Simulating Sequential Search Models with Genetic Algorithms: Analysis of Price Ceilings, Taxes, Advertising and Welfare
Ian M. McCarthy
Institute for Health Care Research and Improvement; Southern Methodist University (SMU)
April 30, 2008
CAEPR Working Paper No. 2008-010
This paper studies advertising, price ceilings and taxes in a sequential search model with bilateral heterogeneities in production and search costs. We estimate equilibria using a genetic algorithm (GA) applied to over 100 market scenarios, each differing based on the number of firms, number of consumers, existence of price ceilings or taxes, costs of production, costs of advertising, consumers' susceptibility to advertising and consumers' search costs. We compare our equilibrium results to those of the standard theoretical consumer search literature and analyze the welfare effects of advertising, price ceilings and sales taxes. We find that price ceilings and uninformative advertising can improve welfare, especially if search costs are sufficiently high.
Number of Pages in PDF File: 29
JEL Classification: C63, D21, D43, D73, D83, M37working papers series
Date posted: April 30, 2008
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