Information, Multiprice Search, and Cost-of-Living Index Theory
1987, Journal of Political Economy
Paul M. Anglin, Michael R. Baye
This paper derives the cost-of-living index of an individual who faces imperfect and costly information about prices. Traditional cost-of-living indexes assume that the consumer passively accepts prices as given. The authors derive a multiprice search model in which the consumer chooses the search strategy that minimizes the expected cost of buying a given 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 construct a cost-of-living index for an agent who searches across distributions 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.
Paul M. Anglin and Michael R. Baye, “Information, Multiprice Search, and Cost-of-Living Index Theory,” Journal of Political Economy, Vol. 95 (December 1987), pp. 1179-1195.