Wednesday, March 23, 2011
P. 216- 219
In Romers pure spillover world of his Thesis, if Kodak produced a new type of file, Fuji knew about it the next day. So this puts emphasis on differentiating your product and keeping your discoveries secret for a time. This will help you be a price maker and act like monopolists for a time to help you gain a higher profit. This is the same logic that Edward Chamberlin had on monopolistic competition about 60 years before. But what Romer was doing differently is he was writing math in such a way to describe this world that he saw.
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C for Tim. How many Romers are there in this section? And Thesis is specific, but thesis is generic.
ReplyDeleteThe big picture here is that the math for Romer's new direction was harder.
The basic problem is that the math of optimization works best when there is one global optimum: finding the highest point on one mountain is easy. But what if there is more than one local optimum: finding the highest point in a mountain range is not that easy. And, if you get to the top of one mountain, and see a bigger one in the distance, you have to go down to go up again. This is what Warsh means by the non-convexity of a dented ball: the optimum could be on either side of the dent and you have to go around it to get from one side to the other.
This makes solving out the math by hand much more difficult (which was the only way Romer had at that time). Now, you might use something like Solver to do this, but this is exactly the sort of problem that Solver is the worst at.