# PRICING STRATEGIES

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```					    CS and ECON

R AKESH VOHR A

KELLOGG SCHOOL OF
M ANAGEM ENT
NOR THWESTER N U NIVER SITY
Brief History of Interactions
Brief History of Interactions

So, 5 minutes?
What is CS?
What is CS?
 Conception has changed over time

 Subjects once central have moved to the periphery, e.g.,
Numerical Analysis

 Subjects once on the periphery are closer to the center, e.g.,
statistics (data mining, clustering, classification, inference)

 Border is porus; Combinatorial Optimization, Graph Theory,
Combinatorics, Logic

 Even with subfields there is enormous variance, e.g., AI.
What is ECON?
What is ECON?
 Debate about it's definition, scope and label since
inception.

 Whatley: Catallactics (Science of Exchange)

 Robbins :
`is the science which studies human behavior as a
relationship between ends and scarce means which
have alternative uses.'
Obvious Similarities

 Vintage (Victorian)

 Employment of Mathematics (discrete vs.
continuous)

 Imperial: each holds a perspective that is believed
to have universal application
John von Neuman

 Game Theory

 Duality theorem of linear programming.

 Cellular automata.

 Merge Sort algorithm (according to Knuth)

 Pseudorandom numbers
Gaspard de Prony (1755-1839)

 Charged to produce log and trig tables
to between 14 and 29 decimal places.

 Inspired by Adam Smith's analysis of
division of labor
Gaspard de Prony (1755-1839)

`I conceived all of a sudden the idea of
applying the same method to the
immense work with which I had been
burdened, and to manufacture
logarithms as one would manufacture
pins'.
de Prony’s Machine

Hierarchy of 3 levels

 Top:
decided on the formulas to be used in
the calculations.
de Prony’s Machine

 Middle: Given the mathematical formulas
to be used, organized the computations and
compiled the results ready for printing.

 Bottom: 60-80 unemployed hairdressers
who performed the actual computations
that required only addition and subtraction.
Babbage

 On the Economy of Machinery and
Manufactures (1835)

 Introduces notion of economies scale.

 Division of labor impacts not just
output, but wages.
Babbage

“The present volume may be considered
as one of the consequences that have
resulted from the Calculating-Engine,
the construction of which I have been
so long superintending.”
Algorithms
Algorithms in Economics

Procedure, Process, Protocol,
Tatonnement and Mechanism

 Proposal algorithm

Algorithms in Economics

Ascending Auctions

 Fictitious Play

 Backward Induction

 Rationalizability
Algorithm as Existence Proof

 Stable Matching and House Allocation

 Rationalizability of Preferences
Algorithm as Mechanism

 Auctions

 Preference Aggregation - Consensus
methods
Algorithm as Model/Dynamic
 Hannan Theorem/Experts Theorem

 Approachability

 Reinforcement learning

 Search Models in Matching Markets

 Replicator Dynamics
Complexity
Complexity: Bounded Rationality
 Herbert Simon

 Bounded Depth Automata

 Incomplete Contracts

 Imitability

 Organizational Design (Babbage and de Prony!)
Complexity: Communication

 Organizational Design

 Size of Message Spaces
Complexity: Computation

 Hardness of Computing Equilibrium

 Hardness of Manipulation (voting,
forecasting)

 MDP's

 Groebner basis
Complexity: Description

 Kolmogorov-Entropy

 Strategies in Repeated Games
Complexity: Learning

 VC dimension

 Vapnik-Chervonenkis
Mediation, Trust & Privacy
 Reputation/Repetition

 Implementation without a mediator

 Multiparty computation

 Preference revelation

 Indirect vs. Direct mechanisms
Epistemology

 Role of Knowledge in Games

 e-mail game, general's dilemma

 TARK
Social Networks

 Formation

 Information Transmission

 Distribution of wealth, income

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