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.
|Date of creation:||17 Jun 1994|
|Date of revision:||17 Jun 1994|
|Note:||24 pages, TeX file, macros included|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Benhabib, Jess & Bull, Clive, 1981.
"Job Search: The Choice of Intensity,"
81-28, C.V. Starr Center for Applied Economics, New York University.
- R. Manning & P. B. Morgan, 1982. "Search and Consumer Theory," Review of Economic Studies, Oxford University Press, vol. 49(2), pages 203-216.
- J. J. McCall, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, Oxford University Press, vol. 84(1), pages 113-126.
- Morgan, Peter & Manning, Richard, 1985. "Optimal Search," Econometrica, Econometric Society, vol. 53(4), pages 923-944, July.
- Veendorp, E. C. H., 1984. "Sequential search without reservation price," Economics Letters, Elsevier, vol. 16(1-2), pages 53-57.
- Peter B. Morgan, 1983. "Search and Optimal Sample Sizes," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 659-675.
- George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213-213.
- Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
- 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.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpga:9406001. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.