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Information, Multiprice Search, and Cost-of-Living Index Theory

Paul Anglin and Michael Baye

Journal of Political Economy, 1987, vol. 95, issue 6, 1179-95

Abstract: This paper derives the cost-of-living index of an individual who faces imperfect and costly information about prices. Traditional cost-of-living in dexes assume that the consumer passively accepts prices as given. The authors derive a multiprice search model in which the consumer choos es the search strategy that minimizes the expected cost of buying a g iven level of utility. In contrast to existing search models, the mod el allows the consumer to change the allocation of expenditures among goods as information about prices changes and enables them to constr uct a cost-of-living index for an agent who searches across distribut ions of offer prices. Unlike traditional cost-of-living measures that ignore search behavior, the searcher's cost-of-living index depends on search costs. Copyright 1987 by University of Chicago Press.

Date: 1987
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