Document Type


Publication Date



We use extreme value theory (EVT) to develop insights about price theory. Our analysis reveals detail-independent equilibrium properties that characterize a large family of models. We derive a formula relating equilibrium prices to the level of competition. When the number of rms is large, markups are proportional to 1= (nF' [F^-1 (1- 1/n)], where F is the random utility noise distribution and n is the number of rms. This implies prices are pinned down by the tail properties of the noise distribution and that prices are independent of many other institutional details. The elasticity of the markup with respect to the number of rms is shown to be the EVT tail exponent of the distribution for preference shocks and in most leading cases is relatively insensitive to the number of rms. For example, for the Gaussian case asymptotic markups are proportional to 1=pln n, implying a zero asymptotic elasticity of the markup with respect to the number of rms. Thus competition only exerts weak pressure on prices. We also study applications of the model, including endogenizing the level of noise.


Working Paper 13-07



To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.