Friday, December 26, 2014

Modeling can highlight real-world difficulties

So I'm making a model of agents who might exchange goods. The initial idea is to have utility function for each good they might have or obtain, as well as a present endowment of each good (which may be zero). Now, for an Edgeworth Box, my initial price model, this is easy: we only have two goods, and we know what they are in advance.

But eventually, we would like to have agents discover goods on the market that they know nothing about before encountering a potential seller. So how can they have a utility function for a good before they know it exists? (I have not solved this problem in my model, although I have ideas.)

In fact, this reflects a problem that actual market actors face: how can they know how much they want of, or what price to pay for, a good they have never encountered before? As my mentor Israel Kirzner has noted, markets inherently involve discovery.

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