position auctions with consumer search this paper examines a model in which advertisers bid for sponsored link positions on a search engine the value advertisers derive from each position is endogenized as coming from sales to a population of consumers who make rational inferences about rm qualities and search optimally consumer search strategies equilibrium bidding and the welfare benets of position auctions are analyzed implications for reserve prices and a number of other auction design questions are discussed

accounting rates of return many economic studies provide empirical evidence regarding cross sectional differences in firm profitability in most of these studies firm profitability is measured by an accounting rate of return net income dividend by the book value of assets hereafter arr rather than an economic rate of profit franklin fisher and john mcgowan define the firm s economic rate of profit irr as that interest rate which equates the present value of its net revenue stream to its initial outlay 1983 p 82 fisher and mcgowan examine the analytic relation between a firm s arr and its irr in a series of examples and conclude that the arr is such a bad surrogate for the irr that the results of arr based empirical studies are likely to be totally misleading p 91 william long and david ravenscraft 1984 have criticized the theoretical work of fisher and mcgowan because the nature of the analytic relationship between the arr and the irr in the context of highly simplified hypothetical examples may not be indicative of the nature of the relationship in empirical settings their criticism adopts the utilitarian view that the arr has to be treated as a suitable surrogate for the irr as long as no preferable alternative measure of profitability is available for empirical work this view has merit as long as the measurement error which is contained in the arr is random rather than systematic unfortunately the nature and extent of the measurement error which is contained in the arr in a particular empirical setting can only be determined unequivocally if the irr is unequivocally known in such a case of course there would be no need to rely on the arr at all due to this unhappy circle empirical research on firm profitability has continued to rely on the arr despite the fact that many persons reasonably believe that the results of such research may be totally misleading fisher and mcgowan g c harcourt 1965 while others reasonably believe that the results are reliable enough to form a basis for policy decisions long and ravenscraft recent work by y ijiri 1978 1979 1980 and by myself 1982 has shown that conditional irr estimates can be obtained from data in firms financial statements while these irr estimates are conditional they do abstract from certain extraneous factors that influence arrs and that differ across firms consequently the conditional irr estimates are free from some of the sources of measurement error which are known to contaminate the arr thus the conditional irr estimates can be used to provide evidence on whether these sources of measurement error have or have not affected the outcome of prior studies in which profitability was measured by the arr such evidence can help to objectively resolve the conflict between the opposing views on the reliability of arr based profitability research this paper uses conditional irr estimates to examine the properties of the measurement error in the arr in a study of the relationship between firm profitability and firm size the remainder of the paper is organized as follows in section i the theoretical work of fisher and mcgowan is used professor of accounting university of iowa iowa city ia 52242 i gratefully acknowledge the comments of william albrecht dan dhaliwal gary fethke franklin fisher scott linn william r kinney jr and the participants of a workshop at the university of florida on earlier versions of this paper 1 some authors for example william long and david ravenscraft 1984 have used the sales margin ratio earnings sales as a measure of profitability however if one views profitability as return per unit of sacrifice the sales margin ratio is not a profitability measure since it ignores the sacrifice or investment required to generate a dollar of sales consequently this paper does not attempt to shed any insight into prior studies that have relied on the sales margin ratio as a measure of profitability

the proper scope of government theory and an application to prisons when should a government provide a service in house and when should it contract out provision we develop a model in which the provider can invest in improving the quality of service or reducing cost if contracts are incomplete the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee has however the private contractor s incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on noncontractible quality the model is applied to understanding the costs and benefits of prison privatization

a search cost model of obfuscation this article develops models in which obfuscation is individually rational for oligopolistic firms firms sell a homogeneous good to rational consumers who incur search costs to learn prices search costs are endogenized by allowing obfuscation firms have an unobservable action that increases the time needed to learn their price one model involves search costs convex in shopping time we show that slight convexity can dramatically alter the equilibrium price distribution a second model examines an informational linkage between current and future search costs consumers are uncertain about a component of search costs here a signal jamming mechanism can lead to equilibrium obfuscation

toward a public choice theory of monopoly regulation its many dimensions from the perspective of market economics this new thrust was consolidated in 1976 by s peltzman who developed a formal market model in which regulations were viewed as commodities brokered via political markets in response to bids and counter bids by those who stood to gain or to lose from specific regulation outcomes the subsequent contribution by becker 1983 added insights and institutional flesh to the stigler peltzman embryo confirming regulation as an integral component of mainstream market economics an important implication of such contributions especially those from the chicago perspective is that regulation for the most part confirms resource efficiency within market process that political markets in the absence of entry barriers are just as effective as are competitive commodity markets in achieving economic efficiency defined within a comparative institutions framework nowhere is this complacency more apparent than in the conclusion drawn by becker 1983 from a detailed formal analysis of competition among pressure groups for political influence

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

bureau competition and inefficiency abstract this paper evaluates the claim that an increase in bureau competition will improve efficiency in the public supply of services it gives explicit consideration to the property rights characteristics of a public sector market and to the role of legislators as active demanders of bureau output rather than as passive monitors of bureau production the analysis demonstrates that bureau managers prefer nonprice competition to price competition a major prediction of the paper is that greater bureau competition may increase bureau output costs and budgets

price competition under limited comparability this paper studies market competition when firms can influence consumers ability to compare market alternatives through their choice of price formats we introduce random graphs as a tool for modelling limited comparability of formats our main results concern the interaction between firms equilibrium price and format decisions and its implications for industry profits and consumer switching rates we show that narrow regulatory interventions that aim to facilitate comparisons may have adverse consequences for consumer welfare finally we argue that our limited comparability approach provides a new perspective into the phenomenon of product differentiation

managerialism ownerism and risk abstract this paper proposes that managers having the value of their human capital dependent on the performance of the firm they manage and being unable to diversify away this risk are expected to attempt to reduce their employment risk internally by project selection or by income smoothing intended to stabilize the firm s income stream an empirical investigation shows that manager controlled firms exercise income smoothing to a greater extent than owner controlled firms have relatively lower unsystematic risk and perhaps lower systematic risk

social security and the rise in health spending abstract in a quantitative model of social security with endogenous health i argue that social security increases the aggregate health spending of the economy because it redistributes resources to the elderly whose marginal propensity to spend on health is high i show by using computational experiments that the expansion of us social security can account for over a third of the dramatic rise in us health spending from 1950 to 2000 in addition social security has a spill over effect on medicare as social security increases health spending it also increases the payments from medicare thus raising its financial burden

price dispersion in the small and in the large evidence from an internet price comparison site this paper examines four million daily price observations for more than 1 000 consumer electronics products on the price comparison site http shopper com we find little support for the notion that prices on the internet are converging to the law of one price in addition observed levels of price dispersion vary systematically with the number of firms listing prices the difference between the two lowest prices the gap averages 23 per cent when two firms list prices and falls to 3 5 per cent in markets where 17 firms list prices these empirical results are an implication of a general clearinghouse model of equilibrium price dispersion

comparing public and private schools the puzzling role of selectivity bias recent articles using the same data and variants of the same estimation technique report conflicting estimates of the relative quality of education provided by public and catholic schools this article explains the reasons for the conflict in so doing the article clarifies the assumptions underlying the increasingly popular two step methods for controlling selectivity bias and highlights the hazards of using these methods when the assumptions are not satisfied the article also illustrates an alternative method for detecting the presence of selectivity bias

the family as an incomplete annuities market families can self insure against uncertain dates of death through implicit or explicit agreements with respect to consumption and interfamily transfers interfamily transfers need have nothing to do with altruistic feelings they may simply reflect risk sharing behavior of completely selfish family members although family annuity markets are incomplete even small families can substitute by more than 70 percent for perfect market annuities given adverse selection and transaction costs family risk pooling may be preferred to public market annuities in the absence of public annuities these risk sharing arrangements provide powerful incentives for marriage and family formation

estimation of search frictions in the british electricity market this paper studies consumer search and pricing behaviour in the british domestic electricity market following its opening to competition in 1999 we develop a sequential search model in which an incumbent and an entrant group compete for consumers who nd it costly to obtain information on prices other than from their current supplier we use a large data set on prices and input costs to structurally estimate the model our estimates indicate that consumer search costs must be relatively high in order to rationalize observed pricing patterns we confront our estimates with observed switching behaviour and

the impact of hospital market structure on patient volume average length of stay and the cost of care a variety of recent proposals rely heavily on market forces as a means of controlling hospital cost inflation sceptics argue however that increased competition might lead to cost increasing acquisitions of specialized clinical services and other forms of non price competition as means of attracting physicians and patients using data from hospitals in 1972 we analyzed the impact of market structure on average hospital costs measured in terms of both cost per patient and cost per patient day under the retrospective reimbursement system in place at the time hospitals in more competitive environments exhibited significantly higher costs of production than did those in less competitive environments

welfare effects of life annuities some clarifications abstract the present paper clarifies the intergenerational welfare effects of life annuities while present young cohorts experience significant welfare gains future generations are hurt by lower bequest for sufficiently high interest rates long run welfare will decrease although aggregate efficiency rises

competitive search obfuscation abstract obfuscation is a literature term referring to sales practices which increase the costs consumers pay to search how does competition shape it how does it shape competition to address these questions we develop a model where each firm can freely commit to any observable degree of search obfuscation which pins down the time cost of searching its product consumers have limited time for browsing around websites this endogenizes consumer information and competition intensity and gives clear predictions about market welfare and surplus division we find that competition for prominence and the fear of frustrating consumers keeps the negative welfare effects of obfuscation low however because obfuscation reduces price awareness and differentiation relaxes price competition the obfuscation choices in the unique equilibrium are persistently positive and different

price competition with consumer confusion this paper proposes a model in which identical sellers of a homogenous product compete in both prices and price frames i e ways to present price information we model price framing by assuming that firms frame choices affect the comparability of their price offers consumers may fail to compare prices due to frame differentiation and due to frame complexity in the symmetric equilibrium the firms randomize over both price frames and prices and make positive profits this result is consistent with the observed coexistence of price and price frame dispersion in the market we also show that i the nature of equilibrium depends on which source of consumer confusion dominates and ii an increase in the number of firms can increase industry profits and harm consumers

oligopolistic pricing with sequential consumer search n identical stores compete by choosing prices for a homogeneous good with constant marginal costs consumers search sequentially with perfect recall for the lowest price one class of consumers called shoppers have zero search costs while all other consumers have a positive search cost c there is a unique symmetric nash equilibrium price distribution with the property that it changes smoothly from marginal cost pricing when all consumers are shoppers and or c 0 and monopoly pricing when no consumers are shoppers remarkably as the number of stores increases the nash equilibrium becomes more monopolistic copyright 1989 by american economic association

behavior of the firm under regulatory constraint a recent article by akira takayama discusses an earlier paper by harvey averch and leland l johnson on fair rate of return regulation of public utilities although takayama p 255 agrees with averch and johnson s general conclusions that a firm will tend to increase its investment with the introduction of an active constraint on its rate of return he criticizes the a j argument as being confusing ambiguous and in error takayama then attempts a clarification and presents a new formulation which leads to the a j result quoted above this comment will discuss several of takayama s criticisms in addition to showing that the so called a j effect cannot be derived from the basic assumptions made by both averch and johnson and takayama 1 we will show that the very assumptions used to prove the a j effect by defining the region of x require an assumption that the a j effect exists in the first place

shrouded attributes consumer myopia and information suppression in competitive markets bayesian consumers infer that hidden add on prices e g the cost of ink for a printer are likely to be high prices if consumers are bayesian firms will not shroud information in equilibrium however shrouding may occur in an economy with some myopic or unaware consumers such shrouding creates an inefficiency which firms may have an incentive to eliminate by educating their competitors customers however if add ons have close substitutes a curse of debiasing arises and firms will not be able to profitably debias consumers by unshrouding add ons in equilibrium two kinds of exploitation coexist optimizing firms exploit myopic consumers through marketing schemes that shroud high priced add ons in turn sophisticated consumers exploit these marketing schemes it is not possible to profitably drive away the business of sophisticates it is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms we show that informational shrouding flourishes even in highly competitive markets even in markets with costless advertising and even when the shrouding generates allocational inefficiencies

the effects of competition on publicly owned firms evidence from the municipal electric industry in the u s abstract previous studies have examined the effects of competition on privately owned firms this study examines the impact of competition on a sample of publicly owned electric utilities operating in the u s during 1961 1980 estimates from a translog variable cost function indicate that competitive firms had higher generating costs than monopolists ceteris paribus in addition it appears that operating costs would fall significantly if a single monopolist were to replace two competitors in a given market

ownership versus competition efficiency in public enterprise certainly the introduction of product market competition into potentially competitive or at least contestable markets can improve performance to take just one example morrison and whinston 1986 1986 estimate that even in the imperfectly contestable u s airline industry the annual u s welfare gains from deregulation have been around 6 billion

inequality neighbourhoods and welfare of the poor abstract this paper investigates how neighbourhood effects interacting with income inequality affect poor people s ability to access basic facilities like health care services schooling and so on we model this interaction by integrating consumers income distribution with the spatial distribution of their location and explore the consequences of an increase in income inequality or variations in the neighbourhood characteristics on the welfare of the rich and poor in general and their access to market in particular we find that in general the impact will be non monotonic owing to an interesting trade off between the provision effect and the price effect on the one hand there is the positive provision effect higher valuation of the rich attracts the supplier to enter into the neighbourhood allowing the poor who live sufficiently close by to access the service on the other hand there is the negative price effect the service provider charges a higher price higher is the income or larger is the proportion of the rich in the neighbourhood in the extreme there exists the possibility of complete exclusion of poor from the market the service provider caters only to the rich and the poor has absolutely no market access we have identified the higher income gap between rich and poor as the key factor that exposes the poor to this complete exclusion possibility

externalities in economies with imperfect information and incomplete markets this paper presents a simple general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation by identifying the pecuniary effects of these externalities that net out the paper simplifies the problem of determining when tax interventions are pareto improving the approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained pareto optima it can also lead to simple tests based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection signaling moral hazard incomplete contingent claims markets and queue rationing equilibria traditional discussions of externalities have emphasized the distinction between technological externalities in which the action of one individual or firm directly affects the utility or profit ofanother and pecuniary externalities in which one individual s or firm s actions affect another only through effects on prices while the presence of technological externalities imply in general that a competitive equilibrium may not be pareto efficient pecuniary externalities hy themselves are not a source of inefficiency the fact that prices change has of course important consequences there are both distributional and allocational effects but the distribution effects net out gains for example hy firms whose prices increase are precisely offset by losses e g to individuals who must pay higher prices and there are no welfare losses from the allocation effects as long as the price changes involved are small if firms are maximizing profits and individuals are maximizing utility both facing prices that correctly refiect opportunity costs then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations resulting from any small change in prices are negligible

income inequality and the quality of public services a developing country perspective abstract that the high growth rising inequality phenomenon experienced by many high growth developing economies in the recent past may lead to discontent among the poor is a well discussed issue this paper argues that as the demand for higher quality of the public services rises with income the rising income in the hands of the rich leads to their dissatisfaction about the quality of available public services thereby inducing them to form their own club for self provision of the public services whenever possible this however results in a lowering of quality available to the others outside the club despite less crowding at the publicly provided facilities

competitive promotional strategies this article analyzes the equilibrium pricing strategies of brands engaged in a pricing game each brand has a monopoly market loyal consumers and competes with others in a common market called brand switchers in the case of a duopoly it is shown that the behavior of the brand switchers characterizes the equilibrium behavior of the duopolists this article focuses on two key comparative statics namely the depth of discounts away from a regular high price and the probability of giving a deal or the frequency of deals how these properties vary with the size of the loyal markets and the behavior of the brand switching population is discussed copyright 1988 by the university of chicago

raising search costs to deter window shopping can increase profits and welfare consumers tend to browse products they are interested in and firms often invest resources in selling to them a consequence i show is that it is optimal for a firm to increase the cost of browsing even though this drives away potential customers because doing so allows it to target sales efforts at those consumers most likely to buy despite representing pure waste this can increase welfare by facilitating efficient allocation of sales or marketing resources for a similar reason consumers often benefit from search costs in aggregate and prefer them to other means of screening such as price increases

multiproduct pricing in oligopoly abstract this paper proposes a two good model of price competition where some consumers visit all shops and others visit only one we find that information frictions lead to price dispersion when the two goods are complements their prices will tend to be negatively correlated so if one is priced high the other will be discounted this finding is supported by some empirical evidence which suggests that simultaneous price discounts of complements are infrequent if the goods are substitutes their prices will be uncorrelated potentially rationalizing the lack of evidence on their co pricing when selling complements retailers earn higher profits than in the one good model through taxing captive consumers with a high overall price tag and attracting shoppers by pricing one of the goods aggressively bundling practices are thus shown to be detrimental to retailers profits

public versus private water delivery a hedonic cost approach automotive news 1967 almanac detroit slocum publishing co 1967 bucklin louis p competition and evolution in the distributive trades englewood cliffs new jersey prentice hall 1972 federal trade commission annual line of business report 1974 washington ftc 1981a processed annual line of business report 1975 washington ftc 1981b processed guth louis a robert a schwartz and david k whitcomb the use of buyer concentration ratios in tests of oligopoly models this review 58 nov 1976 488 491 jeifreys james b the distribution of consumer goods new york cambridge university press 1950 lilly digest indianapolis ely lilly and co 1976 martin stephen advertising concentration and profitability the simultaneity problem belljournal 10 autumn 1979 639 647 national petroleum news fact book 1976 new york mcgraw hill 1976 ncr expenses in retail business dayton ohio ncr undated but about 1966 and about 1976 strickland allyn d and leonard w weiss advertising concentration and price cost margins journal of political economy 84 oct 1976 1109 1123 u s department of commerce bureau of economic analysis the detailed input output structure of the u s economy 1972 volume 1 the use and make of commodities by industries washington d c government printing office 1979 u s treasury department internal revenue service statistics of income source book 1972 processed ward t s the distribution of consumer goods structure and performance new york cambridge university press 1973 weiss leonard w the geographic size of markets in manufacturing this review 54 aug 1972 245 257 case studies in american industry new york john wiley and sons 1980

prominence and consumer search this article examines the implications of prominence in search markets we model prominence by supposing that the prominent firm will be sampled first by all consumers if there are no systematic quality differences among firms we find that the prominent firm will charge a lower price than its less prominent rivals making a firm prominent will typically lead to higher industry profit but lower consumer surplus and welfare the model is extended by introducing heterogeneous product qualities in which case the firm with the highest quality product has the greatest incentive to become prominent and making it prominent will boost industry profit consumer surplus and welfare

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

when can public policy makers rely on private markets the effective provision of social services the privatisation of social services is being increasingly discussed the social services market is characterised by multiple market failures including informational asymmetries agency problems externalities and distributional concerns consumers may care as much or more about quality of services than about price if quality is readily observable the government can regulate private providers to assure standards are met but when standards are difficult to observe or when the recipient is not the agent who makes the decisions government ownership may be preferable this paper categorises the market situations in which government provision of social services is likely to be most versus least attractive

endogenous quality choice price vs quantity competition two versions of a vertical product differentiation model one with fixed and the other with variable costs of quality are analyzed to study how the hypotheses of price versus quantity competition affect equilibrium solutions product differentiation arises under all the scenarios considered contrasting previous findings of symmetric quality choices under cournot behavior however to relax harsher market competition firms differentiate more under bertrand than under cournot a simple welfare measure also indicates that the economy is better off when firms compete on prices with fixed costs of quality not only consumer but also producer surplus is higher under price competition copyright 1993 by blackwell publishing ltd

the validity of roi as a measure of business performance business performance at the corporate level is widely assessed by the return through changes in the price of the stock and dividends to shareholders however corporate level performance analysis whether for strategic or public policy purposes is inappropriate in many instances because of the heterogeneity of the corporation s operations the strategic business units sbus comprising a corporation are often very diverse profitability analysis grouping these entities together yields few of the insights needed for strategic or public policy decision making because of this heterogeneity profitability analysis is often advocated and undertaken at the sbu level the absence of an equity market at the sbu level means that a measuring instrument other than that based on stock price must be used to assess profitability due to the lack of alternatives the performance of an sbu is almost always based on accounting data in particular the accounting measure return on investment roi is widely regarded as the most useful measure and ultimate bottom line test of business performance james reese and william cool 1978 it is used both as an objective of management and as a dependent criterion variable to evaluate the effect of various factors on performance despite its widespread use roi has been extensively criticized as being a totally inadequate indicator of economic rate of return g c harcourt 1965 ezra solomon 1971 franklin fisher and john mcgowan 1983 roi most typically defined as net income total assets 1 does not properly relate the stream of profits to the investment that produced it the earnings numerator is a consequence of investment decisions made in the past but the assets denominator can be expected to have had influence on not only past and current earnings but also to have influence on future earnings because of this failure to produce an accurate mapping roi has been criticized as being so seriously flawed that it bears little if any resemblance to the crucial concept of internal or economic rate of return the shortcomings of roi are said to be so severe that its cross sectional variations can be completely explained by the inappropriateness of the measure due to a lack of proven validity empirical investigations using roi have been labeled by fisher and mcgowan as totally misleading enterprises and by george benston 1985 as of doubtful value those making use of accounting roi argue that the noise created by the accounting distortions need not be expected to drown out the underlying signal of economic return contained in roi and therefore roi is still appropriate for use in analysis f m scherer 1979 and william long and david ravenscraft 1984 this paper examines the validity of roi as a measure of economic rate of return by ascertaining the existence and extent of the association of corporate level accounting roi with stock return a widely accepted indicator of business performance the null hypothesis for the analysis is that roi has no validity as a measure of business performance and as such will not exhibit an association with stock return while the tests provide direct evidence on the validity of corporate level roi the same underlying theorized inadequacies of accounting roi are also present at the sbu level 1 conclu

can prominence matter even in an almost frictionless market consumer search on the internet is rarely random sponsored links appear higher up a webpage and consumers often click them firms also bid aggressively for these prominent positions at the top of the page but why should prominence matter when visiting an additional website is almost costless i present a model in which consumers know their valuations for the products offered in the market but do not know which retailer sells which product i show that a prominent retailer earns significantly more profit than other firms even when the cost of searching websites and comparing products is essentially zero