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Budget-Constrained Search

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  • Richard Manning

    (Department of Economics, State University of New York at Buffalo)

  • Julian Manning

    (Department of Economics, University of New South Wales and Department of Economics, University of Pennsylvania)

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.

Suggested Citation

  • Richard Manning & Julian Manning, 1994. "Budget-Constrained Search," Game Theory and Information 9406001, University Library of Munich, Germany, revised 17 Jun 1994.
    • Handle: RePEc:wpa:wuwpga:9406001
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    References listed on IDEAS

    as
    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.
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    9. 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.
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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.

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    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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