underestimating the real growth of gdp personal income and productivity economists have long recognized that changes in the quality of existing goods and services along with the introduction of new goods and services can raise grave difficulties in measuring changes in the real output of the economy but despite the attention to this subject in the professional literature there remains insufficient understanding of just how imperfect the existing official estimates actually are after studying the methods used by the us government statistical agencies as well as the extensive previous academic literature on this subject i have concluded that despite the various improvements to statistical methods that have been made through the years the official data understate the changes of real output and productivity the official measures provide at best a lower bound on the true real growth rate with no indication of the size of the underestimation in this essay i briefly review why national income should not be considered a measure of well being describe what government statisticians actually do in their attempt to measure improvements in the quality of goods and services consider the problem of new products and the various attempts by economists to take new products into account in measuring overall price and output changes and discuss how the mismeasurement of real output and of prices might be taken into account in considering various questions of economic policy

day of the week effects and asset returns the number of empirical studies using daily stock returns is rapidly increasing researchers generally assume that the distribution of stock returns is identical for all days of the week a convenient statistical assumption but not a necessary condition of market equilibrium nevertheless there are reasons to suspect that the distribution of returns may vary according to the day of the week the most obvious is the impact of weekends on monday s return since monday s return is calculated over three instead of one calender day the mean and variance may well be higher on monday compared with any other daily return perhaps three times as large previous research has examined the daily distribution of stock returns for a monday effect while fama 1965 does not compare daily mean returns he does report that monday s variance is about 20o greater than other daily returns with a traditional distributional assumption regarding the returns on a financial asset specifies that the expected returns are identical for all days of the week contrary to this plausible assumption this paper discovers that the expected returns on common stocks and treasury bills are not constant across days of the week the most notable evidence is for monday s returns where the mean is unusually low or even negative several explanations of the results are investigated but none proves satisfactory aside from documenting significant day of the week effects the implications of the results for tests of market efficiency are examined while market adjusted returns continue to exhibit day of the week effects these effects are no longer concentrated on monday during the last year we have had many conversations with our colleagues throughout the professions we are particularly thankful to the participants at sessions of the western and american finance associations where preliminary versions of this paper were presented special thanks are due to gene fama gailen hite jon ingersoll robert jarrow merton miller clifford smith and rex thompson the expert research assistance of frank rabinovitch and youngsup yun is gratefully acknowledged 1 the list of papers using daily stock returns is too long to name recent examples include charest 1978 dodd 1980 banz 1981 and reinganum 1981

the sensitivity of vpin to the choice of trade classification algorithm abstract the vpin metric easley et al 2012b aims to detect and predict the toxicity of order flow this paper examines the sensitivity and robustness of vpin to the choice of trade classification scheme which is the major input used to compute vpin we compare deterministic trade by trade classification approaches with results computed using a newly proposed heuristic approach bulk volume classification we find substantial differences for all levels of aggregation trade classification order imbalance vpin and identifying toxic periods we also find that the detection of toxic periods does not yield consistent results in more than 60 of cases but regression analysis can identify volume and return volatility as parameters that contribute to higher levels of sensitivity

a day end transaction price anomaly a large mean price change is observed on the last daily nyse transaction this suggests that closing prices may not consistently represent stock values transaction prices are studied to further characterize the day end price rise and to determine whether it is due to any limited subsample of stocks or dates the results indicate that the phenomenon is pervasive over most firms and days some evidence suggests that it is caused by a change in the frequency of ask prices at day end

an empirical analysis of consumer purchase decisions under bucket based price discrimination bucket based price discrimination is a unique price format that involves monthly subscription fees and instantaneous quotas the number of rental products that can be checked out we propose an empirical model in which consumers make dynamic purchase decisions under consumption uncertainty accounting for the constraints imposed by the instantaneous quota applying the model to an online dvd rental data set we find that 1 consumers incur a large disutility 8 from stockout i e unmet consumption needs 2 such a disutility drives consumers overpurchase of the service quota as a way to avoid potential stockout situations and 3 the dynamics of overpurchase are driven by the interplay between trends in consumption needs and the magnitude of consumers plan switching costs we run counterfactual exercises to better understand how the instantaneous quota and stockout risk affect consumers consumption rates purchase decisions and firm profitability we find that the instantaneous quota induces a greater stockout compared with a monthly quota we further demonstrate that the company should recognize the drivers of the dynamics in overpurchase to balance short and long term profitability for example by offering targeted discounts to customers with excess overpurchase

estimating demand for local telephone service with asymmetric information and optional calling plans in this paper i study the theoretical and econometric implications of agents uncertainty concerning their future consumption when a monopolist offers them either a unique mandatory nonlinear tariff or a choice in advance from a menu of optional two part tariffs agents uncertainty is resolved through individual and privately known shocks to their types in such a situation the principal may screen agents according to their ex ante or ex post type by offering either a menu of optional tariffs or a standard nonlinear schedule the theoretical implications of the model are used to evaluate a tariff experiment run by south central bell in two cities in kentucky in 1986 the empirical approach explicitly accounts for the existence of informational asymmetries between local telephone users and the monopolist leading to different nested econometric specifications under symmetric and asymmetric information the empirical evidence suggests that there exists a significant asymmetry of information between consumers and the monopolist under both tariff regimes all expected welfare components failed to increase with the introduction of optional tariffs for the estimated value of the parameters copyright 2002 wiley blackwell

paying too much and being happy about it existence causes and consequences of tariff choice biases abstract a common assumption underlying the analysis of consumers choices among optional tariffs is that consumers choose the tariff that maximizes their surplus and thus the tariff that leads to the lowest billing rate for a given amount of usage yet there is evidence that many users prefer a flat rate even though their billing rate would be lower with a pay per use tariff flat rate bias and some users prefer a pay per use tariff even though they would save money with a flat rate pay per use bias the authors conduct four empirical analyses based on three different data sets they show that the flat rate bias is more important and has a greater regularity and time persistence than the pay per use bias they classify potential causes of the flat rate bias as insurance effect taxi meter effect convenience effect and overestimation effect and show that the insurance the taxi meter and the overestimation effects lead to a flat rate bias they provide evidence that underestimation of usag

statistical properties of the roll serial covariance bid ask spread estimator exact small sample population moments of the standard serial covariance and variance estimators are derived under the assumptions of the roll bid ask spread model noise explains why serial covariance estimates are often positive in annual samples of daily and weekly returns small sample estimator bias partially explains why weekly estimates are more negative than daily estimates noise causes the roll spread estimator to be severely biased by jensen s inequality the french roll adjusted variance estimator is unbiased but noisy empirical tests confirm the major implications

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

paying not to go to the gym how do consumers choose from a menu of contracts we analyze a novel dataset from three u s health clubs with information on both the contractual choice and the day to day attendance decisions of 7 752 members over three years the observed consumer behavior is difficult to reconcile with standard preferences and beliefs first members who choose a contract with a flat monthly fee of over 70 attend on average 4 3 times per month they pay a price per expected visit of more than 17 even though they could pay 10 per visit using a 10 visit pass on average these users forgo savings of 600 during their membership second consumers who choose a monthly contract are 17 percent more likely to stay enrolled beyond one year than users committing for a year this is surprising because monthly members pay higher fees for the option to cancel each month we also document cancellation delays and attendance expectations among other findings leading explanations for our findings are overconfidence about future self control or about future efficiency overconfident agents overestimate attendance as well as the cancellation probability of automatically renewed contracts our results suggest that making inferences from observed contract choice under the rational expectation hypothesis can lead to biases in the estimation of consumer preferences

forecasting volatility of the u s oil market abstract we examine the information content of the cboe crude oil volatility index ovx when forecasting realized volatility in the wti futures market additionally we study whether other market variables such as volume open interest daily returns bid ask spread and the slope of the futures curve contain predictive power beyond what is embedded in the implied volatility in out of sample forecasting we find that econometric models based on realized volatility can be improved by including implied volatility and other variables our results show that including implied volatility significantly improves daily and weekly volatility forecasts however including other market variables significantly improves daily weekly and monthly volatility forecasts

no lease is short enough to solve the time inconsistency problem the author provides a model of endogenous lease duration determination in the context of the durable goods monopolist problem he shows that infinitely many leases per finite unit of time are required to solve completely the time inconsistency problem thus suggesting that leasing may not provide a practical solution the author also provides a warning regarding the results that can be derived by exogenously setting lease durations equal to one period by resolving a paradoxical result in the literature copyright 1994 by blackwell publishing ltd

consumption self control by rationing purchase quantities of virtue and vice consumers attempts to control their unwanted consumption impulses influence many everyday purchases with broad implications for marketers pricing policies addressing theoreticians and practitioners alike this paper uses multiple empirical methods to show that consumers voluntarily and strategically ration their purchase quantities of goods that are likely to be consumed on impulse and that therefore may pose self control problems for example many regular smokers buy their cigarettes by the pack although they could easily afford to buy 10 pack cartons these smokers knowingly forgo sizable per unit savings from quantity discounts which they could realize if they bought cartons by rationing their purchase quantities they also self impose additional transactions costs on marginal consumption which makes excessive smoking overly difficult and costly such strategic self imposition of constraints is intuitively appealing yet theoretically problematic the marketing literature lacks operationalizations and empirical tests of such consumption self control strategies and of their managerial implications this paper provides experimental evidence of the operation of consumer self control and empirically illustrates its direct implications for the pricing of consumer goods moreover the paper develops a conceptual framework for the design of empirical tests of such self imposed constraints on consumption in consumer goods markets within matched pairs of products we distinguish relative virtue and vice goods whose preference ordering changes with whet her consumers evaluate immediate or delayed consumption consequences for example ignoring long term health effects many smokers prefer regular relative vice to light relative virtue cigarettes because they prefer the taste of the former however ignoring these short term taste differences the same smokers prefer light to regular cigarettes when they consider the long term health effects of smoking these preference orders can lead to dynamically inconsistent consumption choices by consumers whose tradeoffs between the immediate and delayed consequences of consumption depend on the time lag between purchase and consumption this creates a potential self control problem because these consumers will be tempted to over consume the vices they have in stock at home purchase quantity rationing helps them solve the self control problem by limiting their stock and hence their consumption opportunities such rationing implies that per purchase occasion vice consumers will be less likely than virtue consumers to buy larger quantities in response to unit price reductions such as quantity discounts we first test this prediction in two laboratory experiments we then examine the external validity of the results at the retail level with a field survey of quantity discounts and with a scanner data analysis of chain wide store level demand across a variety of different pairs of matched vice regular and virtue reduced fat calorie or caffeine etc product categories the analyses of these experimental field and scanner data provide strong convergent evidence of a characteristic crossover in demand schedules for relative vices and virtues for categories as diverse as among others potato chips chocolate chip cookies cream cheese beer soft drinks ice cream and frozen yogurt chewing gum coffee and beef andturkey bologna vice consumers demand increases less in response to price reductions than virtue consumers demand although their preferences are not generally weaker for vices than for virtues constraints on vice purchases are self imposed and strategic rather than driven by simple preferences we suggest that rationing their vice inventories at the point of purchase allows consumers to limit subsequent consumption as a result of purchase quantity rationing however vice buyers forgo savings from price reductions through quantity discounts effectively paying price premiums for the opportunity to engage in self control thus purchase quantity rationing vice consumers are relatively price in sensitive from a managerial and public policy perspective our findings should offer marketing practitioners in many consumer goods industries new opportunities to increase profits through segmentation and price discrimination based on consumer self control they can charge premium prices for small sizes of vices relative to the corresponding quantity discounts for virtues virtue consumers on the other hand will buy larger amounts even when quantity discounts are relatively shallow a key conceptual contribution of this paper lies in showing how marketing researchers can investigate a whole class of strategic self constraining consumer behaviors empirically moreover this research is the first to extend previous theoretical work on impulse control by empirically demonstrating its broader implications for marketing decision making

economic development and the demand for energy a historical perspective on the next 20 years abstract this paper draws on evidence from the last two centuries of industrialisation analysing the evolution of energy intensity over the long and short run we argue that the increased specialisation of the fuel mix coupled with accelerating convergence of both the sectoral and technological composition of economies will continue to improve energy intensity of economic output and to reduce the reliance on any single energy resource this analysis suggests that even high growth in per capita income over the next 20 years need not be constrained by resource availability

penny wise dollar foolish buy sell imbalances on and around round numbers this paper provides evidence that stock traders focus on round numbers as cognitive reference points for value using a random sample of more than 100 million stock transactions we find excess buying selling by liquidity demanders at all price points one penny below above round numbers further the size of the buy sell imbalance is monotonic in the roundness of the adjacent round number i e largest adjacent to integers second largest adjacent to half dollars etc conditioning on the price path we find much stronger excess buying selling by liquidity demanders when the ask falls bid rises to reach the integer than when it crosses the integer we discuss and test three explanations for these results finally 24 hour returns also vary by price point and buy sell imbalances are a major determinant of that variation across price points buying selling by liquidity demanders below above round numbers yield losses approaching 1 billion per year this paper was accepted by brad barber teck ho and terrance odean special issue editors

decision making under uncertainty capturing dynamic brand choice processes in turbulent consumer goods markets we construct two models of the behavior of consumers in an environment where there is uncertainty about brand attributes in our models both usage experience and advertising exposure give consumers noisy signals about brand attributes consumers use these signals to update their expectations of brand attributes in a bayesian manner the two models are 1 a dynamic model with immediate utility maximization and 2 a dynamic forward looking model in which consumers maximize the expected present value of utility over a planning horizon given this theoretical framework we derive from the bayesian learning framework how brand choice probabilities depend on past usage experience and advertising exposures we then form likelihood functions for the models and estimate them on nielsen scanner data for detergent we find that the functional forms for experience and advertising effects that we derive from the bayesian learning framework fit the data very well relative to flexible ad hoc functional forms such as exponential smoothing and also perform better at out of sample prediction another finding is that in the context of consumer learning of product attributes although the forward looking model fits the data statistically better at conventional significance levels both models produce similar parameter estimates and policy implications our estimates indicate that consumers are risk averse with respect to variation in brand attributes which discourages them from buying unfamiliar brands using the estimated behavioral models we perform various scenario evaluations to find how changes in marketing strategy affect brand choice both in the short and long run a key finding obtained from the policy experiments is that advertising intensity has only weak short run effects but a strong cumulative effect in the long run the substantive content of the paper is potentially of interest to academics in marketing economics and decision sciences as well as product managers marketing research managers and analysts interested in studying the effectiveness of marketing mix strategies our paper will be of particular interest to those interested in the long run effects of advertising note that our estimation strategy requires us to specify explicit behavioral models of consumer choice behavior derive the implied relationships among choice probabilities past purchases and marketing mix variables and then estimate the behavioral parameters of each model such an estimation strategy is referred to as structural estimation and econometric models that are based explicitly on the consumer s maximization problem and whose parameters are parameters of the consumers utility functions or of their constraints are referred to as structural models a key benefit of the structural approach is its potential usefulness for policy evaluation the parameters of structural models are invariant to policy that is they do not change due to a change in the policy in contrast the parameters of reduced form brand choice models are in general functions of marketing strategy variables e g consumer response to price may depend on pricing policy as a result the predictions of reduced form models for the outcomes of policy experiments may be unreliable because in making the prediction one must assume that the model parameters are unaffected by the policy change since the agents in our models choose among many alternative brands their choice probabilities take the form of higher order integrals we employ monte carlo methods to approximate these integrals and estimate our models using simulated maximum likelihood estimation of the dynamic forward looking model also requires that a dynamic programming problem be solved in order to form the likelihood function for this we use a new approximation method based on simulation and interpolation techniques these estimation techniques may be of interest to researchers and policy makers in many fields where dynamic choice among discrete alternatives is important such as marketing decision sciences labor and health economics and industrial organization

pricing access services many established industries such as the online service industry the telecommunication industry or the fitness club industry are access service industries when using services in these industries consumers pay for the privilege of accessing the firm s facilities but do not acquire any right to the facility itself a firm s pricing decisions in access industries frequently come down to a simple choice among flat fee pricing usage pricing or two part tariff pricing however it is not so simple for firms in those industries to make this choice access service firms typically face a mix of consumers who have intrinsically different usage rates a key characteristic of access service firms however is that the cost of providing an additional minute of usage is typically negligible as long as the firm has the necessary capacity to serve its customers service capacity which corresponds to the total available time on a firm s system is often limited in this paper we show that service capacity and consumer usage heterogeneity are two important factors that determine a firm s optimal choice we develop a model that incorporates these two salient characteristics shared by access industries and study what determines a firm s choice among the three alternative pricing structures flat fee pricing usage pricing or two part tariff pricing our analysis shows that in the presence of consumer usage heterogeneity service capacity mediates a firm s optimal choice in a complex yet predictable way a firm s choice also hinges on whether heavy or light users are more valuable in terms of their willingness to pay on a per unit capacity basis the presence of both consumer usage heterogeneity and capacity constraints prompts a firm to choose its pricing structure to attract a desired customer mix and to price discriminate as a result two part tariff pricing is not always optimal in access industries and a firm s pricing structure can vary in a complex way with the interaction of those two factors specifically we show that when light users are more valuable a firm may use a two part tariff or a flat fee depending on whether the firm is constrained by its service capacity but never charge a usage price alone or offer any signing bonus a negative flat fee or a flat payment to customers when heavy users are more valuable a firm may choose to set a usage price a signing bonus plus a usage price or flat fee interestingly regardless of whether heavy or light users are more valuable in an access service industry only flat rate pricing is a sustainable pricing structure once the industry has developed sufficient excess capacity we also show that the optimal pricing strategy in access industries can have some intriguing nonintuitive implications that have not been explored elsewhere for instance when the industry capacity is unevenly distributed between competing firms the large capacity firm may well be advised to increase rather than to decrease its price to accommodate the small firm it would be too costly and too tactless for the large firm to do otherwise in fact the strategy of accommodation calls on the larger firm to retreat in both light and heavy user markets and leave more of its capacity idle and more of the market demand unmet when the small firm s capacity hence the industry capacity increases this implies that incremental policy measures that encourage the growth of smaller companies in the presence of a large company can be welfare decreasing because the growth of smaller firm can force the retreat of a large company at the expense of market coverage today services account for two thirds to three quarters of the gnp not only in the united states but also in many industrial countries access industries are growing rapidly to exert profound impact on today s economy however service pricing in general and pricing access services in particular have not received adequate attention in the literature in this paper we take the first step in understanding how capacity constraints and consumer usage heterogeneity mediate the choice of pricing structures in both monopolistic and competitive contexts

the value of trading consolidation evidence from the exercise of warrants we study the effect of trading consolidation by examining the response of liquidity and stock price to the exercise of deep in the money corporate warrants this enables a relatively clean test of the value of trading consolidation the exercise at the warrant expiration is fully anticipated and has no information content an effect can come from the value of trading consolidation that improves liquidity indeed we find that liquidity and stock prices both increase significantly at warrant expiration further the price increase is positively related to the pre exercise extent of fragmentation to post exercise improvement in stock liquidity and to the proportional increase in the number of shares following the warrant exercise

fails to deliver short selling and market quality we investigate the aggregate market quality impact of equity shares that fail to deliver hereafter ftds for a sample of 1 492 nyse stocks over a 42 month period from 2005 to 2008 greater ftds lead to higher liquidity and pricing efficiency and their impact is similar to our estimate of delivered short sales furthermore during the operative period of a security and exchange commission sec order mandating stock borrowing prior to short sales the securities affected display relatively lower liquidity and higher pricing errors finally we do not find any evidence that ftds caused price distortions or the failure of financial firms during the 2008 financial crisis

optimal pricing of new subscription services analysis of a market experiment there are now available a number of new subscription services that comprise a dual pricing system of a monthly access fee rental and a per minute usage charge examples include cellular phones the internet and pay tv the usage and retention of such services depend on the absolute and relative prices of this dual system for instance a moderate access fee but a low usage charge might initially appeal to customers but later a low usage customer might find the monthly fee unjustified and thereby relinquish the service providers of such services therefore usually offer several pricing packages to cater to differing customer needs the purpose of this study is to derive a revenue maximizing strategy for subscription services that is the combination of access and usage price that maximizes revenue over a specified time period an additional objective is to determine access and usage price elasticities because they have historically played an important role in theoretical pricing models the application area is the cellular phone market but for a new rather than an existing product to help gauge the likely usage rates and customer retention a field experiment is conducted in which several alternative price combinations are used specifically a sample of potential residential customers most of whom did not have an existing cell phone were divided into four treatment groups the first group were not charged an access fee but did have to pay a small per minute usage charge the second group also paid a small usage charge but in addition had three access price increases over the duration of the trial the third group paid no access fee but had usage charge increases while the fourth group had both access fee and usage charge increases usage levels for each respondent are recorded as is their month of dropout if they discontinue the service an initial examination of the data shows that higher access fees result in higher customer attrition and higher usage cost results in lower usage furthermore usage and retention are related in that declining usage levels over time often signal impending customer attrition hence two phenomena need to be modeled usage of the service and customer retention conditional on usage some seasonal effects are also observed and are allowed for in the model modeling customer attrition simultaneously with usage is important because ignoring customer attrition will likely result in an underestimate of price sensitivity this results from a censoring effect whereby respondents who remain in the trial tend to be wealthier and hence less price sensitive given the known problems of ignoring customer attrition we develop a theoretical model of usage which explicitly incorporates attrition by extending a time series model introduced by hausman and wise 1979 we make two extensions of the hausman and wise model the first is to generalize it from two to many time periods and the second is to allow for respondent heterogeneity by incorporating latent classes we fit the model by maximum likelihood and find that a two segment model is best in addition we examine the predictive validity of our model and find it to be reasonably good in general the results show that access and usage prices have different relative effects on demand and retention there are five key results first access price has some effect on usage but a much stronger effect on retention second usage price has a strong effect on usage and a moderate effect on retention in that if usage price increases so much that usage declines then lower usage levels results in higher attrition third access price elasticity is about half that of usage price with both elasticities generally being much smaller than 1 indicating relative inelasticity for this particular service fourth customer attrition rate churn is much more sensitive to access than usage price and last if just observed usage is examined and customer attrition is ignored then price sensitivity is very likely to be substantially underestimated on the order of 45 in our case finally when developing the revenue maximizing price combination we allow for the cost of customer acquisition by using some typical advertising to sales ratios for the telecommunications industry we find that the revenue maximizing price is 27 70 per month for the access fee and 0 81 per minute for the airtime charge these values are in line with current access fees and usage costs in the given market

measuring the impact of promotions on brand switching when consumers are forward looking abstract logit choice models have been used extensively to study promotion response this article examines whether brand switching elasticities derived from these models are overestimated as a result of rational consumer adjustment of purchase timing to coincide with promotion schedules and whether a dynamic structural model can address this bias using simulated data the authors first show that if the structural model is correct brand switching elasticities are overestimated by stand alone logit models a nested logit model improves the estimates but not completely second the authors estimate the models on real data the results indicate that the structural model fits better and produces sensible coefficient estimates the authors then observe the same pattern in switching elasticities as they do in the simulation third the authors predict sales assuming a 50 increase in promotion frequency the reduced form models predict much higher sales levels than does the dynamic structural model the autho

the effect of promotion on consumption buying more and consuming it faster the authors empirically demonstrate the existence of flexible consumption rates in packaged goods products how this phenomenon can be modeled and its importance in assessing the effectiveness of

nonlinear pricing with random participation the canonical selection contracting programme takes the agent s participation decision as deterministic and finds the optimal contract typically satisfying this constraint for the worst type upon weakening this assumption of known reservation values by introducing independent randomness into the agents outside options we find that some of the received wisdom from mechanism design and nonlinear pricing is not robust and the richer model which allows for stochastic participation affords a more general empirical specification we develop a multidimensional methodology for addressing this class of problems providing two important applications to nonlinear pricing first with nonlinear pricing by a monopolist the familiar nodistortion at the top result persists but in tandem with the surprising conclusion that there is either no distortion at the bottom or bunching second in a simple model of product differentiated duopolists competing with nonlinear pricing we show that generally the duopoly outcome is qualitatively similar to the monopoly outcome however when marginal costs are symmetric and competition is sufficiently intense distortions disappear and the equilibrium outcome takes a remarkably simple form efficient quality allocations with cost plus fee pricing

regulatory and legal pressures and the costs of nasdaq trading the nasdaq market came under intense pressure from regulators and class action lawsuits following allegations of tacit collusion by christie and schultz 1994 this article examines the changes in transaction costs on the nasdaq from january 1993 through june 1996 using 16 million trades in 30 stocks effective spreads cannot be matched however the autocovariance spread estimator of roll 1984 works well with intraday data over this period this spread estimator reveals that trading costs declined significantly for 29 of the 30 stocks over 1993 96 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

an investigation of transactions data for nyse stocks using transactions data the behavior of returns and characteristics of trades at the micro level is examined a minute by minute market return series is formed and tested for normality and autocorrelation evidence of differences in return distributions is found among overnight trades trades during the first 30 minutes following the market opening trades at the close and trades during the remainder of the day the latter distribution is found to be normal unusually high returns and standard deviations of returns are found at the beginning and the end of the trading day when the beginningand end of the day effects are omitted autocorrelation in the market return series is reduced substantially a number of patterns in trading are reported this paper empirically investigates the nature of the return generating process and the characteristics of trade size price changes trading frequency and trading interval at the level of individual trades for a large sample of nyse stocks previous studies of market indices have used daily weekly or monthly

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

trade execution costs and market quality after decimalization this study assesses trade execution costs and market quality for nyse and nasdaq stocks before and after the 2001 change to decimal pricing several theoretical predictions are confirmed quoted bid ask spreads declined substantially on each market with the largest declines for heavily traded stocks the percentage of shares receiving price improvement increased on the nyse but not on nasdaq however those trades completed at prices within or outside the quotes were improved or disimproved by smaller amounts after decimalization and trades completed outside the quotes saw the largest reductions in trade execution costs as a class effective bid ask spreads as a percentage of share price arguably the most relevant measure of execution costs for smaller trades averaged 0 33 on a volume weighted basis after decimalization for both nyse and nasdaq stocks there is no evidence of systematic intraday reversals of quote changes on either market as would be expected if decimalization had damaged liquidity supply

do liquidity measures measure liquidity abstract given the key role of liquidity in finance research identifying high quality proxies based on daily as opposed to intraday data would permit liquidity to be studied over relatively long timeframes and across many countries using new measures and widely employed measures in the literature we run horseraces of annual and monthly estimates of each measure against liquidity benchmarks our benchmarks are effective spread realized spread and price impact based on both trade and quote taq and rule 605 data we find that the new effective realized spread measures win the majority of horseraces while the amihud 2002 illiquidity and stock returns cross section and time series effects journal of financial markets 5 31 56 measure does well measuring price impact

marketing of vice goods a strategic analysis of the package size decision consumers are often unable to resist the temptation of overconsuming certain products such as cookies crackers soft drinks alcohol etc to control their consumption some consumers buy small packages or abstain from purchasing the product altogether other consumers however still purchase large packages and overconsume from a strategic perspective firms have the option of introducing small packages or only offering large packages we use the literature on hyperbolic discounting to model consumers self control problems and examine conditions under which firms will offer small packages to help consumers combat their self control problem and how this offering in turn affects prices profits consumer and social welfare our results show that introducing small packages can increase firms profits only when a small fraction of consumers have overconsumption problems or when small packages can bring in new customers additionally we find that competition can sometimes reduce the incentives for firms to introduce small packages this is particularly true when a large fraction of consumers is attracted to small packages we also find that firms profits can sometimes decrease if they produce healthier alternatives of their goods our analysis of consumer welfare reveals that small packages enhance consumer and social welfare even though they sometimes increase the consumption of vice goods

efficiency of experimental security markets with insider information an application of rational expectations models the study reports on the ability of competing models of market information integration and dissemination to explain the behavior of simple laboratory markets for a one priced security returns to the security depended upon a randomly drawn state of nature some agents insiders whose identity was unknown to other agents knew the state before the markets opened with replication of market conditions the predictions of a fully revealing rational expectations model are relatively accurate prices adjusted immediately to near rational expectations prices profits of insiders were virtually indistinguishable from non insiders and efficiency levels converged to near 100 percent

tick size and spreads the case of nasdaq s decimalization abstract recent studies by the securities and exchange commission sec and by academics have provided empirical evidence that nasdaq trade execution costs are still higher than for instance on the nyse introducing decimal pricing is one concrete plan to enhance nasdaq s competitiveness however effects of tick size changes are difficult to predict for that reason models have been required for quite a while capital market synergetics is appropriate to investigate the effects of market microstructure changes in this paper we examine the impact of a variation in nasdaq s minimum price increment on quoted spreads first our findings confirm the numerical value of the decline in the average quoted spread in 1997 as an immediate effect of reducing the tick size from 1 8 to 1 16 this strongly affirms the reliability of our calculation results second by applying the same research design again we investigate the impact of a further reduction in the tick size to 1 100 no such study is available at the moment the expected changes in the average quoted spreads due to the reduction in the tick size from 1 16 to 1 100 the change through decimalization range from an increase of 2 82 to a decrease of 15 51 derived by applying the same method again the figures embody a reliable forecast of the real effects and are therefore of eminent importance to academics and to practitioners as well

tick size bid ask spreads and market structure we propose a link between market structure and the resulting market characteristics tick size bid ask spreads quote clustering and market depth we analyze transactions data of stocks traded on the london stock exchange a dealer market we conclude that market charateristics are endogenous to the market structure the london dealer market does not have a mandated tick size and it exhibits higher spreads higher quote clusterings and higher market depth than the nyse auction market clustering of trade prices is similar in london and new york

generics and new goods in pharmaceutical price indexes drug prices and their rate of inflation are a major focus of current policy debates on u s health care in this paper we show that where patent expiration and generic entry are significant as they are for many important classes of drugs movements in the official price indexes may be poor indicators of the actual prices paid and the resulting changes in consumer welfare when a drug goes off patent those consumers who regard the branded and generic versions as more or less perfect substitutes experience a substantial price decline and concomitant welfare gain which the current methods used by the statistical agencies fail to capture we suggest a number of alternative ways of proceeding although our computations are based on a limited number of cases they imply that the overall rate of inflation in drug prices may be quite seriously overstated while generic pharmaceuticals are the topic of our calculations the problem discussed is also of wider importance generic drugs are a special and possibly easy case

choosing the wrong calling plan ignorance and learning when a firm offers several tariff options to its customers the possibility arises that they will make an ex post mistake in tariff choice this occurs since consumers cannot commit to a certain purchase level at the time they subscribe to the service option and thus they might find out later that a different choice of tariff could have resulted in a lower payment for their actual level of consumption this is a common feature of increasingly important subscriptions markets in which buyers and sellers maintain long term nonanonymous relations and where learning induces interesting dynamics on the one hand buyers may learn their taste over time thus making the right choice as times goes by on the other hand the seller may design options to identify the type of each buyer and if possible to extract a higher proportion of their consumer surplus by offering tariff options that are better tailored to the profile of the consumer this paper focuses on the first type of learning in turn i document buyer behavior in a subscriptions market using data from a tariff experiment run by south central bell scb in kentucky during the second half of 1986 the most frequently studied case of subscriptions markets is the choice among optional calling plans ocps in the telephone industry this paper shows that contrary to the conven

electronic tickets smart cards and online prepayments when and how to advance sell advance selling occurs when sellers allow buyers to purchase at a time preceding consumption shugan and xie 2000 electronic tickets smart cards online prepayments and other technological advances make advance selling possible for many if not all service providers these technologies lower the cost of making complex transactions at a greater distance from the seller s site they also give sellers more control over advance selling by decreasing arbitrage as technology enhances the capability to advance sell more academic attention is vital this paper strives to exploit these technologies by developing advance selling strategies until recently advance selling research focused on the airline industry and specific characteristics of that industry these characteristics included the price insensitivity of late arrivals e g business travelers compared with early arrivals e g leisure travelers demand uncertainty across flights on the same day and capacity constraints recent findings by shugan and xie 2000 show that advance selling is a far more general marketing tool than previously thought it does not require these industry specific characteristics it only requires the existence of buyer uncertainty about future valuations moreover sellers without the ability to price discriminate can use advance selling to improve profits to the level of first degree price discrimination this finding is important because buyers are nearly always uncertain about their future valuations for most services e g the utility of next year s vacation or a future college education in this paper we take the next step from shugan and xie 2000 we show that advance selling profits do not come from buyer surplus but from more buyers being able to purchase we determine when and how to advance sell in a variety of situations including situations with limited capacity second period arrivals refunds buyer risk aversion exogenous credibility continuous preference distributions and premium pricing we determine when advance selling improves profits and when it does how to set advance prices we ask and answer seven questions first when should sellers advance sell second how much can advance selling improve profits compared with only spot selling third what factors impact the profitability of advance selling and how fourth should advance prices be higher or lower or the same as spot prices fifth how do capacity constraints impact advance selling strategies sixth should sellers limit the number of advance sales finally what is the possible impact of buyer risk aversion first we provide precise conditions when sellers should advance sell for example without capacity constraints we show that sellers should advance sell when marginal costs are sufficiently low to make it profitable to sell to buyers with low valuations and sufficiently high to convince buyers that the spot price will be higher than the advance price second we find that advance selling can almost double the profits from optimal spot selling to early arrivals we also show that advance selling has no impact on consumer surplus in markets with homogenous consumers and no capacity constraints therefore advance selling can increase social welfare because seller profits increase third we find that two very important factors impacting the profitability of advance selling are seller credibility and marginal costs buyers only advance buy when they expect an advantage from advance buying over spot buying without capacity constraints sellers must credibly convince buyers that the advance price is at a discount to the spot price we show that this condition is met under different circumstances for example large marginal costs can create credibility because buyers believe that these costs will lead to high spot prices fourth we find although optimal advance prices can be at a discount to the spot price that sometimes a premium is optimal premiums are optimal when capacity is large but limited and marginal costs are not too large buyers advance purchase at a premium to spot prices when capacity is limited and spot prices are low note that this is not a risk premium and risk aversion is not required no prior research has suggested this strategy because that research relies on the assumption that early arrivals are more price sensitive than later ones without that assumption premium advance pricing is sometimes optimal fifth we find that binding capacity constraints can impact the profitability of advance selling in opposite ways on one hand capacity constraints create seller credibility buyers believe that spot prices will be high when they know spot capacity is limited and perhaps more limited by advance sales on the other hand when capacity is limited the need to increase sales from discounted advance prices diminishes sixth consistent with desiraju and shugan 1999 we find that limiting advance sales can be profitable but only under restrictive conditions these conditions are 1 selling to all early arrivals would leave insufficient capacity in the spot period to sell to all second period arrivals with high valuations 2 the optimal spot price is high and 3 marginal costs are sufficiently small to make advance selling profitable finally we find that buyer risk aversion can sometimes increase the profitability of advance selling our findings provide precise guidelines for a large number of service providers that will have the technical capability to advance sell for those service providers advance selling provides a creative pricing strategy that can potentially provide substantial improvements in profits

the intertemporal dynamics of consumer lock in this article examines how dynamic changes in information cost structure and time preferences affect consumers search and switching behavior over time and lead to lock in the information cost structure is conceptualized as a trade off of initial setup costs and ongoing usage costs lock in is defined as consumers decreased propensity to search and switch after an initial investment which is determined both by a preference to minimize immediate costs and by an inability to anticipate the impact of future switching costs the results of three experiments support the proposed mechanism experiment 1 shows that a small initial investment is sufficient to produce lock in experiment 2 shows that the results of a prior investment on lock in are not due to psychological commitment but to a shift in relative costs of incumbent and new options experiment 3 shows that respondents fail to anticipate how their prior investment will lock them in

the market liquidity of diamonds q s and their underlying stocks abstract we investigate the market liquidity effects of the introduction of index tracking stocks for the dow jones industrial average diamonds and the nasdaq 100 index q s our main finding is liquidity of the underlying djia 30 index stocks improves after the introduction of the exchange traded fund largely because of a decline in the cost of informed trading further we find the diamonds has significantly lower liquidity costs over the first 50 days of trading as compared to the portfolio of its component stocks again primarily because of lower adverse selection costs finally we find weaker but qualitatively similar results for the q s

when talk is free the effect of tariff structure on usage under two and three part tariffs abstract in many service industries firms introduce three part tariffs to replace or complement existing two part tariffs in contrast with two part tariffs three part tariffs offer allowances or free units of the service behavioral research suggests that the attributes of a pricing plan may affect behavior beyond their direct cost implications evidence suggests that customers value free units above and beyond what might be expected from the change in their budget constraint nonlinear pricing research however has not considered such an effect the authors examine a market in which three part tariffs were introduced for the first time they analyze tariff choice and usage behavior for customers who switch from two part to three part tariffs the findings show that switchers significantly overuse in comparison with their prior two part tariff usage that is they attain a level of consumption that cannot be explained by a shift in the budget constraint the authors estimate a discrete continuous

consumption patterns and self selecting tariffs the authors describe and apply methods for empirically investigating the relation between consumption and tariff choice these methods allow 1 testing of alternative specifications for the relations of tariff choice and consumption patterns 2 estimation of parameters that provide information on the response of customers to marginal prices and fixed fees and 3 a determination of the extent to which the assumptions embodied in welfare results on self selecting tariffs are valid in a particular setting they apply the procedures to residential demand for local telephone service in an area where households are offered a choice among tariffs copyright 1989 by mit press

bundling with customer self selection a simple approach to bundling low marginal cost goods with declining costs of distributing digital products comes renewed interest in strategies for pricing goods with low marginal costs in this paper we evaluate customized bundling a pricing strategy that gives consumers the right to choose up to a quantity m of goods drawn from a larger pool of n different goods for a fixed price we show that the complex mixed bundle problem can be reduced to the customized bundle problem under some commonly used assumptions we also show that for a monopoly seller of low marginal cost goods this strategy outperforms individual selling m 1 and pure bundling m n when goods have a positive marginal cost or when customers have heterogeneous preferences over goods comparative statics results also show that the optimal bundle size for customized bundling decreases in both heterogeneity of consumer preferences over different goods and marginal costs of production we further explore how the customized bundle solution is affected by factors such as the nature of distribution functions in which valuations are drawn the correlations of values across goods and the complementarity or substitutability among products altogether our results suggest that customized bundling has a number of advantages both in theory and practice over other bundling strategies in many relevant settings

trading and returns under periodic market closures this paper studies how market closures affect investors trading policies and the resulting return generating process it shows that closures generate rich patterns of time variation in trading and returns including those consistent with empirical findings 1 u shaped patterns in the mean and volatility of returns over trading periods 2 higher trading activity around the close and open 3 more volatile open to open returns than close to close returns 4 higher returns over trading periods than over nontrading periods 5 more volatile returns over trading periods than over nontrading periods it also shows that closures can make prices more informative about future payoffs we model a competitive stock market with periodic closures in which investors trade for both allocational and informational reasons we use the model to study how market closures intrinsically affect investors trading behavior and the return generating process the purpose of this analysis is to increase our understanding of the time variation in security trading and returns that are associated with regular market closures such as the intraday and intraweek patterns in stock returns volatility and trading volume we consider a stock market in which the exogenous information flow is homogeneous over time and the market closes periodically when the market is open investors trade the stock either to rebalance their overall portfolio of assets which also includes other illiquid assets or to speculate on future stock payoffs using their private information in particular investors adjust their asset portfolio by trading the stock in order to hedge the risk of illiquid assets we refer to these trades as hedging trades and those motivated by private information as speculative trades when the market is closed hong is from the graduate school of business stanford university and wang is from the sloan school of management massachusetts institute of technology and nber the authors thank jennifer huang for programming assistance and an anonymous referee for many valuable suggestions they also thank glenn ellison john heaton craig holden andrew lo steve slezak jeremy stein rene stulz the editor the nber asset pricing lunch group and par

a closing call s impact on market quality at euronext paris abstract the paris bourse currently euronext paris refined its trading system to include electronic call auctions at market closings in 1996 for its less liquid continuous b stocks and in 1998 for its more actively traded continuous a stocks this paper analyzes the effects of the innovation on market quality our empirical analysis of price behavior for two samples of firms 50 b stocks and 50 a stocks for two different calendar dates 1996 and 1998 indicates that introduction of the closing calls has lowered execution costs for individual participants and sharpened price discovery for the broad market we further observe that market quality is improved at market openings albeit to a lesser extent we suggest that a positive spillover effect explains the closing call s more pervasive impact

a transaction data study of weekly and intradaily patterns in stock returns abstract weekly and intradaily patterns in common stock prices are examined using transaction data for large firms negative monday close to close returns accrue between the friday close and the monday open for smaller firms they accrue primarily during the monday trading day for all firms significant weekday differences in intraday returns accrue during the first 45 minutes after the market opens on monday mornings prices drop while on the other weekday mornings they rise otherwise the pattern of intraday returns is similar on all weekdays most notable is an increase in prices on the last trade of the day

calendar anomalies abnormal returns at calendar turning points 1988 calendar anomalies abnormal returns at calendar turning points financial analysts journal vol 44 no 6 pp 28 39

the demand for local telephone service a fully discrete model of residential calling patterns and service choices we present an empirical model of households choices among local telephone service options for example between flat rate and measured service and the interrelation of these choices with the number and average duration of local calls households make at each time of day to each geographical zone using a nested logit model with estimation performed on a randomly selected subset of the households calling patterns we calculate elasticities of demand for each local service option number of calls average duration and revenues with respect to the fixed monthly charges and the usage charges for calling under each option we find moderate price elasticities of number of calls with respect to usage charges for households subscribing to measured service nevertheless raising usage charges has a negligible effect on revenues since a sufficient number of households either originally subscribe to flat rate service or convert to flat rate service in response to higher usage charges we find a high elasticity of demandfor each service option with respect to itsfixed monthlyfee this indicates high substitutability among service options the shift among service options induces new calling patterns which wefind to be a small but not negligible indirect effect e most telephone operating companies offer residential customers several options for local service there are two general categories of service flat rate service under which a household can for a fixed monthly charge make an unlimited number of calls within a specified geographical area and measured service for which the household pays a lower fixed monthly fee but can make only a specified number or dollar value of calls at no extra charge after which charges are incurred for additional calls various flat rate services differ in the size of the geographical area in which calling is at no extra charge with higher monthly fees for larger areas measured services differ with respect to the threshold number or dollar value of calls beyond which the customer is charged

does uncertainty matter consumer behavior under three part tariffs in communication information and other industries three part tariffs are increasingly popular a three part tariff is defined by an access price an allowance and a marginal price for any usage in excess of the allowance empirical nonlinear pricing studies have focused on consumer choice under two part tariffs we show that consumer behavior differs under three part tariffs and assess how consumer demand uncertainty impacts tariff choice we develop a discrete continuous model of choice among three part tariffs and estimate it using consumer level data on internet usage our model extends prior work in accommodating consumer switching to competitors thereby capturing behavior in competitive industries more accurately our empirical work shows that demand uncertainty is a key driver of choice among three part tariffs consumers expected bill increases with the variation in their usage steering them toward tariffs with high allowances consequently demand uncertainty decreases consumer surplus and increases provider revenue a further analysis of consumers responsiveness to the different elements of a three part tariff under the provider s current pricing structure reveals that prices affect a consumer s tariff choice more than her usage quantity and that the allowance plays a strong role in consumer tariff choice based on our results we derive implications for pricing with three part tariffs

institutional trades and intraday stock price behavior abstract this paper examines the price effect of institutional stock trading using a unique data set that reports the transactions large and small of 37 large institutional money management firms the direction of each trade and the identity of the management firm behind each trade are known although institutional trades are associated with some price pressure we find that the average effect is small there is also a marked asymmetry between the price impact of buys versus sells we relate our findings to various hypotheses on the elasticity of demand for stocks the cost of executing transactions and the determinants of market impact although market capitalization and relative trade size influence the market impact of a trade the dominant influence is the identity of the money manager behind the trade

promotion effect on endogenous consumption over the years researchers have found that promotion makes consumers switch brands and purchase earlier or more however it is unclear how promotion affects consumption especially for product categories that are perceived to be versatile and substitutable in this paper we propose a dynamic structural model with endogenous consumption under promotion uncertainty to analyze the promotion effect on consumption this model recognizes consumers as rational decision makers who form promotion expectations and plan their purchase and consumption decisions in light of promotion schedule applying the proposed model to packaged tuna and yogurt we find that endogenous consumption responds to promotion as a result of forward looking and stockpiling behavior this is the first empirical paper that recognizes consumption as an endogenous decision variable and proposes a structural model to offer behavioral explanations on whether how and why promotion encourages consumption for product categories with flexible consumption

tariff choice with consumer learning and switching costs abstract consumers choosing flat rate contracts tend to have insufficient usage to warrant the cost particularly for new products we propose and estimate a bayesian learning model of tariff and usage choice that explains this flat rate bias without relying on behavioral misjudgments or tariff specific preferences for new products consumers are uncertain about both their utility relative to the population mean and the mean itself we show that this latter uncertainty inflates prior variances which leads consumers to weight their private signals more heavily when updating beliefs posteriors are unbiased across products for a given product however the unknown mean yields a winner s curse consumers with high posteriors tend to overestimate their utility these consumers choose fixed rate tariffs and lower their usage as they correct their beliefs the flat rate bias arises when switching costs deter them from changing tariffs using the estimated model the authors find that tariff menus are ineff