Notice: On Hiatus!

Hi to all who read this blog... as you have noticed, I have been updating my blog less often than normal. I have a very good reason for this - the upcoming exams! But I might do some random posting when I get bored studying.

In any case, for those having assignments, exams, all the best!

Schumpeterian Economics: Introducing, Information Economics

The economics of information is a relatively new thing I am currently studying. One interesting quote is from Boyle (1996, p.38 as cited in Dempsey, 1999, p.33):

[Incentive] analysis largely ignores the opposite perspective, that of the free flow of information. If we switch the perspective, we can see that one important purpose of [intellectual property] law is to make sure that future creators have available to them an adequate supply of raw materials. From this perspective, too many ‘incentives’ could convert the public domain into a fallow landscape of private plots.

Basically, we are pretty used to thinking that information is a public good, and hence to protect the profit incentives of firms investing to create information, governments put intellectual property laws in place. I will update this more later on.

Of Interest: The importance of preparing for your tax return early!

This is understandably quite a random post. The reason for this is that I was assisting my research doctor with compiling receipts to prepare for his tax return. Since he has been busy with other stuff, he's been unable to complete it for the year, which means that my job was to compile receipts together and then match them to the relevant banking statement. Wow. Imagine, if once I start working, I have to do something like that. So, here is a gentle encouragement/threat to myself and to readers, please, please, please, PREPARE FOR YOUR TAX RETURN EARLY! I hereby salute all the office, personal, etc assistants who do those jobs.

Experimental Economics: Double auction vs Posted offer

As a short intro, both double auction and posted offer are market institutions (which is basically a specification of the rules of trade in a market). Let us assume that buyers want to buy and sellers want to sell a specific good, for instance, shoes.

In a double auction institution, buyers bid upward for the shoes and sellers bid downward to sell their shoes, and then a trade happens when these meet. For example, I want to buy the shoes for $5, and then a seller wants to sell it for $7. So then I say '$5.50!' The seller might find it too low and go 'Ok, ok, $6.50'. It goes on and on until we agree on a price. The double auction institution is in fact highly efficient, as it yields the maximum efficiency in trade (this is measured as the economic surplus from the trade divided by the total potential surplus. Economic surplus is calculated like this: for buyers, this is the price you pay minus the price you would be willing to pay for it; say I wanted to pay $6.50 for the shoes but I got it for $6.00, then my surplus is $0.50. Similarly, for sellers, this is the price you receive minus the price you were willing to sell it for; say you were willing to sell the shoes for $5.80 but got $6.00 for it, so your surplus is $0.20).

The posted offer institution is as follows: sellers post a price, and then buyers see the price and decide if they want to buy or not. No bargaining, just a posted price. This tends to be less efficient than the double auction, as maybe some sellers would have been willing to sell for $0.50 less (and possibly make a trade), but cannot bid down due to the price being fixed.
A class experiment would confirm this result. It is actually a rather fun* experiment. In fact, if you're planning on having a birthday party, I would recommend this as an icebreaker or a game in the party. Perhaps I really am too much of a scholar.

*according to my individual preferences

Of Interest: Have you ever noticed that many of the world's smartest are Jews?

In fact, I was actually wondering about this. I remember, prior to commencing my Economics degree and preparing for a scholarship interview, the results of the winners for the most recent Nobel prize (at the time) was released. Of interest to me were the winners for their game theory, Aumann and Schelling. Ariel Rubinstein, a famous microeconomist, is a Jew (haha, the last name gives it away). And I thought, wow, why is that the case? I found an article from Commentary Magazine here, which I found a good read. It really makes you think. The article made me go wow.

Game Theory: Beauty Contest (Ooh!)

A quote from Keynes, 1936, p.156 regarding the levels of thinking regarding beauty contests:

"It is not a case of choosing those [faces] which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees."

Have a wiki about the beauty contest here.

History: Israel and Palestine

I found this link while browsing through Harry Clarke's blog, and had a read at it. It is highly interesting - seeing the differences between what is reported in the media, and what the real story is behind the scenes. Have a read here, posted on the online commentary magazine.

Music: Darin Zanyar

It is rather evident, after this posting, that I am in fact, a female! This is the runner up of the 2004 (if I remember correctly) Swedish Idol, Darin Zanyar.

His lyrics are rather well... as one would expect from European artists (no offense to them, I enjoy European music)... but the beat and arrangements are good, in my opinion.

Visit Darin's official homepage here (in Swedish and English)

Experimental economics: Price Matching Guarantees (2)

Hi again everybody (so far it seems no one has left any comments... but let's move on)
This is the update regarding Price Matching Guarantees (PMGs), where one seller promises to match (note: match, not beat) its rivals prices, as seen in supermarkets or bookstores. I will recap the theory again. When a seller says that he/she will match its rivals prices on a product, it seems like such cut-throat competition, doesn't it? The truth is that it is anti-competitive. Think about it this way. If I sell my product for $70 (assume a price range of 1 to 100), then if you sell yours for $65, you will service the entire market demand for that good. However, if I promise to match your price of $65, then we both split the market. Since that's the case, we might as well tacitly collude (in layman's terms, cooperate non-formally) and set our price at $100 and get even more profits. There's no point in you lowering your price to $60 if you know I'm going to match it - and hey, that means lower profits for the both of us! (Assume that the number of buyers and products on the market remain constant). So, we might as well keep a high price. And that is the anticompetitive nature of PMGs.

There are many assumptions that come along with the theory of course (which was first noted by Salop, 1986). I will skip them, but the main point to note is that we are assuming that it doesn't cost buyers anything to invoke the guarantee. BUT, other authors have noted that if buyers have to incur some sort of 'hassle cost' - i.e. such as fill in forms, go back to the shop and ask for the guarantee slip, etc, which cost money - then buyers would rather just buy from the seller that immediately offers the lowest price on the market, regardless of if its competitor chooses to match its price. In such a case, the game unravels and the predicted competitive equilibrium is equal to marginal cost (in this case, the lowest price of $1). True enough, the experimental data confirms this convergence towards the equilibrium price, although full convergence does not necessarily happen.

See: Dugar and Sorensen (2006) for example (sorry I can't link the article here due to copyright)

Statistics: Maximum Likelihood

Ah, the infamous maximum likelihood - what I've been waiting to study all semester for a stats subject I am currently taking. I normally don't use Wikipedia and read journal articles instead, but I love the simplicity of everything in Wikipedia. I tend to think that Wikipedia is fine for basics. So, read about maximum likelihood here.

Microeconomics: Bounded Rationality

I've read a few journal articles that keep mentioning the term 'bounded rationality' somewhere, and I have wondered for the longest time what that actually is! If I read correctly, it's basically that in classical economics, we have assumed economic agents as having perfect rationality - they will not do anything that would violate their preference ordering, etc, basically being perfect, non-contradictory, always utility maximising in their choices. Of course, such a perfect agent does not exist in reality. Consequently, there have been people (whose names have slipped my mind for the moment, sorry!) who pointed this out and then developed models for bounded rationality - accounting for the fact that economic agents are not perfectly rational. Have a wiki at 'bounded rationality' here or check out this reading about modeling bounded rationality by Ariel Rubinstein here.

Statistics: Multivariate = Bivariate normal distribution?

True, only if n = 2.

Formula for the multivariate normal distribution:

If is non-singular, then the distribution may be described by the following PDF:

where represents the variance-covariance matrix.


Formula for the bivariate normal distribution:

In the 2-dimensional nonsingular case, the probability density function (with mean (0,0)) is

where ρ is the correlation between X and Y. In this case,

.

The above matrix gives a hint of how to solve the problem. In fact, I had to do this exercise for a class assignment. The proof took 3 pages long, using various statistical definitions and theorems! My proof was just meticulous and long, and I am sure that 1.5 to 2 pages should suffice. It is an amazing feeling to solve such a problem as that.

Have a look at the multivariate normal distribution page on Wikipedia, from which I copied and pasted the above formulae.