retailer pricing strategy and consumer choice under price uncertainty this research examines how consumers choose retailers when they are uncertain about store prices prior to shopping simulating everyday choice participants made successive retailer choices where on each occasion they chose a retailer and only then learned product prices the results of a series of studies demonstrated that participants were more likely to choose a retailer that offered an everyday low pricing strategy edlp or that offered frequent small discounts over a retailer that offered infrequent large discounts this choice advantage for the retailer that was cheaper more often manifested even when its average price was judged to be higher the same results were obtained when choices were made a day apart when price feedback was only given for the chosen retailer and when price feedback was given for both retailers participant s expectations of future prices but not their judgments of retailer s past average prices predicted their subsequent retailer choice

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

implicit delivery options and optimal delivery strategies for financial futures contracts abstract futures contract specification usually allow the short position some variation as to when where how much and what is to be delivered in this paper we derive the optimal delivery policy for the treasury bond futures contracts and find that our policy produces profits that are positive and statistically significant this indicates that future prices are too high in that the short position can earn profits by skillfully exercising his delivery options we find the actual delivery policies of market participants depart substantially from the optimal strategy the implications of these findings for futures traders and bond dealers are discussed

an empirical study of uniform and differential pricing in the movie theatrical market abstractmovies vary widely in appeal star power cost and other elements and therefore each might be expected to charge a different price multiplexes however typically charge the same price for all movies except for such premium formats as 3d a choice that has puzzled managers and researchers because of data limitations minimal empirical work has directly addressed this issue in hong kong however prices vary both within and across multiplexes using daily ticket prices and attendance by theater and movie the authors empirically examine the potential gains from differentiated movie specific pricing as well as the increasingly common two tier 2d 3d uniform pricing as compared with a full uniform pricing strategy in which a theater charges the same price for all its movies their results show that differential pricing leads to higher profits than the two tier uniform pricing practice but that the improvement is limited in contrast the gains are substantial when compared with the full uni

looking for loss aversion in scanner panel data the confounding effect of price response heterogeneity recent work in marketing has drawn on behavioral decision theory to advance the notion that consumers evaluate attributes and therefore choice alternatives not only in absolute terms but asdeviations from a reference point the theory has important substantive and practical implications for the timing and execution of price promotions and other marketing activities choice modelers using scanner panel data have tested for the presence of these reference effects in consumer response to an attribute such as price in applications of the theory of reference dependent choice tversky and kahneman 1991 some modelers report empirical evidence of loss aversion when a consumer encounters a price above his or her established reference point a loss the response is greater than for a price below the reference point a gain researchers have gone so far as to suggest that evidence for the so called reference effect make it an empirical generalization in marketing e g kalyanaram and winer 1995 meyer and johnson 1995 it is our contention that the measurement of loss aversion in empirical applications of the reference dependent choice model is confounded by the presence of unaccounted for heterogeneity in consumer price responsiveness our reasoning is that the kinked price response curve implied by loss aversion is confounded with the slopes of the response curves across segments that are differentially responsive to price a more price responsive consumer with a steeper response function tends to have a lower price level as a reference point this consumer faces a larger proportion of prices above his reference point thus the response curve is steeperin the domain of losses similarly the less price responsive consumer sees a greater proportion of prices below his reference point so the response curve is less steep within the domain of gains as a result any cross sectional estimate of loss aversion that does not take this into account will be biased upward researchers who do not control for heterogeneity in price responsiveness may arrive at incorrect substantive conclusions about the phenomenon it is interesting to note that in this instance failure to control for heterogeneity induces a bias infavor of finding an effect rather than the more typical case of attenuation of the effect toward zero we first test our assertion regarding the referencedependent model using scanner panel data on refrigerated orange juice and subsequently extend this analysis to 11 additional product categories in all cases we find as predicted that accounting for price response heterogeneity leads to lower and frequently nonsignificant estimates of loss aversion we do however find some categories in which the effect does not disappear altogether we also estimate loss aversion using a sticker shock model of brand choice in which the reference prices arebrand specific in line with the results of the majority of prior literature we find smaller and insignificant estimates of loss aversion in this model we show that this is because in the sticker shock model there is no apparent correlation between the price responsiveness of the consumer and the representation of reference effects as losses or gains our findings strongly suggest that loss aversion may not in fact be a universal phenomenon at least in the context of frequently purchased grocery products

are markets with loss averse consumers more sensitive to losses behavioral pricing and revenue management aim to incorporate realistic consumer behavior into firms pricing and inventory models the key input to these models is market demand which is often assumed to inherit the characteristics of consumer behavior as when for example one assumes that a market consisting of loss averse consumers is more responsive to losses than to gains yet market demand and consumer behavior need not be related and so we argue that approach to modeling market demand is misguided this paper proposes an approach that accounts for the heterogeneity in consumer valuation we aggregate the demand of individual loss averse consumers to obtain market demand and show that market demand may be more responsive to gains or losses or it may be equally responsive our results have profound implications not only for how best to characterize the market demand of behaviorally biased consumers but also for determining the firm s optimal pricing policy this paper was accepted by serguei net

is inflation persistence different in reality this study examines the inflation persistence using both online and official price indexes in argentina brazil china japan germany south africa the uk and the us using fractional integration technique the main results suggest that the degree of persistence estimated by the long memory parameter is smaller when using online price indexes believed to be a more realistic measure of inflation mainly in the cases of argentina brazil china and the uk monetary policy implications are discussed

the persistence of marketing effects on sales are marketing efforts able to affect long term trends in sales or other performance measures answering this question is essential for the creation of marketing strategies that deliver a sustainable competitive advantage this paper introduces persistence modeling to derive long term marketing effectiveness from time series observations on sales and marketing expenditures first we use unit root tests to determine whether sales are stable or evolving trending over time if they are evolving we examine how strong this evolution is univariate persistence and to what extent it can be related to marketing activity multivariate persistence an empirical example on sales and media spending for a chain of home improvement stores reveals that some but not all advertising has strong trend setting effects on sales we argue that traditional modeling approaches would not pick up these effects and therefore seriously underestimate the long term effectiveness of advertising the paper concludes with an agenda for future empirical research on long run marketing effectiveness

inflation persistence and nonlinearities in central and eastern european countries abstract in this paper we provide an insight into the inflation dynamics in a panel of central and eastern european countries applying unit root tests and allowing for nonlinearities we show that inflation rates in more than half of these countries are stationary

multiattribute loss aversion and reference dependence evidence from the performing arts industry we study the prevalence of multiattribute loss aversion and reference effects in a revenue management setting based on data of individual level purchases over a series of concert performances the reference dependence that drives consumer choice is not only based on the price but also on observed sales as a fraction of the seating capacity during their past visits we find that consumers suffer from loss aversion on both prices and seats sold consumers incur significant utility loss when prices are above their references or when the actual seat sales are lower than their references we suggest pricing policies that can address consumer decisions driven by such reference dependence and loss aversion this paper was accepted by vishal gaur operations management

dynamics of persistence in international inflation rates characteristics of inflation play a key role in policy formulation and market analysis several studies have analyzed inflation persistence and reached diverging conclusions in this paper we investigate the dynamics of inflation persistence using fractionally integrated processes and find that there has been a clear decline in inflation persistence in the united states over the past two decades we also show that the presence of fractional integration in inflation successfully explains previous diverging results lastly we provide some international comparisons to examine the extent to which there has been a commensurate decline in inflation persistence in the other g7 economies

a comparative analysis of reference price models the effect of reference price on brand choice decisions has been well documented in the literature researchers however have differed in their conceptualizations and therefore in their modeling of reference price in this article we evaluate five alternative models of reference price of which two are stimulus based i e based on information available at the point of purchase and three that are memory based i e based on price history and or other contextual factors we calibrate the models using scanner panel data for peanut butter liquid detergent ground coffee and tissue to account for heterogeneity in model parameters we employ a latent class approach and select the best segmentation scheme for each model the best model of reference price is then selected on the basis of fit and prediction as well as on the basis of parsimony in cases where the fits of the models are not very different in all four categories we find that the best reference price model is a memory based model namely one that is based on the brand s own price history in the liquid detergent category however we find that one of the stimulus based models namely the current price of a previously chosen brand also performs fairly well we discuss the implications of these findings

predicting competitive response to a major policy change combining game theoretic and empirical analyses this research uses procter gamble s value pricing initiative as a context for testing whether actual competitor and retailer response to a major policy change can be predicted using a game theoretic model we first estimate demand functions for p g and competitor brands from the period before value pricing was initiated we then formulate a dynamic manufacturer retailer stackelberg model that includes p g a national brand competitor and a retailer the model takes p g s move as given and prescribes the price and promotion response of the competitors and the retailer we substitute the estimated demand parameters into the model to obtain prescriptions for each competitor and the retailer and see whether these prescriptions are related to the actual response we find that the dynamic game theoretic model calibrated with empirical estimates of demand parameters has significant predictive power we also test the predictive power of two benchmark models the first is based on the reaction function approach of leeflang and wittink leeflang peter s h wittink dick r 1992 diagnosing competitive reactions using aggregated scanner data internat j res marketing9 39 57 and the second is a simplification of our dynamic model where the retailer is not strategic the dynamic game theoretic model performs better than either benchmark

stale prices and strategies for trading mutual funds we demonstrate that an institutional feature of numerous mutual funds funds managing billions in assets generates fund net asset values that reflect stale prices because investors can trade at these navs with limited transaction costs in many cases obvious trading opportunities exist these opportunities are especially prevalent in funds that buy japanese or european equities simple feasible strategies generate sharpe ratios excess return divided by standard deviation that are many times greater than the sharpe ratio of the underlying fund we illustrate the potential of the strategy for three vanguard group mutual funds a particular issue to keep in mind is that when the strategies are implemented the gains from these strategies are matched by offsetting losses incurred by buy and hold investors in these funds

consumer price and promotion expectations an experimental study the authors report results from a controlled experiment designed to investigate the impact of a brand s price promotion frequency and the depth of promotional price discounts on the price consumers

the long term effects of price promotions on category incidence brand choice and purchase quantity abstract to what extent do price promotions have a long term effect on the components of brand sales namely category incidence brand choice and purchase quantity the authors answer this question by using persistence modeling on weekly sales data of a perishable and a storable product derived from a scanner panel their analysis reveals first that permanent promotion effects are virtually absent for each sales component next the authors develop and apply an impulse response approach to estimate the promotional adjustment period and the total dynamic effects of a price promotion specifically they calculate the long term equivalent of gupta s 1988 14 84 2 breakdown of promotional effects because of positive adjustment effects for incidence but negative adjustment effects for choice the authors find a reversal of the importance of category incidence and brand choice 66 11 23 for the storable product and 58 39 3 for the perishable product the authors discuss the implications of the findings an

the impact of reference price effects on the profitability of price promotions this paper investigates the impact of reference price effects on retailer price promotions and describes why these effects can make promoting profitable first we analyze the profit impact of reference price effects generated by a single period of promotion the promotion can increase profit if the gain that these effects create in the promotion period outweighs the loss they create in future periods we then describe how retailers can estimate the optimal strategy of recurring promotions that maximizes profits from reference price effects over a time horizon examples of such strategies are presented for a retailer selling a national brand of peanut butter we obtain insights into how promotion prices timing and profits are affected by changes in costs interest rates consumers reactions to reference price effects and error in estimates used in the model the retailer s optimal reaction to a trade deal is also examined this strategy involves a phase of increased promotion activity sandwiched between phases of decreased activity we explain these results using the effects described in the single period model

from cradle to grave how to loot a 401 k plan abstract the regulations governing asset distributions from many retirement plans give participants the option to time retirement or rollovers from the plan strategically they possess a long lived put option whose exercise price resets periodically to the current value of the assets in the plan i derive a recursive closed form valuation formula for the option and develop a numerical algorithm for implementing the result i find that for reasonable assumptions about volatility and life expectancy the option s value may approach 40 of the value of the assets in the plan financed entirely by those still contributing this wealth transfer can however be easily avoided by making a simple change to the current regulations governing valuation and payout of these retirement plans

price flexibility in channels of distribution evidence from scanner data in this study we empirically examine the extent of price rigidity using a unique store level time series data set consisting of i actual retail transaction prices ii actual wholesale transaction prices which represent both the retailers costs and the prices received by manufacturers and iii a measure of manufacturers costs for 12 goods in two widely used consumer product categories we simultaneously examine the extent of price rigidity for each of the 12 products at both final goods and intermediate goods levels we study two notions of price rigidity employed in the existing literature i the frequency of price changes and ii the response of prices to exogenous cost changes we find that retail prices exhibit remarkable flexibility in terms of both notions of price rigidity i e they change frequently and they seem to respond quickly and fully to cost changes furthermore we find that retail prices respond not just to their direct costs but also to the upstream manufacturers costs which further reinforces the extent of the retail price flexibility at the intermediate goods level of the market in contrast we find relatively more evidence of rigidity in the response of manufacturers prices to cost changes this despite the fact that wholesale prices change frequently and therefore exhibit flexibility according to the first notion of price rigidity

the influence of prior beliefs frequency cues and magnitude cues on consumers perceptions of comparative price data a widespread practice in grocery store advertising is to compare the advertised store s prices to a competitor s prices on multiple items an important but largely unexplored issue is how this information is processed and used in conjunction with prior beliefs to influence price perceptions in our initial studies we manipulated prior beliefs and two data based cues frequency of price advantage and magnitude of price advantage to determine their relative influence on consumer price perceptions results indicate that prior beliefs affected price perceptions but that the frequency cue exerted a dominating influence several follow up studies demonstrate the robustness of this phenomenon across a variety of presentational and instructional conditions

similarities in choice behavior across product categories differences between consumers in sensitivity to marketing mix variables have been extensively documented in the scanner panel data all studies of consumer heterogeneity focus on a specific category of products and ignore the fact that the purchase behavior of panel households is often observed simultaneously in multiple categories if sensitivity to marketing mix variables is a common consumer trait then one should expect to see similarities in sensitivity across multiple categories the goal in this paper is to measure the covariance of both observed linked to measured characteristics of households and unobserved heterogeneity in marketing mix sensitivity across multiple categories measurement of correlation in sensitivities across categories will serve to guide the interpretation of the literature on household heterogeneity if there is a large correlation one can be more confident that sensitivity to marketing variables is a fundamental household pr operty and not simply a category specific anomaly detection of correlation in sensitivities across categories requires an appropriate methodology that can handle the high dimensional covariance structures and properly account for uncertainty in estimatio n for example a simple approach might be to fit a brand choice model to each of the available categories in turn ignoring the data in the other categories for each category household parameter estimates could be obtained for the parameters corresponding to price display and feature sensitivity these parameter estimates could be viewed as data and the correlations across categories could be computed such a procedure could induce a downward bias in the estimation of correlation dueto the independent sampling errors which are present in each parameter estimate we develop a hierarchical model structure that introduces an explicit correlation structure across categories and utilizes the data in multiple categories at the same time to reduce the size of the covariance matrix we use a variance components approach we introduce household specific demographic variables to decompose the correlation across categories into that which can be ascribed to observable and unobservable sources shopping behavior variables such as shopping frequency and market basket size as well as intensity of shopping in a category are also included in the model using data on five categories we find substantial and statistically important correlations ranging from 32 for price sensitivities to 58 for feature sensitivity these correlations are much larger than the correlations obtained with the state of the art techniques available prior to our work we attribute our ability to detect substantial correlations to our method which involves the joint use of multiple category data in a parsimonious and efficient manner unlike previous studies with panel data household demographic variables are found to be strongly related to price sensitivity higher income households are less price sensitive and large families are more price sensitive shopping behavior variables are also important in explaining price sensitivity households that visit the store often are more price sensitive households with larger market baskets are less price sensitive confirming the view of bell and lattin 1998 heavy user households tend to be both less price sensitive and less display sensitive the evidence presented here of substantial correlations validates in part the notion that sensitivity to marketing mix variables is a consumer trait and is not unique to specific product categories it also opens the possibility of using information across categories in making inferences about consumer brand preference and marketing mix sensitivity providing a richer source of information for target marketing

dynamic pricing with loss averse consumers and peak end anchoring we study the dynamic pricing implications of a new behaviorally motivated reference price mechanism based on the peak end memory mode this model suggests that consumers anchor on a reference price that is a weighted average of the lowest and most recent prices loss averse consumers are more sensitive to perceived losses than gains relative to this reference price we find that a range of constant pricing policies is optimal for the corresponding dynamic pricing problem this range is wider the more consumers anchor on lowest prices and it persists when buyers are loss neutral in contrast with previous literature in a transient regime the optimal pricing policy is monotone and converges to a steady state price which is lower the more extreme and salient the low price anchor is our results suggest that behavioral regularities such as peak end anchoring and loss aversion limit the benefits of varying prices and caution that the adverse effects of deep discounts on the firm s optimal prices and profits might be more enduring than previous models predict

modeling consideration sets and brand choice using artificial neural networks brand choice can be viewed as a two step process households first construct a consideration set which does not necessarily include all available brands and then make a final choice from this set in this paper we put forward an econometric model for this two step process where we take into account that consideration sets usually are not observed our model is an artificial neural network where the consideration set corresponds with the hidden layer of the network we discuss representation parameter estimation and inference we illustrate our model for the choice between six detergent brands and show that the model improves upon one step models in terms of fit and out of sample forecasting

am i getting a good deal reference dependentdecision making when the reference price is uncertain models of consumer decision making commonly incorporate reference dependent preferences in these models the reference point is typically assumed to be known by the consumer however research on price recall and the reference formation process reveals that the reference price is often uncertain at the time of purchase reference price uncertainty creates ambiguity for the consumer about whether they are getting a good or bad deal this paper develops a model of consumer choice in the presence of reference dependent preferences when the reference price is uncertain data from two empirical studies that vary the product category and order of the elicitation of reference prices show that the new model generally outperforms conventional discrete choice models that either ignore reference prices or treat reference prices as certain the new model provides insights into the effect of reducing reference price uncertainty on consumer choice and reveals that high uncertainty smoothes the kink in the demand curve that is present in traditional reference price demand models

practice prize report an assortmentwide decision support system for dynamic pricing and promotion planning in diy retailing the main objective of this report is to describe a decision support system for dynamic retail pricing and promotion planning our weekly demand model incorporates price reference price effects seasonality article availability information features and discounts building on previous research we quantify demand interdependencies and integrate the resulting profit lifting effects into the optimal pricing model the methodology was developed and implemented at baumax an austrian do it yourself retailer along with the practical requirements an objective function was employed that can be used as a vehicle for implementing a retailer s strategy eight pricing rounds with thousands of different stock keeping units have each served as a testing ground for our approach based on various benchmarking methods a positive impact on profit was reported the currently implemented marketing decision support system increased gross profit on average by 8 1 and sales by 2 1

valuation and optimal exercise of the wild card option in the treasury bond futures market the chicago board of trade treasury bond futures contract allows the short position several delivery options as to when and with which bond the contract will be settled the timing option allows the short position to choose any business day in the delivery month to make delivery in addition the contract settlement price is locked in at 2 00 p m when the futures market closes despite the facts that the short position need not declare an intent to settle the contract until 8 00 p m and that trading in treasury bonds can occur all day in dealer markets if bond prices change significantly between 2 00 and 8 00 p m the short has the option of settling the contract at a favorable 2 00 p m price this phenomenon which recurs on every trading day of the delivery month creates a sequence of 6 hour put options for the short position which has been dubbed the wild card option this paper presents a valuation model for the wild card option and computes estimates of the value of that option as well as rules for its optimal exercise the treasury bond futures contract on the chicago board of trade gives several delivery options to the short position the quality option which allows the short to deliver any of several eligible delivery bonds has already been studied fairly extensively because many bonds are eligible to be delivered against the futures contract and the conversion factors used to adjust for the bond actually delivered do not perfectly reflect relative price differences the short side trader will choose to deliver the cheapest eligible bond kilcollin 71 presents a discussion and analysis of conversion factors and their effects on the optimal delivery bond gay and manaster 4 present a theoretical valuation model for the quality option when two classes of commodities with uncertain end of period spot prices may be delivered garbade and silber 3 provide a similar analysis and estimate parameters of the valuation formula for a variety of agricultural commodity futures kane and marcus 6 have used monte carlo simulations to value the quality option in the treasury bond futures market in contrast the various timing options embedded in the delivery process have received comparatively little attention one of the most important of these is the so called wild card option the wild card option arises because the futures market closes each trading day at 2 p m central standard time which locks in the futures settlement price for the rest of the day while the short trader has until 8 p m of each trading day in the delivery month to declare an intent to deliver

research note estimating heterogeneous price thresholds a brand choice model with heterogeneous price threshold parameters is used to investigate a three regime piecewise linear stochastic utility function the model is used to explore the relationships between aspects of consumer price sensitivity and price thresholds using hierarchical bayes modeling with the markov chain monte carlo mcmc method this study contributes to the modeling literature on discontinuous likelihoods in choice models the empirical application using our scanner panel data set shows that the reference effect and loss aversion are more marked after price thresholds are taken into heterogeneous price response models furthermore loss aversion is attenuated by using price thresholds than by an aggregate homogeneity model without price thresholds

the bright side of loss aversion in dynamic and competitive markets a well established phenomenon of consumer buying behavior is that consumers evaluate prices relative to a reference point and exhibit loss aversion i e their propensity to buy is more negatively affected by prices above the reference point than it is positively affected by prices below the reference point the objective of this paper is to analytically examine how the competitive strategy and profitability of firms are affected by the presence of consumer loss aversion in the price dimension although we assume that consumer loss aversion increases consumer propensity to search for lower prices we find that it does not necessarily lead to lower prices or profits when firms compete over multiple periods and when the consumer reference price in subsequent periods is affected by current prices specifically consumer loss aversion could lead to higher prices and profits when consumer valuation is sufficiently high relative to search costs and the proportion of consumers with positive search costs is in an intermediate range we also show that when forward looking firms incorporate the negative effect of price promotions on future profits the equilibrium range of price promotions may actually increase

an examination of consumer heterogeneity in a stochastic model of consumer purchase dynamics with explanatory variables abstract a stochastic model of brand choice and purchase incidence is proposed that relates marketing variables including advertising exposures to brand performance measures such as market share penetration and depth of repeat purchase dynamics over time the approach considers various aspects of consumer heterogeneity including individual differences in brand loyalty levels advertising exposures and purchase rates for a population of consumers a major focus of this study is on the evaluation of the impact of consumer heterogeneity in alternative models on the basis of single source scanner panel data for an actual market situation in particular we demonstrate the critical importance of considering heterogeneity over a consumer population as a means of enhancing descriptive and predictive model fit as well as for allowing the analysis of advertising media schedules

modeling multiple sources of heterogeneity in multinomial logit models methodological and managerial issues we offer a framework to specify and estimate various sources of heterogeneity in multinomial logit brand choice models we let each brand specific intercept and each parameter of the explanatory variable vector vary randomly across households in addition we distinguish loyal households from the rest our results suggest that incorporating multiple sources of heterogeneity improves the model fit and suggests higher impact of marketing mix elements on brand choice we highlight the importance of incorporating multiple sources of heterogeneity the model we implement yields valuable managerial insights

risk preferences and demand drivers of extended warranties we disentangle and study the relative importance of different risk preferences in explaining extended warranty purchases and the high premia paid for them empirical and behavioral research on insurance is at odds with whether diminishing returns curvature of the utility function or loss aversion and nonlinear probability weighting lead to observed consumer behavior this lack of consensus is primarily due to the inability of standard choice data to separate different risk preferences and the consequent need to rely on strong parametric assumptions we design two conjoint studies consistent with simultaneous and sequential decision making with choices about washing machines and extended warranties where subjects are given failure probabilities and repair costs using stated choice data from the surveys we can nonparametrically identify product and risk preferences we find that loss aversion is significantly more important than curvature and probability weights in explaining extended warranty choices importantly failure to decompose risk averse behavior into that arising from curvature loss aversion and probability weighting leads to lower washer prices and profits these findings are robust to alternate reference point assumptions we rationalize the premia paid for warranties by exploring retailer incentives to price discriminate and test the theory on complementary goods pricing finally based on counterfactual analysis forcing separate retailers to sell washers and extended warranties is not necessarily welfare enhancing as cited in the media and previous literature

reference effects of price and promotion on brand choice behavior when consumers are exposed to pricing and promotional activity by frequently purchased packaged goods they may develop expectations that are used as points of reference in evaluating future activi

an empirical analysis of internal and external reference prices using scanner data single source yogurt data are used to examine whether both internal and external reference prices affect purchase decisions internal reference prices are memory resident prices based on actual fair or other price concepts external reference prices are observed stimuli such as regular prices that stores may display along with a sale price for comparability discrete choice models with variables representing the two types of reference prices are estimated and both types of variables are found to have significant effects on purchase probabilities this suggests that consumers may use multiple reference points in evaluating price in purchase decisions in addition a model using an indicator of a sale price discount explains purchase probabilities as well as one that models the actual discount which suggests that consumers may be reacting to the indication of savings rather than to the amount of the discount

convergence of inflationary shocks evidence from the caribbean in this paper we aim to shed some light on the inflation dynamics in the caribbean we analyse the inflation rates for twelve countries using various time series methods the results show that the inflation rates are mean reverting processes and that there is evidence of a convergence club in inflation rates within the area which contradicts previous studies our contribution implies a high degree of similarity in the dynamics of our target countries inflation rates

annuitization and asset allocation this paper examines the optimal annuitization investment and consumption strategies of a utility maximizing retiree facing a stochastic time of death under a variety of institutional restrictions we focus on the impact of aging on the optimal purchase of life annuities which form the basis of most defined benefit pension plans due to adverse selection acquiring a lifetime payout annuity is an irreversible transaction that creates an incentive to delay under the institutional all or nothing arrangement where annuitization must take place at one distinct point in time i e retirement we derive the optimal age at which to annuitize and develop a metric to capture the loss from annuitizing prematurely in contrast under an open market structure where individuals can annuitize any fraction of their wealth at anytime we locate a general optimal annuity purchasing policy in this case we find that an individual will initially annuitize a lump sum and then buy annuities to keep wealth to one side of a separating ray in wealth annuity space we believe our paper is the first to integrate life annuity products into the portfolio choice literature while taking into account realistic institutional restrictions which are unique to the market for mortality contingent claims

inflation persistence in central and eastern european countries this article studies inflation persistence with time varying coefficient autoregressions for 12 central european countries in comparison with the united states and the euro area we find that inflation persistence tends to be higher in times of high inflation since the oil price shocks inflation persistence has declined both in the united states and the euro area in most central and eastern european countries for which our study covers 1993 2012 inflation persistence has also declined with the main exceptions of the czech republic slovakia and slovenia where persistence seems to be rather stable our findings have implications for the conduct of monetary policy and for a possible membership in the euro area among the two time varying coefficient methods we use our results favour the flexible least squares smoother over the kalman smoother we also conclude that the ols estimate of an autoregression is likely upward biased relative to the time average of time varying parameters when the paramete

loss aversion in post sale purchases of consumer products and their substitutes this paper considers the measurement of consumer loss aversion in product markets we introduce a test based on a substitution effect focusing on how the end of a sale affects sales not of the good itself but a substitute good such an effect cannot be easily confounded with consumer stockpiling using a unique dataset from an online hardware retailer we find evidence consistent with consumer loss aversion moreover we find that less experienced consumers suffer a more prominent loss aversion bias compared to more experienced consumers

a probabilistic choice model for market segmentation and elasticity structure marketing scholars commonly characterize market structure by studying the patterns of substitution implied by brand switching though the approach is useful it typically ignores the destabilizing

the effect of pension design on employer costs and employee retirement choices evidence from oregon abstract we use administrative data from oregon s public employees retirement system pers to study the effect of pension design on employer costs and employee retirement timing decisions during our 1990 2003 sample period pers calculates each member s retirement benefit using up to three different formulas defined benefit db defined contribution dc and a combination of db and dc and pers pays the maximum benefit for which the member is eligible we show that this maximum benefit calculation results in average ex post retirement benefits that are 54 higher than if they had been calculated using only the db formula and that employees receiving dc benefits are significantly more likely than employees receiving db benefits to retire before the plan s normal retirement age monte carlo simulations verify that the higher costs could have been predicted at the start of our sample period exploiting exogenous plan changes we show that employees respond to within year variation in their retirement incentives and consistent with peer effects that they respond more strongly to these incentives when more of their coworkers face similar incentives finally consistent with the emerging literature on financial mistakes by households we show that a small but noteworthy fraction of retirees would have benefited from shifting their retirements by as little as one month

quantity discount dependent consumer preferences and competitive nonlinear pricing abstract producers of consumer packaged goods often offer several package sizes of the same product and charge a lower unit price for a larger size in this article the authors investigate the quantity discount effect or the phenomenon that consumers derive transaction utility from the unit price difference between a small and a large package size of the same product the authors propose a modeling framework composed of a demand side model and a supply side model the empirical results suggest that quantity discount induced gains or losses have a significant impact on consumer buying behavior the authors also find a substantial amount of structural heterogeneity that is some consumers perceive quantity discounts as gains whereas others perceive quantity discounts as losses conversely the supply side analysis suggests that manufacturers in the empirical application do not consider quantity discount effects when setting prices through a series of policy experiments the authors show that by accou

the impact of heterogeneity in purchase timing and price responsiveness on estimates of sticker shock effects the notion that individuals have an internal reference price against which they compare observed prices is well supported by several psychological theories empirically several papers in the marketing literature employing scanner panel data have modeled the impact of reference prices on brand choice via the sticker shock formulation in which consumers evaluate choice alternatives using differences between shelf prices and reference prices most of the studies reported thus far have not accounted for heterogeneity in price response among consumers and have typically imputed reference prices from the shelf prices of brands that a consumer is supposed to have observed on previous purchases in the category since category marketing activity can differentially affect the purchase timing of households we argue that this measure of reference price may follow certain systematic patterns across consumers and when combined with unaccounted for price response heterogeneity may result in a spurious sticker shock effect specifically we show that estimates of sticker shock are biased upward if households that are price sensitive in the brand choice decision are also more responsive to category promotion activity in their purchase timing decision we discuss some general conditions under which the bias occurs and conduct a simulation experiment to confirm our specific hypotheses our simulation results show that changes in purchase timing are a critical determinant of the bias in the sticker shock effect we also show that unaccounted for price response heterogeneity can in itself result in a biased sticker shock parameter however this requires very large differences in price sensitivities across consumers far greater than what is normally observed we develop a hierarchical bayes version of the nested logit model which models heterogeneity via individual level parameters in a continuous random effects framework we estimate the model on scanner panel data from the yogurt and ketchup categories we find in both categories that the 95 probability interval of the posterior distribution of the mean sticker shock coefficient contains the value zero therefore at least for the data used in this study there is no evidence for the sticker shock effect at the aggregate level in contrast the corresponding coefficient from a standard model which ignores this heterogeneity is highly significant and supports the existence of a possibly spurious sticker shock effect consistent with our explanation of the underlying cause of the bias households that are more price sensitive in the choice decision are also found to be more responsive to category promotion activity in their decision to purchase in the category the results highlight the measurement problems associated with imputing reference prices from past prices since the frequency duration and price level of a retailer s promotional program depend on its size and prevalence accurate estimates of the sticker shock effect are essential for formulating optimal promotion strategies an adequate accounting of consumer heterogeneity is critical to this effort

modeling loss aversion and reference dependence effects on brand choice based upon a recently developed multiattribute generalization of prospect theory s value function tversky and kahneman 1991 we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points and that consumers weigh losses from a reference point more than equivalent sized gains loss aversion we sketch implications of this model for understanding brand choice we develop a multinomial logit formulation of a reference dependent choice model calibrating it using scanner data in addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model the model s coefficients demonstrate significant loss aversion as hypothesized we also discuss the implications of a reference dependent view of consumer choice for modeling brand choice demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics and examine other implications for competitive strategy

specifying price judgments with range frequency theory in models of brand choice abstract to construct a price judgment consumers compare a focal price with one or more reference prices however reference price operationalizations in the brand choice literature use single point summary measures that cannot account for several distributional effects to account for effects beyond the first moment of the reference price distribution the authors specify price judgments in models of brand choice in accordance with range frequency theory the findings indicate that range frequency price judgments provide a more complete specification of reference price effects and become more important with an increase in the second and third moments of a reference price distribution the data also indicate that range effects are stronger for coupon users and frequency effects are stronger for consumers exposed to a trend of prices the results have several implications for choice modeling pricing theory and pricing strategy

empirical generalizations from reference price research considerable theoretical justification for consumers use of psychological reference points exists from the research literature from a managerial perspective one of the most important applications of this concept is reference price an internal standard against which observed prices are compared in this paper we propose three empirical generalizations that are well supported in the marketing literature first there is ample evidence that consumers use reference prices in making brand choices second the empirical results on reference pricing also support the generalization that consumers rely on past prices as part of the reference price formation process third consistent with other research on loss aversion consumers have been found to be more sensitive to losses i e observed prices higher than reference prices than gains we also propose topics for further research on reference prices

the value of wildcard options wildcard options are embedded in many derivative contracts they arise when the settlement price of the contract is established before the time at which the wildcard option holder must declare his intention to make or accept delivery and the exercise of the wildcard option closes out the underlying asset position this paper provides a simple method for valuing wildcard options and illustrates the technique by valuing the sequence of wildcard options embedded in the s p 100 index oex option contract the results show that wildcard options can account for an economically significant fraction of oex option value many exchange traded derivative securities contain embedded delivery

an empirical comparison of the validity of a neural net based multinomial logit choice model to alternative model specifications applications of choice models to brand purchase data as a rule specify a linear deterministic utility function we estimate deterministic utility by means of a neural net able to approximate any continuous multivariate function and its derivatives to a desired level of precision we compare this model to related alternatives both with linear and nonlinear utility functions alternatives with nonlinear utility functions are based on generalized additive modeling and taylor series expansion respectively we analyze purchase data of the six largest brands in terms of market share for two product groups neural choice models outperform the alternative models studied w r t posterior probabilities they also attain the best crossvalidated log likelihood values these results demonstrate that the increase in complexity caused by the neural choice model is justified by higher validity in the empirical study the neural choice models imply elasticities different from those obtained by linear utility multinomial logit models for several predictors neural choice models discover inversely s shaped saturation and interaction effects on utility

a decision support system for planning manufacturers sales promotion calendars a common event in the consumer packaged goods industry is the negotiation between a manufacturer and a retailer ofthe sales promotion calendar determining the promotion calendar involves a large number of decisions regarding levels of temporary price reductions feature ads and in store displays each executed at the level of individual retail accounts and brand skus over several months or a year though manufacturers spend much of their marketing budget on trade promotions they lack decision support systems to address the complexity and dynamics of promotion planning previous research has produced insights into how to evaluate the effectiveness of promotional events but has not addressed the planning problem in a dynamic environment this paper develops a disaggregate level econometric model to capture the dynamics and heterogeneity of consumer response by modeling the purchase incidence timing choice and quantity decisions of consumers we decompose total sales into incremental and nonincremental baseline plus borrowed the response model forms the basis of a market simulator that permits us to search for the manufacturer s optimal promotion calendar subject to a set of constraints some of them imposed by the retailer via the simulated annealing algorithm calendar profits are the net result of the contribution from incremental sales minus the opportunity cost from giving away discounts to nonincremental sales and the fixed costs associated with implementing promotional events e g retagging features displays incremental sales result from promotion induced switching the acceleration and quantity promotion effects on those switchers increased consumption and the carryover effect from purchase event feedback we applied our approach to the promotion planning problem of a large consumer packaged goods company in a nonperishable staple product category suggested by company executives canned tomato sauce subject to a retailer pass through constant rate of 80 provided to us by the collaborating firm the optimal promotion calendar produced by the modeling system followed a pattern of frequent and shallow temporary price reductions with no feature or display activity we also analyze how that result would change under different retailer pass through scenarios our findings indicated that the manufacturer could substantially improve the profitability of its sales promotion activity and that there would be a concurrent positive effect on retailer profit and volume levels management reported to us that the insights from the use of the system were implemented in their promotion planning process and produced positive results a validation analysis on follow up data for one market showed that promotion activity could be significantly reduced as recommended with no adverse effect on the brand s market share as predicted to generalize the model beyond the specific category where it was implemented we conducted a sensitivity analysis on the profile of the calendar i e frequency depth and duration of deals with respect to changes in market response competitive activity and retailer pass through first we found that the optimal depth frequency and timing of discounts is stable for price elasticities ranging from near zero to around four in absolute magnitude we also found no systematic impact of competitive promotions on the profile of the optimal calendar for example variation in competitive activity did not affect the optimal depth or frequency of discounts lastly we found changes in retailer pass through to have a significant effect on the optimal depth and number of weeks of trade promotion that a manufacturer should offer this emphasizes the importance to manufacturers of having accurate estimates of pass through for purposes of promotion budgeting and planning

the decision to raise firm value through a sports business exchange how much are real madrid s goals worth to its president s company s goals abstract global brands emerging from the world of sports are becoming commonplace and firms invest in the realm of sports usually through sponsorship initiatives to get a link with these global brands over and above just a mere business link what if a company makes a personal commitment to get into the core of a renowned celebrated sports team this article provides managers with a procedure to analyze in a weekly basis how valuable this type of decision is a conceptual model shows that the personal involvement of a firm s figurehead in a first class sports club can impact positively on firm value if the person is doing well in the task s he is entrusted with by the club the empirical application to the soccer club real madrid over 1 409 days and 215 matches finds that the club s performance on the field has a significant impact on the economic returns of its president s company with asymmetrical effects on firm value in a loss aversion pattern that is lost matches have a greater effect on firm value than games won

incorporating consumer price expectations in diffusion models in this paper the sensitivity of the optimal price path of a new durable product to the price expectations of consumers is examined consumers enter the market every period in a diffusion type framework during the initial periods more consumers enter the market due to word of mouth influence but in the latter periods saturation effects set in the entering set of cohorts form expectations about future prices and in a stable equilibrium these expectations are fulfilled it is shown that the price path is cyclical with the following properties at the beginning of the cycle the price is at its highest level it falls monotonically over time reaching a low price at the end of the cycle equal to the reservation price of the consumers willing to pay less the cycle lengths are not equal the sensitivity of the optimal price path to model parameters is explored through a numerical procedure

quality perceptions and asymmetric switching between brands rotating indifference curves are used to induce an income effect that favors superior brands at the expense of inferior brands in a discrete choice model when calibrated on scanner panel data the model yields an objective measure of brand quality which is related to the rate of rotation the model also leads to asymmetric responses to price promotions where switching up to high quality brands is more likely than switching down the model is capable of nesting the standard logit model and is similar to a nested logit model when there exists clusters of brands of like quality the model is used to explore a product line pricing decision where profits are maximized subject to the constraint that consumer utility is maintained

differentiated price loss aversion in destination choice the effect of tourists cultural interest abstract this article looks into the differentiated effects of loss aversion depending on whether individuals show cultural interest when choosing a destination based on the fact that perceived value implies not only sacrifices but also the expectations of a certain level of quality and prospects of satisfaction together with the idea the prospect theory applies to tourism prices the article states the hypothesis that interest in culture when choosing a destination lowers people s loss aversion by incorporating the reference dependent model into a multinomial logit model with random parameters which controls for heterogeneity the empirical application shows that culture interested tourists are less loss averse i e the negative effect of finding a higher than expected price diminishes with cultural interest the expectation of enjoyment of these attributes and the more conscious attitude toward maintenance restoration activities of cultural sites are hypothesized to lead prices to be evaluated differently when selecting a destination

an investigation of reference price segments abstract empirical research on reference price has typically assumed that consumers use either an internal reference price irp or an external reference price erp but not both in brand choice decisions in this article the authors assume that consumers use both irp and erp but may consider one of them more salient than the other the authors develop a model that segments consumers on the basis of the differences in the importance they assign to each type of reference price as well as in their brand preferences and responses to marketing mix variables the authors calibrate the model on data for four categories liquid detergents ketchup tissue and yogurt in all four categories the proposed model performs significantly better than the one that assumes that consumers use either irp or erp exclusively the authors discuss the managerial implications of this finding

the effects of consumers price expectations on sellers dynamic pricing strategies abstract the authors propose a dynamic market equilibrium model to investigate how consumers form price expectations and how these expectations influence their sequential search behavior and prices in the market they derive a perfect bayesian nash equilibrium and show that whereas higher current period prices induce search consumers who observe higher historical prices form higher price expectations become more pessimistic and search less furthermore the authors show that when prices increase as a result of an increase in marginal costs consumers respond by searching more which then leads to higher prices and instant price adjustment in contrast because consumer search activities decline when prices fall sellers may respond by lowering their prices just enough to dampen consumers search tendencies when costs decrease the authors test their theoretical model and its implications and find support for it in a series of simulated market experiments

a laboratory study of duopoly price competition with patient buyers i introduction two extreme forms of pricing behavior sometimes called the bertrand paradox and the diamond paradox emerge from a single distinguishing assumption bertrand 1883 assumes that a buyer knows ex ante the prices of all sellers and notes that with homogeneous goods a single competitive price emerges even among a small number of sellers because at any slightly higher price at least one seller can increase his profit by engaging in undercutting in diamond s 1971 model on the other hand a buyer first chooses a seller and then receives the price quote ex post even with infinitesimal search cost in equilibrium a buyer searches only one seller and all sellers charge the monopoly price the only difference between the two formulations is whether sellers price ex ante or ex post 1 intuitively however there is no strong rationale for preferring either assumption for when price information is acquired this is especially so since the law of one price is known to fail and persistent price dispersion is widely observed even in essentially homogenous goods markets e g baye morgan and scholten 2004 brynjolfsson and smith 2000 sorensen 2000 most of the theoretical literature that models price dispersion has employed costly buyer search e g salop and stiglitz 1977 1982 stahl 1989 1996 stigler 1961 or costly seller advertising butters 1977 robert and stahl 1993 to generate dispersed prices 2 gale 1988 on the other hand models price dispersion in a rather stark form using only two sellers and one buyer this can provide a modeling foundation for some types of multilateral bargaining such as in concentrated intermediate goods markets sellers are uncertain whether the buyer is receiving price offers from both ex ante pricing or one ex post pricing of them at any given time if the buyer s sample contains both offers with a positive but not certain probability gamma a unique dispersed price equilibrium exists that shifts systematically with gamma extending this static model to multiround pricing with time discounting gale examines the impact of greater buyer patience modeled as a higher discount factor on the equilibrium price level and price dispersion this is intended to approximate market conditions with many buyers where trade continues over time as can occur also in durable goods settings as buyers become more patient sellers must compete not only with the other seller but also with their own future price offers consequently the equilibrium price distribution becomes concentrated at lower prices this article presents the first laboratory experiment that studies the interaction of buyer patience and search with multiround pricing by competing sellers specifically we focus on prices posted by competing sellers in a noisy search environment where buyers can wait for more price offers this enables us to explore how the timing of buyer s purchase decisions influences sellers pricing strategy which is not captured by the stationary equilibrium of the theoretical model the experiment includes both a static treatment where agents have only one opportunity to trade each period and a dynamic treatment where trading opportunities may continue for future rounds of price offers with a positive and known probability 3 one interpretation of these single round trading and multiple round trading treatments is that the former refers to a disposable goods and the latter to a durable goods environment the model s predictions that prices decrease if the buyer is more patient or is more likely to receive both price offers are intuitive but the available evidence from previous durable goods and bargaining experiments provides only weak support for theory furthermore implications of multiple price offers from competing sellers have never been studied previously in experiments with durable goods and multiple round trading which have focused on single seller environments

is there a unit root in the inflation rate evidence from sequential break and panel data models summary using sequential trend break and panel data models we investigate the unit root hypothesis for the inflation rates of thirteen oecd countries with individual country tests we find evidence of stationarity in only four of the thirteen countries the results are more striking with the panel data model we can strongly reject the unit root hypothesis both for a panel of all thirteen countries and for a number of smaller panels consisting of as few as three countries the non rejection of the unit root hypothesis for inflation is very fragile to even a small amount of cross section variation 1997 john wiley sons ltd

reassessing brand loyalty price sensitivity and merchandising effects on consumer brand choice this article reports the results of an empirical study of household brand choices over four scanner panel data sets the study uses a random effects autocorrelated logistic regression model the analysis presents evidence that the brand choice process is not zero order in addition the influence of in store displays and feature advertisements on switching is shown to be about two to three times more effective than estimates obtained from previous studies finally the analysis indicates systematic differences between frequent and infrequent buyers of products in terms of their sensitivity to price displays and feature advertising

asymmetric reference price effects and dynamic pricing policies we consider a group of frequently purchased consumer brands which are partial substitutes and examine two situations the first where the group of brands is managed by a retailer and second where the brands compete in an oligopoly we assume that demand is a function of actual prices and reference prices and develop optimal dynamic pricing policies for each situation in addition to researchers studying pricing strategy our results may interest retailers choosing between hi lo pricing and an everyday low price and manufacturers assessing whether to follow procter gamble s lead and replace a policy of funding consumer price reductions through trade deals with a constant wholesale price a reference price is an anchoring level formed by customers based on the pricing environment the literature suggests that demand for a brand depends not only on the brand price but also whether the brand price is greater than the reference price a perceived loss or is less than it a perceived gain the responses to gains and losses are asymmetric broadly speaking we find that when enough consumers weigh gains more than losses the optimal pricing policy is cyclical likewise when they weigh losses more than gains a constant price is optimal thus we provide a rationale for dynamic pricing which is quite distinct from the three explanations previously offered 1 decreasing unit variable costs due to learning effects 2 the transfer of inventory to consumers who face lower inventory holding costs than do retailers and 3 competitive effects our explanations apply even when the other explanations do not i e in mature product categories where learning effects are minimal when retailer inventories are minimized through the use of just in time policies and when competitive effects do not exist as in a monopoly greenleaf 1995 has shown numerically that in the presence of reference price effects the optimal pricing policy for a monopolist can be cyclical we first analytically extend greenleaf s result to a monopolist with a constant cost of goods facing a homogeneous market where all customers either weigh gains more than losses or vice versa using this building block we examine a monopolist retailer managing multiple brands we assume that demand is a linear function of prices of multiple brands and together with an expression which reflects the reference price effect further we assume that the retailer maximizes average profit per period next we analyze a duopoly and extend the results to an oligopoly we assume that the manufacturers are able to set the retail prices as in an integrated channel here we retain the same demand function as for the retailer and derive markov perfect nash equilibria we use two alternative processes of reference price formation the exponential smoothed es past price process which is frequently used in the literature and for the multi brand situations the recently proposed reference brand rb process hardie johnson and fader 1993 in the latter the reference price is the current price of the last brand bought the reference brand we adapt the individual level rb formulation in hardie et al to an aggregate demand specification for the es process we obtain most results analytically for the rb process we use simulation finally we extend our results to a population with two customer segments segment 1 which weighs gains more than losses and segment 2 which does the opposite i e is loss averse when the market consists exclusively of segment 1 customers and es is the reference price process we find that prices are cyclical in all cases analyzed i e for a monopoly a monopolist retailer managing multiple brands a duopoly and an oligopoly if the rb formulation is the underlying process a monopolist retailer managing two brands uses cyclical prices but in a duopoly the equilibrium solution is for the brands to maintain constant prices when all customers belong to segment 2 i e they are loss averse constant prices are optimal in all cases for both reference price formulations when the population consists of both segment 1 and segment 2 and the es process applies we develop a sufficient condition for cyclical pricing policies to be optimal the condition is expressed in terms of the proportion of the two segment sizes the absolute difference between the gain and loss parameters of each segment and their respective exponential smoothing constants interestingly for reasonable values of the latter two factors cyclical policies are optimal even when the proportion of segment 1 is quite small similar magnitudes are obtained numerically for the rb case

hysteresis price acceptance and reference prices the existence of price thresholds in grocery retailing is well documented most authors explain the existence of price thresholds using assimilation contrast theory adaptation level theory or prospect theory however each of these theories is untenable if consumers are believed to behave rationally we offer a theoretical explanation grounded in real options theory rot and economic hysteresis we test the rot hypothesis against three plausible alternatives using a maximum likelihood friction model that we augment for unobserved heterogeneity our findings support the rot hypothesis and suggest that the existence of price thresholds in aggregate data are driven by a common recognition of real option values which do not disappear with the inclusion of consumer heterogeneity

a model of balanced choice behavior in some product categories consumers appear to alternate among items in a consistent and purposeful though not entirely deterministic fashion such alternation occurs even in the absence of any apparent external influences on choice to explain such balanced choice behavior we present a model based upon the premise that past consumption influences the utility of items on subsequent choice occasions individuals may seek variety on certain product attributes and exhibit loyalty toward others the model specification yields a logit choice model which may be calibrated using consumption diary panel data at the individual or cross sectional level

brand loyalty and market equilibrium two concepts of brand loyalty are defined inertial brand loyalty resulting from time lags in awareness and cost based brand loyalty resulting from intertemporal utility effects their market level implications are formally derived in a continuous time model it is found that inertial brand loyalty leads to equilibria with price dispersion while cost based brand loyalty also may allow single price equilibria in all cases as brand loyalty vanishes so does the difference between the average trading price and the price which obtains with no brand loyalty consistent with empirical results the theory predicts that the relationship between market share and performance is positive in cross sectional studies but flat in time series studies the theory is also consistent with the view that market share is an asset in itself after developing the theory several strategic implications are drawn in the end some questions for further theoretical and empirical research are raised

persistence in international inflation rates we test for fractional dynamics in inflation rates based on the consumer price index cpi for 27 countries and inflation rates based on the wholesale price index wpi for 22 countries the fractional differencing parameter is estimated using semiparametric and approximate maximum likelihood methods significant evidence of fractional dynamics with long memory features is found in both cpi and wpi based inflation rates for industrial as well as developing countries implications of the findings are considered and sources of long memory are hypothesized

reference points in revenue sharing contracts how to design optimal supply chain contracts abstract coordinating supply chains is an important goal for contract designers because it enables the channel members to increase their profits recently many experimental studies have shown that behavioral aspects have to be taken into account when choosing the type of contract and specifying the contract parameters in this paper we analyze behavioral aspects of revenue sharing contracts we extend the classical normative decision model by incorporating reference dependent valuation into the decision model and show how this affects inventory decisions we conduct different lab experiments to test our model as a result human inventory decisions deviate from classical normative predictions and we find evidence for reference dependent valuation of human decision makers we also show how contract designers can use the insights we gained to design better contracts

mental accounting and changes in price the frame dependence of reference dependence mental accounting principles for multiple events were replicated and then extended to pricing situations that were designed to moderate these principles if reference dependence is proportional i e if consumers evaluate events in terms of proportional deviations from reference states rather than raw deviations prices were stated with or without popular percentage based pricing frames such as 33 off mental accounting principles generally prevailed in the absence of percentage based frames however percentage based frames altered two principles and increased tendencies toward the others the findings demonstrate that mental accounting principles price perception and reference dependence are sensitive to the ways in which deviations from reference states are framed

consumer evaluations of multiple versus single price change this article examines how consumer evaluations of multiple price changes differ from the evaluation of a single price change of an equal amount consistent with r thaler s theory about segregation versus integration of gains and losses we find that multiple price decreases are evaluated more favorably than a single price decrease and multiple price increases are evaluated more unfavorably than a single price increase however these effects are moderated by consumer price uncertainty and relative magnitude of the prices being evaluated because price uncertain consumers consider higher ranges of prices acceptable they are less unfavorable to multiple price increases and more favorable to multiple price decreases than certain consumers moreover when the magnitude of one price is very small relative to other prices consumers preference for multiple price decreases relative to a single price decrease is reduced however this effect is not found when there are price increases

incorporating reference price effects into a theory of consumer choice although there has been a good deal of research on incorporating the effects of reference price formation into empirical models of consumer buying behavior little formal theoretical work had been undertaken to date this paper incorporates reference price effects into the traditional economic theory of consumer choice and examines the effects of reference price formation on the results of the traditional theory its marketing implications and the implications for empirical models which examine the effects of reference price formation on actual consumer behavior several implications of the theoretical model are empirically tested using weekly retail egg sales data from southern california this analysis indicates that reference price formation does have significant effects on consumer behavior furthermore these effects are asymmetric with consumers two and a half times more responsive to egg price increases that are in excess of the reference price than they are to comparable egg price decreases

a competitive dynamic pricing model when demand is interdependent over time abstract in this study we contribute to the dynamic pricing literature by developing a finite horizon model for two firms offering substitutable and nonperishable products with different quality levels customers can purchase and store the products even if they do not need them at the time in order to use them in future the stockpile of the products generated by customers affects the demand in future periods therefore the demand for each product not only is a function of prices and quality levels but also of the products stockpile levels in addition the stockpile levels change the customers consumption behavior more product in a stockpile leads to more consumption therefore we address not only the price and demand relationship but also the stockpiling and consumption relationship in a competitive environment the decision variable of each firm at the beginning of each period is its unit sale price we use a deterministic dynamic program to calculate the equilibrium prices at the beginning of each period by assuming that the market stockpile is public information we show the existence of a unique nash equilibrium we next consider the case when the firms do not know the market stockpile we then develop appropriate heuristics to calculate the optimal prices in each case a numerical study is also provided to calculate the price levels in different scenarios and compare their performances

consumer uncertainty and purchase decision reversals theory and evidence this research examines how prepurchase information that reduces consumer uncertainty about a product or service can affect consumer decisions to reverse an initial product purchase or service enrollment decision one belief commonly held by retailers is that provision of greater amounts of information before the purchase reduces decision reversals we provide theory and evidence showing conditions under which uncertainty reducing information provided before the purchase decision can actually increase the number of decision reversals predictions generated from an analytical model of consumer behavior incorporating behavioral theory of reference dependence are complemented by empirical evidence from both a controlled behavioral experiment and econometric analysis of archival data combined the theory and evidence suggest that managers should be aware that their information provision decisions taken to reduce decision reversals may actually increase them data as supplemental material are available at http dx doi org 10 1287 mksc 2015 0906

an empirical analysis of latitude of price acceptance in consumer package goods scanner panel data analyses for sweetened and unsweetened drink categories with four brands in each support the presence of a region of price insensitivity around a reference price the analyses also suggest that consumers with higher average reference price have a wider latitude of price acceptance consumers with a higher frequency of purchase i e shorter average interpurchase time interval are found to have a narrower latitude of price acceptance because they are more aware of the range of price distributions finally consumers with a higher average brand loyalty have a wider latitude of price acceptance demonstrating greater tolerance of price fluctuations

between preferences and references asymmetric price elasticities and the simulation of fiscal policies abstract canonical demand studies and fiscal policy simulations rest on the assumption that consumers react symmetrically to price increases and decreases such assumption has been challenged from both the empirical and theoretical points of view we propose theoretically consistent empirical specifications to estimate discrete choice models random utility dcm and continuous demand systems easi and aids demand systems that allow for reference prices and asymmetric own and cross price demand response our application focuses on the demand for sugar sweetened beverages in great britain using transaction level household purchase data and different product aggregation levels we find substantial evidence of asymmetric consumer response and loss aversion with a stronger response when prices rise above their reference level our results hold for both dcms on highly differentiated products and demand systems on aggregate product categories and are robust to alternative model and reference price specifications simulations of taxes and subsidies on soft drinks shows that ignoring asymmetry may lead to biases especially when predicting price cuts

the budget contraction effect how contracting budgets lead to less varied choice how do consumers adjust their spending when their budget changes a common view is that the allocation of one s current budget should not depend on previous budget allocations contrary to this the authors find that when the budget contracts to a particular level consumers select less variety as measured by the number of different items with some of the budget allocated to them than when their budget expands to that same level this budget contraction effect stems from a reduction in variety under the contracting budget not from variety expansion under the expanding budget evidence from five experiments indicates that the effect is driven by a desire to avoid feelings of loss associated with spreading allocation cuts relative to reference quantities from previous allocations across many items

optimal product line design when consumers exhibit choice set dependent preferences in a market of consumers with varying willingness to pay using product line as a discrimination tool may extract higher profits than serving all consumers with a single product local context effects however point to yet another consideration in designing product lines how the appeal of a product changes with the context provided by other products in the choice set i present a model of product line design that incorporates both discrimination and context management goals and offers recommendations for the variety and positioning of products to this end the model makes use of a framework that allows preferences to be choice set dependent given this framework i study how the firm manages externalities between products created by such dependencies the firm creates distortions above and beyond those resulting from discrimination motives alone for example in a vertically differentiated market for quality quality distortions exist even for the consumers with the highest valuations the range of quality provisions given the number of products is compressed as the relative importance of unfavorable comparisons among products increases surprisingly this compression may even lead the firm to forego discrimination among consumers regardless of the cost of offering distinct products

explicit solutions of optimization models and differential games with nonsmooth asymmetric reference price effects models in marketing with asymmetric reference effects lead to nonsmooth optimization problems and differential games which cannot be solved using standard methods in this study we introduce a new method for calculating explicitly optimal strategies open loop equilibria and closed loop equilibria of such nonsmooth problems application of this method to the case of asymmetric reference price effects with loss aversive consumers leads to the following conclusions 1 when the planning horizon is infinite after an introductory stage the optimal price stabilizes at a steady state price which is slightly below the optimal price in the absence of reference price effects 2 the optimal strategy is the same as in the symmetric case but with the loss parameter determined by the initial reference price 3 competition does not change the qualitative behavior of the optimal strategy 4 adopting an appropriate constant price strategy results in a minute decline in profits

an alternative explanation for lower repeat rates after promotion purchases several authors have observed that average repeat rates are lower after a promotion purchase one interpretation of this result is that a media coupon or cents off promotion undermines the consumer

a high tech product market share model with customer expectations in a product category based on dynamic technology new products enter the market in rapid succession and the competitive situation changes almost daily because technological features of available products tend to improve while prices tend to decline customers develop expectations that may influence their purchase decisions we model the impact of customer expectations regarding price and technology on product market share in the personal computer industry finding significant nonlinear effects of both these effects are observed when actual product price and or technology differ from expectations by a threshold amount our results suggest implementable implications for high tech product managers in particular price and technology should meet but not exceed customer expectations this does not mean that managers should strive for mediocrity rather continuous improvement should be implemented so that product development efforts lead customer expectations

chapter 6 market share models publisher summary this chapter describes that three basic principles motivate the specification of the market share models market share models should be competitive descriptive as well as predictive and profit oriented being fundamentally competitive implies that one cannot know the effect or effectiveness of a marketing action without accounting for the actions of competitors market share models are models for understanding how the marketing efforts of every brand impact the results in a competitive marketplace only by describing the influence of each marketing instrument can one gain a basis for marketing planning prediction alone is not enough time series models that forecast the future from the past sales provide no insight into how sales are generated the emphasis on being descriptive also embraces the need to understand the areas in which consumer choice probabilities are synonymous with market shares as well part of the goal of description transcends what can be done by market share models alone managers need to understand that their efforts have potentially competitive effects and potentially market expansive effects in sales response models these effects are comingled but by combining descriptive market share models for the competitive effects with descriptive category volume models for the market expansive effects managers obtain a much richer understanding of the market the profit oriented goal of market share analysis urges us to ask how the firm s allocations of resources to aspects of the marketing mix produce bottom line results

the decomposition of promotional response an empirical generalization price promotions are used extensively in marketing for one simple reason consumers respond the sales increase for a brand on promotion could be due to consumers accelerating their purchases i e buying earlier than usual and or buying more than usual and or consumers switching their choice from other brands purchase acceleration and brand switching relate to the primary demand and secondary demand effects of a promotion gupta 1988 captures these effects in a single model and decomposes a brand s total price elasticity into these components he reports for the coffee product category that the main impact of a price promotion is on brand choice 84 and that there is a smaller impact on purchase incidence 14 and stockpiling 2 in other words the majority of the effect of a promotion is at the secondary level 84 and there is a relatively small primary demand effect 16 this paper reports the decomposition of total price elasticity for 173 brands across 13 different product categories on average we find that 25 of the elasticity is due to primary demand expansion i e purchase acceleration and 75 to secondary demand effects or brand switching thus while gupta s finding that the majority of promotional response stems from brand switching is supported the average magnitude of the effect appears to be smaller than first thought more important there is ample evidence that promotions have a significant primary demand effect the relative emphasis on purchase acceleration and brand switching varies systematically across categories and the second goal of the paper is to explain this variation as a function of exogeneous covariates in doing this we recognize that promotional response is the consumer s reaction to a price promotion and therefore develop a framework for understanding variability in promotional response that is based on the consumer s perspective of the benefits from a price promotion these benefits are posited to be a function of i category specific factors ii brand specific factors and iii consumer characteristics the framework is formalized as a generalized least squares meta analysis in which the brand s price elasticity is the dependent variable several interesting results emerge from this analysis category specific factors brand specific factors and consumer demographics explain a significant amount of the variance in promotional response for a brand at both the primary and secondary demand levels category specific factors have greater influence on variability in promotional response and its decomposition than do brand specific factors there are several instances where exogenous variables do not affect total elasticities yet significantly affect individual components of total elasticity in fact the lack of a significant relationship between the variables and total elasticity is often due to offsetting effects within two or more of the three behavioral components of elasticity this is particularly true for brand specific factors which typically have no effect on total elasticity yet have important effects on the individual behaviors there is some evidence to suggest that not all promotion related increases in primary demand are due to forward buying in some cases promotions appear to increase consumption we use these results to illustrate how category and brand specific factors work to drive primary and secondary demand elasticities in different directions in short this paper offers an empirical generalization of a key finding on promotional response how elasticities decompose across brand choice purchase incidence and stockpiling and new insights into factors that explain variance in promotional response these findings are likely to be of interest to researchers who are concerned with theory development and the generalizability of marketing phenomena and to managers who plan promotion campaigns

understanding reference price shoppers a within and cross category analysis abstract the authors attempt to draw profiles of reference price shoppers specifically the authors study how selected factors that affect brand choice are correlated with consumer sensitivity to gains and losses with respect to internal reference prices they also study the interaction between sociodemographics and gain and loss sensitivity furthermore the authors analyze cross category correlations in gain and loss sensitivity to shed light on their individual and category specific characters in three categories the results show significant heterogeneity in loss sensitivity among consumers and indicate that loss sensitivity is greater and more heterogeneous than gain sensitivity across categories the results show that loss sensitive shoppers are less influenced by past brand use and that both loss and gain sensitive shoppers more sensitive to price display and feature than the average consumer loss sensitive households tend to be larger and their heads are less likely to be fully employed