Advances in Price Theory

Conference: Advances in Price Theory

Client: Becker Friedman Institute for Research in Economics at the University of Chicago

How do markets price goods and services, and what might this tell us about the relationships and forces at play within an economy? For economists who want to unlock richer insights, examining prices can be an important starting point. The approach, known as price theory, has long been associated with the economics department at the University of Chicago and specifically with the work of the late Gary S. Becker.

This conference, organized by E. Glen Weyl of Microsoft Research New England and Jesse M. Shapiro of Brown University, sought to honor Becker’s legacy by revitalizing the use of price theory. The conference focused on emerging new work rooted in this approach.

In addition, the organizers hope to return price theory to what they see as its rightful place the microeconomics toolbox. “It’s that role that I think got somewhat lost as people came to identify price theory so tightly with Chicago,” notes Weyl. “They didn't see [price theory] as one of the fundamental, broad components of economic analysis that’s had an enduring interest.”

Weyl and Shapiro also recognized a revival of the tool among their peers. “There was sort of a current running through a lot of the most exciting work by young economists in recent years that we viewed as being tied to the legacy of price theory work that Gary had carried on for several decades,” said Weyl.

The conference served to connect researchers who did not know one another or recognize the similarities in their approaches because they work in different subject areas, such as international trade, industrial organization, and health. The conference matched each presenter with an economist from a different field but similar methodology who commented on the work presented. Kevin Murphy of the University of Chicago, Edward P. Lazear of Stanford University Graduate School of Business, and Casey Mulligan of the University of Chicago served as conference chairs.

The goal was for the conference to foster a deeper dialogue and create a community around price theory. “I think it was successful in encouraging people working in different substantive areas using similar tools to have a look over the fence,” Shapiro said after the meeting.

The conference also acted as a sounding board for Weyl’s recent working paper that proposes a definition of price theory. Despite decades of work in price theory, Becker had never sharply defined the term, nor could Weyl find a widely accepted definition elsewhere in the economics literature.

Weyl defines price theory as an “analysis that attempts to simplify a rich (high-dimensional heterogeneity, many agent dynamics, etc.) and often incompletely specified model for the purposes of answering a simple (scalar or unidimensional) allocative question.”

This definition “was my attempt to try to take the lessons that Gary and Kevin Murphy, who co-taught with him for many years, shared and try to turn those into a sort of comprehensive definition,” Weyl commented.

Lazear offered a simpler definition of price theory: “The way I think of it is the belief in microeconomic principles as the primary engine for understanding economic behavior.” The three principles he outlined were maximizing behavior, a well-defined equilibrium, and the notion of efficiency as an indicator of how markets might address inefficiencies.

Weyl welcomed this and other viewpoints and recognized there was not a consensus about his definition. “In the end, I felt more confident of what I was doing because it showed just how hard it is to come up with a definition, and I think mine more or less worked, even if it wasn’t perfect.”

The conference explored a broad array of work, further expanded with perspectives from the unique pairings of discussants.

  • Dave Donaldson (Stanford University) presented his study of the marginal costs of distance for international trade in Ethiopia and Nigeria versus that of the US. His paper used a “conduct parameter” approach. His paper’s discussant, Tim Bresnahan (also from Stanford), helped develop this approach in an industrial organization context.

  • Neale Mahoney (Chicago Booth) presented work that examines Medicare benefits and weighs the impact of these payments on companies versus consumers. Suresh Naidu (Columbia University) who has looked at pass-through issues in the development of labor markets, discussed Mahoney’s work.

  • Christopher M. Snyder (Dartmouth College) presented work on drug pricing with a new take on the role of demand curves. Severin Borenstein (University of California, Berkeley) commented on the work.

  • Liran Einav of Stanford University examined why online powerhouse Ebay saw a decline in interest in auctions over time. He used price theory to look at the tradeoffs from a seller’s perspective. Nathaniel Hendren (Harvard University) discussed.

  • Eduardo Azevedo (University of Pennsylvania) discussed developing a price-taking model of adverse selection. Matthew Gentzkow (Stanford) commented, with a focus on the considerations of product characteristics when using price theory.

  • Benjamin Handel (University of California, Berkeley) presented a paper on welfare impacts in insurance markets, which drew on a model first developed by Avinash Dixit of Princeton University and Victor Norman. Dixit provided comments on the paper.

  • Eduardo Dávila (New York University Stern School of Business) shared a paper on optimal financial taxation from a macroeconomic perspective. Eric Budish (Chicago Booth) who commented on the paper, also works on financial regulation and market design.

  • In one of the conference’s most unique match-ups, Bradley Larson, of Stanford University, spoke about the role of bidders in auction estimating. Commenting was Jason D. Hartline (Northwestern University), a computer scientist who also uses price theoretic approaches as a tool for approximation in his work.

-Jennifer Roche

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