Skip to main content

Posts

Some estimates of cross-price elasticity

The final part of this exciting trilogy is cross-price elasticity. (See here for estimates of own price and income elasticity.) Here we are looking for how demand for one product, say cars, is influenced by the price of another product, say petrol. The idea is to find a spread of examples from goods that are close substitutes (have cross price elasticity near 1) to strong complements (have an elasticity near -1). Within the literature there are a lot more examples of substitutes, like cars and public transport, than of complements, like cars and petrol. Indeed, it was a bit of a struggle to find any complements. Here are the examples I converged on: The book versus culture number is taken from the study by Ringstad and Loyland. The numbers for organic food are taken from the report by Bunte and co-authors on Dutch data. Those for alcohol are from a UK a study by Meng and co-authors. For numbers of public transport in the UK there is a  study by Paulley and co-
Post a Comment
Read more
Recent posts

Some estimates of income elasticity of demand

My previous blog looked at estimates of own price elasticity of demand. Now the focus moves on to estimates of income elasticity of demand. In a sense income elasticity should be easier to measure than price elasticity of demand because there is more variation in income than price. But I actually found it a lot harder to come by income elasticicities in the literature. And it was particularly difficult to get a nice spread of elasticities. Ideally we want some examples of luxury goods (with elasticity more than 1), normal goods (more than 0) and inferior goods (less than 0). The large majority of the examples I could find fitted in the 0.3-0.8 range. My rough interpretation of the literature is that 'simple' estimates tended to suggest things like eating out and health care were highly income elastic but more detailed work has lowered the numbers down. It was also the case that goods you might think of as luxuries where not. This could just be a self-selection issue. For i
Post a Comment
Read more

Some estimates of price elasticity of demand

In the  textbook on Microeconomics and Behaviour with Bob Frank we have some tables giving examples of price, income and cross-price elasticities of demand. Given that most of the references are from the 70's I'm working on an update for the forthcoming 3rd edition. So, here is a brief overview of where the numbers come from for the table on price elasticity of demand. Suggestions for other good sources much appreciated. Before we get into the numbers - the disclaimer. Price elasticities are tricky things to tie down. Suppose you want the price elasticity of demand for cars. This elasticity is likely to be different for rich or poor people, people living in the city or the countryside, people in France or Germany etc.etc. You then have to think if you want the elasticity for buying a car or using a car (which includes petrol, insurance and so on). So, there is no such thing as the price elasticity of demand for cars. Moreover, the estimated price elasticity will depend o
Post a Comment
Read more

Is it ever optimal to play a mixed strategy?

In the early days of its (modern) history game theory focused a lot on zero-sum games. These are games in which total payoffs always add to zero no matter what the outcome. So, in a two player setting - your gain is my loss and vice-versa. It was arguably natural for game theory to focus on zero-sum games because they represent the epitome of conflict. The main reason the focus fell on such games is, however, more one of convenience  - zero-sum games have a solution . This solution is captured by the minimax theorem and all that followed. Basically it amounts to saying that there is a unique way of playing a zero-sum game if all players want to maximize their payoff and are rational . Most games do not have a 'solution', because there are multiple Nash equilibria and so there is not an obvious correct way to play the game. In this sense zero-sum games are 'nice' or 'convenient'. But does it make sense to behave according to the minimax theorem? The simple an
Post a Comment
Read more

Have you heard of Berge equilibrium? And should you have?

Recently I refereed a paper on the existence of Berge equilibrium. I must confess that until reading the paper I knew nothing of Berge equilibrium. But in my defence, the equilibrium does not get a mention in any game theory textbook on my shelves and, surely most telling of all, does not get an entry in Wikipedia. So, what is Berge equilibrium and should we hear more about it? The origins of the equilibrium are a book by French mathematician Claude Berge (who does get a Wikipedia page) on a general theory of n-person games, first published in 1957. But it has seemingly gone pretty much unnoticed from then on, although there is a growing literature on the topic as summarized in a 2017 paper by Larbani and Zhukovskii. The basic idea behind Berge equilibrium seems to be one of altruism or cooperation between players in a group. To explain, consider a game. Let s i denote the strategy of player i, s -i the strategies of everyone other than i and u i (s i , s -i ) the payoff of play
Post a Comment
Read more

Reflections on the Rebuilding Macroeconomics Conference

Last week I had the pleasure of attending the Rebuilding Macroeconomics Conference with a theme of Bringing Psychology and Social Sciences into Macroeconomics. The basic question of the conference seemed to be ‘how can we avoid another financial crisis’ or, from a different perspective, ‘how can we avoid not predicting the next financial crisis’. There was an impressive roll call of speakers from economics, psychology, anthropology, neuroscience, sociology, mathematics and so on with their own take on this issue. Here are a few random thoughts on the conference (with the acknowledgement that I didn’t attend every session). I was most at home with the talks from a behavioural economics perspective. But it was still great to get extra insight on how this work can be applied to macroeconomics. For instance, Rosemarie Nagel and Cars Hommes gave an interesting perspective on how the beauty contest has real world relevance. Most economists are familiar with the basic idea – people ind
Post a Comment
Read more

Social value orientation in economics part 2 - slider method

In a previous blog post I looked at social vale orientation (SVO) and one method to measure it, namely the decomposed game or ring technique. Here I will look at a second way of measuring SVO called the slider method . This method, due to Ryan Murphy, Kurt Ackermann and Michel Handgraaf is relatively new and has some nice advantages. While most existing studies use the ring technique I would expect the slider method to become the method of choice going forward. So, it is good to know how it works.  Recall that the basic idea behind social value orientation (SVO) is to gain a snapshot of someone's social preferences. Are they  selfish  and simply do the best for themselves without caring about the payoff of others? Are they  competitive  and want to earn more than others (even if that means sacrificing own payoff)? Are they  inequality averse  and want to earn the same as others? Or are they  pro-social  and want to maximize the payoff of others?  One way to categorize SVO is
Post a Comment
Read more