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Budget-constrained Search

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  • Richard Manning
  • Julian Manning

Abstract

A consumer with diminishing marginal utility in consumption, who can search for lower prices, will balance the gains from spreading consumption evenly through time against the benefits of delaying consumption until lower prices are revealed. Optimal programs of consumption, savings and price are characterized for a general formulation of this problem. Intertemporal substitutability is measured by relative-risk aversion. Small relative-risk aversion is sufficient for the intuitive solution: As the best current price rises, more search and less consumption is done. The general model is adapted to special cases. Among other things, this shows that linear utility and sequential search implies calculable reservation prices and consumption only when search stops. However, this characterization is a consequence of the restriction to linear utility. Outside of this context reservation prices and consumption may not be calculable.
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Suggested Citation

  • Richard Manning & Julian Manning, "undated". "Budget-constrained Search," Penn CARESS Working Papers 30eae25a19493dd4cdf3449d5, Penn Economics Department.
  • Handle: RePEc:cla:penntw:30eae25a19493dd4cdf3449d58ba96aa
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    File URL: http://www.econ.upenn.edu/Centers/CARESS/
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    References listed on IDEAS

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    1. Benhabib, Jess & Bull, Clive, 1983. "Job Search: The Choice of Intensity," Journal of Political Economy, University of Chicago Press, vol. 91(5), pages 747-764, October.
    2. R. Manning & P. B. Morgan, 1982. "Search and Consumer Theory," Review of Economic Studies, Oxford University Press, vol. 49(2), pages 203-216.
    3. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-493, June.
    4. J. J. McCall, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, Oxford University Press, vol. 84(1), pages 113-126.
    5. Morgan, Peter & Manning, Richard, 1985. "Optimal Search," Econometrica, Econometric Society, vol. 53(4), pages 923-944, July.
    6. Veendorp, E. C. H., 1984. "Sequential search without reservation price," Economics Letters, Elsevier, vol. 16(1-2), pages 53-57.
    7. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    8. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213-213.
    9. Peter B. Morgan, 1983. "Search and Optimal Sample Sizes," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 659-675.
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    Cited by:

    1. Sergey MALAKHOV, 2016. "Law of One Price and Optimal Consumption-Leisure Choice Under Price Dispersion," Expert Journal of Economics, Sprint Investify, vol. 4(1), pages 1-8.
    2. Grosfeld-Nir, Abraham & Sarne, David & Spiegler, Israel, 2009. "Modeling the search for the least costly opportunity," European Journal of Operational Research, Elsevier, vol. 197(2), pages 667-674, September.

    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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