Marketing Models

Yonay and Breslau, "Marketing Models: The Culture of Mathematical Economics"

Sociologists often criticize economists for using unrealistic models and for focusing on formal models instead of empirical research. However, the authors look to approach economists as anthropologists approach foreign societies, without using their own standards to evaluate what they see. They focus on "mainstream economics" and in particular on "model-building" which is the "keystone of the economic discipline."

Models in economics are not meant to be realistic but insightful -- capable of highlighting important mechanisms that can explain important phenomena. Economists advance their careers by finding holes in widely accepted theories; they are interested in empirical phenomena to the extent that there is a blind spot in the literature regarding it.

Even as existing theories are revised, there are a set of standard assumptions that are culturally dictated (some assumptions are easier to make than others, because everyone else is also making them). Mainstream economics is committed to methodological individualism (modeled agents are individuals) but not necessarily rationality (although properly modelling deviations from rationality is largely a matter of gut feel and intuition). However, nonrational behavior in economics must still be formalized -- "you must say something." Models must be "close enough" to the real world but also need to be tractable, so that an equilibrium solution exists. Equilibrium solutions are emphasized not because economists believe that the world is static, but because they impose a consistency test on models, meaning that the model is a possible explanation for whatever needs to be explained. As models become more complex, it becomes harder and harder (perhaps impossible) to find an equilibrium solution.

It would be interesting to think about the strengths and limitations of relying on formal models requiring equilibrium.