16. Rob, Rafael, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Blackwell Publishing, vol. 52(3), pages 487-504, July. [Downloadable!] (restricted)
  17. Riechmann, Thomas, 2001. "Genetic algorithm learning and evolutionary games," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 1019-1037, June. [Downloadable!] (restricted)
  18. Tony Curson Price, 1997. "Using co-evolutionary programming to simulate strategic behaviour in markets," Levine's Working Paper Archive 588, David K. Levine. [Downloadable!]
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