Tuesday, September 14, 2010

search theory and prostitution

There's a subfield of macroeconomics dealing with "search theory", though aside from the mathematics (which resembles macroeconomics) it's an issue that's closer in nature to microeconomics. Most macro models seem largely to ignore it, at least as a direct matter; there may be sticky prices or market power layered onto a model that might come from search issues but is typically simply taken as exogenous. There's a certain amount of demand, a certain productive capacity, and the people who want to buy stuff buy stuff from the people who want to sell stuff.

For a lot of goods, that's not an especially good description (though, to be fair, how good a description it is depends on exactly what you care about, and for a lot of macroeconomic treatments it may be adequate). One of the primary roles of advertising, and one of the benefits of being a large (and long-lived) firm, is in the ability of people who want to buy what you're selling to find you. If you open a new business selling erasers, and somebody needs to buy an eraser in your first month in business, there's a good chance they don't know about you. If they've walked by your store a few times a week for the past several years, seen your ads on the subway, and maybe bought an eraser or two from your shop in the past, when they need an eraser, they know where they can get one. Being the answer to the question, "Hey, do you know where I can get an eraser?" is enormously valuable capital.

For illicit markets, it's that much harder; you want people looking to buy to be able to find you, but you don't want the police to. This can be handled in a few different ways. One is ambiguity; you generate a signal that is understood, but perhaps is not explicit enough to be grounds for arrest, or, ideally, even especially heavy levels of suspicion. Word of mouth, where your position in the market is known disproportionately to people whom you have reason to trust, also helps, as do repeat business relationships.

A new paper by Steven Levitt and Sudhir Venkatesh, which apparently I'm not supposed to cite, but let's hope this is okay, discusses the market for prostitution in Chicago.
Even for a given sex act, however, the prices paid by black customers are systematically lower than for other customers. These differences appear to be attributable to price discrimination on the part of the prostitutes.

In a perfectly competitive market, "price discrimination" is unsustainable; if you try to charge less than the going rate to some customers and more than the going rate to others, you only get the customers whom you're charging less. There are a fair number of pimps and prostitutes in the given neighborhoods, and while it's possible they engage in collusion (tacit or explicit, concious or not), this seems likely to be evidence of the search problem; if you charge a white customer more, it's not that easy for him to go find another seller who will charge him the lower rate, so your only real competition is with his going without.

There have been some arrests of Indian actresses for prostitution, in part, it seems, because being an actress is one of these ambiguous signals:
Because of the sexualized roles they play, and the fact that many are in scandalous "live-in relationships"— meaning they move in with boyfriends before marriage—the blanket assumption is that all actresses are available for a price. This is obviously false, but it's an illusion that has been exploited by savvy pimps who have created a market for B-list and C-list "starlets"—often unsuccessful actresses from questionable backgrounds—for men who want to have what's sold as a glamorous sexual experience.
Being an actress is not per se actionable by the police, but it might help someone looking for prostitution to find you.

How information of this nature makes it through an economy is of particular interest to me, and is one of the things I can imagine myself studying over the next five years.

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