No. 745: Stochastic Complementarity

Paola Manzini , University of St. Andrews, and IZA
Marco Mariotti , Queen Mary University of London
Levent Ulkti , ITAM

May 13, 2015

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Abstract

Classical definitions of complementarity are based on cross price elasticities, and so they do not apply, for example, when goods are free. This context includes many relevant cases such as online newspapers and public attractions. We look for a complementarity notion that does not rely on price variation and that is: behavioural (based only on observable choice data); and model-free (valid whether the agent is rational or not). We uncover a conflict between properties that complementarity should intuitively possess. We discuss three ways out of the impossibility.

J.E.L classification codes: D0

Keywords:Complements and substitutes, Correlation, Stochastic choice