price discrimination in broadway theater a common thread in the theory literature on price discrimination has been the ambiguous welfare effects for consumers and the rise in profit for firms relative to uniform pricing in this study i resolve the ambiguity for consumers and quantify the benefit for a firm i describe a model of price discrimination that includes both second degree and third degree price discrimination using data from a broadway play i estimate the structural model and conduct various experiments to investigate the implications of alternative pricing policies the observed price discrimination may improve the firm s profit by approximately 5 relative to uniform pricing while the difference for aggregate consumer welfare is negligible also i show that the gain from changing prices in the face of fluctuating demand is small under the observed price discrimination

competitive coupon targeting with the advent of panel data on household purchase behavior and the development of statistical procedures to utilize this data firms can now target coupons to selected households with considerable accuracy and cost effectiveness in this article we develop an analytical framework to examine the effect of such targeting on firm profits prices and coupon face values we also derive comparative statics on firms optimal mix of offensive and defensive couponing the number of coupons distributed redemption rates face values and incremental sales per redemption among our findings when rival firms can target their coupon promotions at brand switchers the outcome will be a prisoner s dilemma in which the net effect of targeting is simply the cost of distribution plus the discount given to redeemers

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

analyzing the welfare impacts of full line forcing contracts theoretical investigations have examined both anti competitive and efficiency inducing rationales for vertical bundling making empirical evidence important to understanding its welfare implications we use an extensive dataset on full line forcing contracts between movie distributors and video retailers to empirically measure the impact of vertical bundling on welfare we identify and measure three primary effects of full line forcing contracts market coverage leverage and efficiency we find that bundling increases market coverage and efficiency but has little impact on one distributor s gaining leverage over another as a result we estimate that full line forcing contracts increased consumer and producer surplus in this application

the cost of abating sulfur nitrogen and ozone air pollutants economists have a unique ability to get adversaries to stop attacking each other and turn their attention to the real problem the economist this is only appropriate since what economists enjoy most is attacking other economists as shown by a recent conference on the economics of acid rain mandelbaum economists continue to have this unique ability to unite lion and lamb against economists stauffer dunbar parker the economic estimates of benefits drew fire from all sides even the estimated costs of abatement made almost everyone unhappy because the economists claimed that important elements had been omitted while environmentalists and consumers deplored the focus on efficiency because equity got short shrift anyone who accepts a dollar estimate of either benefits or costs of air pollution abatement is a fool these dollar estimates are inherently arbitrary and economists can be expected to attack each estimate since so much is at stake the assumptions made in the analysis and current uncertainties give these estimates value only when seen in the context of the assumptions it is these uncertainties that i stress before quoting current dollar estimates more important this approach allows me to discuss the nature of the controversies

research on the motion picture industry state of the art and new directions off the beaten track away from theatrical release the motion picture industry has been subject of extensive academic research over the last decades however most scholars focused on the u s theatrical motion picture market the number of research activities regarding even more profitable release windows such as home video or television has been substantially lower although international distribution is essential for a motion picture project to break even there has been little significant re search on most other markets this paper aims at summarizing the current state of research on the motion picture industry particularly from marketing and management perspective revealing research gaps and proposing recommendations for future research endeavors therefore a three pillar scheme is developed to systemize previous findings research on intraorganizational decision making contractual relationships between national stakeholders and international market competition are differentiated since these insights are mainly derived from u s theatrical exhibition they can hardly be applied to other markets and exhibition windows thus potential research areas are identified to expand knowledge of posttheatrical and international markets

a micro data approach to the identification of credit crunches this article presents a micro data approach to the identification of credit crunches using a survey among german firms which regularly queries the firms assessment of the current willingness of banks to extend credit we estimate the probability of a restrictive loan supply policy by time taking into account the creditworthiness of borrowers creditworthiness is approximated by firm specific factors e g the firms assessment of their current business situation and their business expectations after controlling for the return on the banks risk free investment alternative which is also likely to affect the supply of loans we derive a credit crunch indicator which measures that part of the shift in the loan supply that is neither explained by firm specific factors nor by the opportunity costs of providing risky loans

measuring heterogeneous reservation prices for product bundles this paper develops a model for capturing continuous heterogeneity in the joint distribution of reservation prices for products and bundles our model is derived from utility theory and captures both within and among subject variability furthermore it provides dollarmetric reservation prices and individual level estimates that allow the firm to target customers and develop customized and nonlinear pricing policies our experiments show that regardless of whether the products are durables or nondurables the model captures heterogeneity and predicts well models that assume homogeneity perform poorly especially in predicting choice of the bundle furthermore the methodology is robust even when respondents evaluate few profiles self stated reservation prices do not have any informational content beyond that contained in the basic model the direct elicitation method appears to understate overstate the variation in reservation prices across consumers for low priced high priced products and bundles hence this method yields biased demand estimates and leads to suboptimal product line pricing policy the optimization results show that the product line pricing policy depends on the degree of heterogeneity in the reservation prices of the individual products and the bundle a uniformly high price strategy for all products and bundles is optimal when heterogeneity is high otherwise a hybrid strategy is optimal

social cost of co2 abatement from energy efficiency and solar power in the united states frequently cited empirical analyses ask whether we should make the transition from reliance on fossil fuels to reduce greenhouse gas emissions and conclude that the transition is too costly so we should instead focus policy on how to adapt to global warming this paper makes two improvements in the analysis first this empirical analysis accounts for existing low cost alternatives that are substitutes for fossil fuels second this empirical analysis incorporates existing estimates of externalities from fossil fuels these two basic improvements in the analysis alter the conclusion policy should focus on how rapidly and extensively to make the transition from reliance on fossil fuels to the alternatives the corollary is that we should focus on the efficacy and cost of policy options that are designed to accomplish the transition

multi dimensional screening a user s guide abstract multi dimensional screening models have many potential applications but economists have so far been hindered by the considerable technical difficulties involved in their resolution this paper studies the simplest formulation of the general screening model and we provide a complete solution to this case we then show how this model can be applied to multi product nonlinear pricing and to multi product monopoly regulation finally we discuss how the model has been applied to other economic situations of interest including auction design and optimal taxation

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

vertical contracts in the video rental industry a large body of theoretical work has explored the channels through which vertical contracts can induce efficiency improvements however it is also important to study vertical contracts empirically in order to gain insight into the relative size of different types of efficiency gains in this paper i empirically analyse a contractual innovation in the vertically separated video rental industry prior to 1998 video stores obtained inventory from movie distributors using simple linear pricing contracts in 1998 revenuesharing contracts were widely adopted i investigate the effect of the introduction of revenue sharing contracts on firms profits and consumer welfare i analyse a new panel data set of home video retailers that includes information on individual retailers contract and inventory choices as well as rentals and contract terms for 246 movie titles and 6137 retailers in the u s during each week of 1998 and 1999 and the first half of 2000 a structural econometric model of firms behaviour is developed that describes the nature of firms contract choices estimates from this model indicate that both upstream and downstream profits increase by 10 under the revenue sharing contract for popular titles for less popular titles the effects can be even larger i also estimate that consumers benefit when revenue sharing contracts are adopted

price discrimination and retail configuration the hypothesis that price discrimination based on willingness to pay for quality can occur in multifirm markets is confirmed using microdata on gasoline retailing a test that discriminates between price structures associated with discrimination and with cost driven competitive differentials is developed and implemented with controls for variation in outlet and market characteristics a second test based on profitability variation rejects a competitive peak load pricing explanation for the observed price dispersion the data suggest that price discrimination at the retail level adds at least 9 a gallon to the average price of full service gasoline

bundling as an optimal selling mechanism for a multiple good monopolist abstract multiple objects may be sold by posting a schedule consisting of one price for each possible bundle and permitting the buyer to select the price bundle pair of his choice we identify conditions that must be satisfied by any price schedule that maximizes revenue within the class of all such schedules we then provide conditions under which a price schedule maximizes expected revenue within the class of all incentive compatible and individually rational mechanisms in the n object case we use these results to characterize environments mainly distributions of valuations where bundling is the optimal mechanism in the two and three good cases

prudential regulation and the credit crunch evidence from japan the underlying causes of sharp declines in bank lending during recessions in large developed economies as exemplified by the u s in the early 1990s and japan in the late 1990s are still being debated due to the lack of any convincing identification strategy of the supply side capital lending relationship from lending demand using within bank share of real estate lending in the late 1980s as an instrumental variable for bank capital we find that japanese banks cut back on their lending in response to a large loss of bank capital in fiscal year 1997

bundle size pricing as an approximation to mixed bundling multiproduct firms can set separate prices for all possible bundled combinations of its products mixed bundling however this is impractical for firms with more than a few products because the number of prices increases exponentially with the number of products we find that simple pricing strategies are often nearly optimal specifically we show that bundle size pricing setting prices that depend only on the size of bundle purchased tends to be more profitable than offering the individual products priced separately and tends to closely approximate the profits from mixed bundling jel d24 d42 l11 l13 l25

zombie lending and depressed restructuring in japan this paper explores the role that misdirected bank lending played in prolonging the japanese macroeconomic stagnation that began in the early 1990s the investigation focuses on the wide spread practice of japanese banks of continuing to lend to otherwise insolvent firms we docu ment the prevalence of this forbearance lending and show its distorting effects on healthy firms that were competing with the impaired firms the paper by hoshi 2000 was the first to call attention to this phenomenon and its ramifi

bundling as an entry barrier in this paper we look at the case for bundling in an oligopolistic environment we show that bundling is a particularly effective entry deterrent strategy a company that has market power in two goods a and b can by bundling them together make it harder for a rival with only one of these goods to enter the market bundling allows an incumbent to credibly defend both products without having to price low in each the traditional explanation for bundling that economists have given is that it serves as an effective tool of price discrimination by a monopolist although price discrimination provides a reason to bundle the gains are small compared with the gains from the entry deterrent effect i introduction in this paper we look at the case for bundling in an oligopolistic environment we show that bundling is a particularly effective entry deterrent strategy a company that has market power in two goods a and b can by bundling them together make it harder for a rival with only one of these goods to enter the market bundling allows an incumbent to defend both products without having to price low in each while it is still possible to compete by offering a rival bundle a monopolist can significantly lower the potential profits of a one product entrant without having to engage in limit pricing prior to entry we also show that bundling continues to be an effective pricing tool even if entry deterrence fails or if there is already an existing one product rival a company with a monopoly in product a and a duopoly in product b makes higher profits by selling an a b bundle than by selling a and b independently leveraging market power from a into b and accepting some one product competition against the bundle is better than using the monopoly power in good a all by itself since bundling mitigates the impact of competition on the incumbent an entrant can expect the bundling strategy to persist even without any commitment the traditional explanation for bundling that economists have given is that it serves as an effective tool of price discrimination by a monopolist see stigler 1968 adams and yellen

price discrimination by a many product firm determining the optimal selling strategy for a multiproduct firm facing consumers with unknown tastes is a difficult task this paper aims to show how almost optimal nonlinear tariffs can often be found when the number of products becomes large

an empirical analysis of competitive nonlinear pricing abstract we estimate a model of competitive nonlinear pricing with multidimensional preference heterogeneity using individual level data on advertisements bought by local businesses e g doctors electricians from two yellow page directories in one u s city market variation in individual choices and payments allows us to identify the joint density of preferences marginal costs of publishing and common utility parameters our estimates suggest substantial welfare loss due to asymmetric information comparing duopoly outcomes with counterfactual monopoly outcomes we find that with less competition i producer surplus increases substantially ii more low type consumers are excluded iii product variety increases but benefits accrue only to the high type consumers iv total consumer surplus decreases v but its distribution across consumers does not change

simple menus of contracts in cost based procurement and regulation in an influential paper jean jacques laffont and jean tirole 1986 formulated a principal agent model of cost based procurement and regulation and showed that the principal can implement the optimal mechanism by offering the agent a menu consisting of a continuum of linear contracts two related problems with applying this theory in practice have been that the economic logic and the underlying mathematics involved in calculating the optimal menu are quite complex and the principal must be able to specify the agent s entire disutility of effort function in order to calculate the optimal menu as a result the model has not been widely used in practice to either calculate actual incentive contracts or even to develop useful qualitative guidance about the nature of the optimal solution and how it is affected by various economic factors the purpose of this paper is to show that dramatically simpler menus which are easy to understand and calculate and which have lower informational requirements can at least in some cases capture a substantial share of the gains achievable by the fully optimal complex menu in particular this paper considers two item menus where one item is a cost reimbursement contract and the other item is a fixed price contract such menus are called fixed price cost reimbursement fpcr menus for the case where the agent s utility is quadratic and the agent s type is distributed uniformly it is shown that the optimal fpcr menu always captures at least three quarters of the gain that the optimal complex menu achieves where the gain is measured relative to the result of using a cost reimbursement contract this paper s research was originally motivated by a policy issue in defense procurement in the united states the department of defense dod purchases almost all major weapons systems from sole source contractors using contracting methods that essentially amount to using cost reimbursement contracts the best way to understand why dod uses costreimbursement contracting methods is that they perform precisely the function identified in laffont and tirole s principal agent model they guarantee in a situation that amounts to a bilateral monopoly that dod and the firm can reach an agreement i e they guarantee that the agent will always produce the good of course the use of cost reimbursement contracting methods

the international transmission of financial shocks the case of japan one of the more dramatic financial events of the late 1980s and early 1990s was the surge in japanese stock prices that was immediately followed by a very sharp decline of more than 50 percent while the unprecedented fluctuations in japanese stock prices were domestic financial shocks the unique institutional characteristics of the japanese economy produce a framework that is particularly suited to the transmission of such shocks to other countries through the behavior of the japanese banking system the large size of japanese bank lending operations in the united states enables us to use u s banking data to investigate the extent to which this domestic japanese financial shock was transmitted to the united states as well as to identify a supply shock to u s bank lending that is independent of u s loan demand we find that binding risk based capital requirements associated with the decline in the japanese stock market resulted in a decline in commercial lending by japanese banks in the united states that was both economically and statistically significant this finding has added importance given the severe real estate loan problems currently faced by japanese banks how japanese bank regulators decide to resolve these problems will have significant implications for credit availability in the united states as well as in other countries with a significant japanese bank presence

the morphology of price dispersion this paper is a study of the shape and structure of the distribution of prices at which an identical good is sold in a given market and time period we find that the typical price distribution is symmetric and leptokurtic with a standard deviation between 19 and 36 only 10 of the variance of prices is due to variation in the expensiveness of the stores at which a good is sold while the remaining 90 is due in approximately equal parts to differences in the average price of a good across equally expensive stores and to differences in the price of a good across transactions at the same store we show that the distribution of prices that households pay for the same bundle of goods is approximately normal with a standard deviation between 9 and 14 half of this dispersion is due to differences in the expensiveness of the stores where households shop while the other half is mostly due to differences in households choices of which goods to purchase at which stores we find that households with fewer employed members pay lower prices and do so by visiting a larger number of stores rather than by shopping more frequently

robustness and linear contracts abstract we consider a moral hazard problem where the principal is uncertain as to what the agent can and cannot do she knows some actions available to the agent but other unknown actions may also exist the principal demands robustness evaluating possible contracts by their worst case performance over unknown actions the agent might potentially take the model assumes risk neutrality and limited liability and no other functional form assumptions very generally the optimal contract is linear the model thus offers a new explanation for linear contracts in practice it also introduces a flexible modeling approach for moral hazard under nonquantifiable uncertainty jel d81 d82 d86

selling costs and switching costs explaining retail gasoline margins recent theoretical work has shown that price discrimination can take place in imperfectly competitive as well as monopoly markets the persistence of higher retail margins on unleaded than on leaded gasoline during the 1980s suggests that discrimination may occur even in very competitive markets this article studies a number of cost based explanations for such gasoline pricing as well as the possibility of price discrimination the analysis indicates that gas stations discriminate against groups of customers who are less likely to switch to another station the conclusions highlight the influence of shopping or search costs on pricing decisions even in markets thought to be quite competitive

the capital crunch neither a borrower nor a lender be the dramatic reduction in the growth rate of bank lending associated with the 1990 91 recession particularly in new england has evoked claims by many observers of a credit crunch however because of the difficulty in determining whether the observed slow credit growth is a demand or supply phenomenon convincing evidence of the practical importance of credit crunches for economic activity remains elusive we overcome this obstacle by examining a cross section of banks in new england that have experienced the same economic downturn effectively controlling for changes in demand we find empirical support for a capital crunch whereby poorly capitalized institutions shrink to satisfy capital requirements this alone is not a sufficient condition for a credit crunch however we find s6me additional evidence that the ca ital crunch may have limited credit availability in new england

optimal multi unit mechanisms with private demands abstract a seller can produce multiple units of a single good the buyer has constant marginal value for each unit she receives up to a demand and zero marginal value for units beyond the demand the marginal value and the demand are drawn from a distribution and are privately known to the buyer we show that under natural regularity conditions on the distribution the optimal revenue maximizing selling mechanism is deterministic it is a price schedule that specifies the payment based on the number of units purchased further under the same conditions the revenue as a function of the price schedule is concave which in turn implies that the optimal price schedule can be found in polynomial time we give a more detailed characterization of the optimal prices when there are only two possible demands

a probabilistic approach to pricing a bundle of products or services the authors propose a probabilistic approach to optimally price a bundle of products or services that maximizes seller s profits their focus is on situations in which consumer decision making is o

on the equivalence of bayesian and dominant strategy implementation we consider a standard social choice environment with linear utilities and independent one dimensional private types we prove that for any bayesian incentive compatible mechanism there exists an equivalent dominant strategy incentive compatible mechanism that delivers the same interim expected utilities for all agents and the same ex ante expected social surplus the short proof is based on an extension of an elegant result due to gutmann kemperman reeds and shepp 1991 we also show that the equivalence between bayesian and dominant strategy implementation generally breaks down when the main assumptions underlying the social choice model are relaxed or when the equivalence concept is strengthened to apply to interim expected allocations

capital requirements monetary policy and aggregate bank lending theory and empirical evidence capital requirements linked solely to credit risk are shown to increase equilibrium credit rationing and lower aggregate lending the model predicts that the bank s decision to lend will cause an abnormal runup in the borrower s stock price and that this reaction will be greater the more capital constrained the bank i provide empirical support for this prediction the model explains the recent inability of the federal reserve to stimulate bank lending by increasing the money supply i show that increasing the money supply can either raise or lower lending when capital requirements are linked only to credit risk the motivation of this article is first to examine the impact of risk based capital requirements namely those that link mandatory capital to asset ratios for banks to their loans on aggregate bank lending these requirements called the basle capital rules or bis guidelines went into effect in march 1989 for banks in the leading industrialized nations these rules initially required banks to maintain capital equal to 7 25 percent of business and most consumer loans with the requirement increasing to 8 percent by the end of 1992 secondly i wish to understand the link between monetary policy and aggregate bank credit in the presence of risk based capital requirements my curiosity is sparked in part by two recent phenomena one is the experience of the u s economy which displayed sluggish growth during 1989 93 despite a monetary policy that attempted to spur bank lending and economic activity and the other is the striking decline in loans relative to security holdings mostly government bonds in the asset portfolios of u s

in search of capital crunch supply factors behind the credit slowdown in japan the seeming failure of loose monetary policy to reactivate japan s economy has led some observers to suggest that the usual credit channels through which monetary policy affects the real economy are blocked and this is because of a pervasive shortage of bank capital that has induced a leftward shift in the supply of bank credit this is the so called capital crunch hypothesis this paper finds support for the hypothesis in the bank data for 1997 a year during which the landscape of the japanese financial system underwent some fundamental changes

bounding the relative profitability of price discrimination we derive bounds on the ratio of a monopolist s profit from third degree price discrimination to that from uniform pricing if the monopolist serves n independent markets demand is continuous and the cost function is superadditive then the profit ratio is bounded by n a linear demand example is provided coming arbitrarily close to this bound we provide examples showing the profit ratio can be unboundedly large when marginal cost is decreasing demand is discontinuous or fixed cost is positive if the monopolist has access to certain demand rationing strategies under uniform pricing we can bound the profit ratio even for discontinuous demand functions and multiproduct cost functions

a structural econometric model of price discrimination in the french mortgage lending industry we propose a model of discrimination in the market for mortgages the model explains accepted loan applications and simultaneously determines loan sizes and interest rates a competitive and a discriminating monopoly version of the model are proposed offered interest rates and loan sizes are a function of observable borrower characteristics the competitive model rests on a marginal condition reflecting contract optimality to which a zero profit condition is added in contrast the discriminating monopoly maximizes profits under a borrower participation constraint reflecting the availability of a rental market as an outside option each version of the model is a bivariate nonlinear model and is estimated by standard maximum likelihood methods the data used for estimation is a sample of clients of a french network of mortgage lenders we show the presence of social discrimination in the data the loan conditions depending not only on the borrower s wage and down payment but also on the borrower s occupational status abnormally high risk premia in the competitive version of the model suggest the presence of market power justifying an attempt at estimating its monopolistic version the discriminating monopoly model estimates show that the borrowers price elasticity of demand for housing varies with occupational status and is inversely related with the lender s interest rate markups this confirms that the lender exploits structural differences in the preferences to discriminate as predicted by standard theories

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

bundling information goods of decreasing value consumers average value for information goods websites weather forecasts music and news declines with the number consumed this paper provides simple guidelines to optimal bundling marketing strategies in this case if consumers values do not decrease too quickly we show that bundling is approximately optimal if consumers values to subsequent goods decrease quickly we show by example that one should expect bundling to be suboptimal

the effectiveness of english auctions abstract we study the performance of the english auction under different assumptions about the seller s degree of bayesian sophistication we define the effectiveness of an auction as the ratio between the expected revenue it generates for the seller and the expected valuation of the object to the bidder with the highest valuation total surplus we identify tight lower bounds on the effectiveness of the english auction for general private values environments and for private values environments where bidders valuations are non negatively correlated for example when the seller faces 12 bidders who the seller believes have non negatively correlated valuations whose expectations are at least as high as 60 of the maximal possible valuation an english auction with no reserve price generates an expected price that is more than 80 of the value of the object to the bidder with the highest valuation

robust monopoly pricing we consider a robust version of the classic problem of optimal monopoly pricing with incomplete information in the robust version the seller faces model uncertainty and only knows that the true demand distribution is in the neighborhood of a given model distribution we characterize the pricing policies under two distinct decision criteria with multiple priors i maximin utility and ii minimax regret the equilibrium price under either criterion is lower then in the absence of uncertainty the concern for robustness leads the seller to concede a larger information rent to all buyers with values below the optimal price without uncertainty

tying foreclosure and exclusion in recent years the leverage theory of tied good sales has faced heavy and influential criticism in an important sense though the models used by its critics are actually incapable of addressing the leverage theory s central concerns here the author reconsiders the leverage hypothesis and argues that tying can indeed serve as a mechanism for leveraging market power the mechanism through which this leverage occurs its profitability and its welfare implications are discussed in detail copyright 1990 by american economic association

gaussian demand and commodity bundling in an important and widely cited essay adams and yellen 1976 examine the use of package selling as a price discrimination device they consider a monopolist producing two goods with constant unit costs and facing buyers with diverse tastes the marginal utility of a second unit of either good is assumed to be zero for all buyers the two goods are independent in demand for all buyers so that any buyer s reservation price for the first unit of either good is independent of the market price of the other thus the maximum amount any buyer would pay for a bundle consisting of one unit of each good is the sum of the two reservation prices and buyers are completely described by the values of those two prices 2 resale markets are assumed away in order to obtain comparative results for alternative pricing strategies the distribution of reservation prices in the adams yellen framework is assumed to be bivariate normal implications of gaussian demand are explored pure bundling is shown to operate by reducing buyer diversity thus facilitating the capture of consumers surplus it generally makes buyers worse off than unbundled sales it is more profitable if average reservation prices are high enough mixed bundling combines advantages of both pure bundling and unbundled sales and it is generally strictly more profitable than either bundling which treats goods symmetrically seems most attractive under symmetric reservation price distributions i am indebted to severin borenstein for superb research assistance to the ford motor company for research support through a grant to m i t and to the harvard economics department for housing me as a visiting scholar while most of this research was performed of course only i can be held responsible for this essay s shortcomings 1 the first clear recognition of this possibility seems to have been by stigler 1968 but also see burstein 1960 2 paroush and peles 1981 relax the assumption that consumers purchase at most one unit of each good but they consider only two types of buyers both with linear demand functions they retain the assumption that demands are independent for all buyers telser 1979 and phillips 1981 use different frameworks to analyze bundling policies spence 1980 explores the relation between bundling across commodities as here and bundling multiple units of the same

optimal bundling strategies under heavy tailed valuations we develop a framework for the optimal bundling problem of a multiproduct monopolist who provides goods to consumers with private valuations that are random draws from a distribution with heavy tails we show that in the vickrey auction setting the buyers prefer separate provision of the goods to any bundles we also provide a complete characterization of the optimal bundling strategies for a monopolist producer who provides goods for profit maximizing prices for products with low marginal costs the seller s optimal strategy is to provide goods separately when consumers valuations are heavy tailed and in a single bundle when valuations are thin tailed these conclusions are reversed for goods with high marginal costs for simplicity we use a specific class of independent and identically distributed random variables but our results can be generalized to include dependence skewness and the case of nonidentical one dimensional distributions

buy it now or take a chance price discrimination through randomized auctions increasingly detailed consumer information makes sophisticated price discrimination possible at fine levels of aggregation demand may not obey standard regularity conditions we propose a new randomized sales mechanism for such environments bidders can buy it now at a posted price or take a chance in an auction where the top d 1 bidders are equally likely to win the randomized allocation incentivizes high valuation bidders to buy it now we analyze equilibrium behavior and apply our analysis to advertiser bidding data from microsoft advertising exchange in counterfactual simulations our mechanism increases revenue by 4 4 and consumer surplus by 14 5 compared to an optimal second price auction this paper was accepted by assaf zeevi stochastic models and simulation

robotization and labour dislocation in the manufacturing sectors of oecd countries a panel var approach robots are the most important innovation which has affected the production process in the last three decades thanks to the latest advances in technology they have been able to perform an ever inc

estimating multiple discrete choice models an application to computerization returns buyers in many markets face multiple discrete choices they can purchase multiple units as well as multiple brands at the same time this paper presents a multiple discrete choice model for the analysis of differentiated products demand users maximize profits by choosing the number of units of each brand they purchase i estimate the model using micro level data on the demand for personal computers i use the estimated demand structure to assess the welfare gains from computerization and technological innovation in peripherals the estimated return on investment in personal computers is 92 moreover a 10 increase in the performance to price ratio of microprocessors leads to a 2 2 gain in the estimated user surplus the personal computer pc market is of interest to industrial organization economists because of its size the continual technological change and above all because of the farreaching implications of pcs on the economy as a whole several distinct features make pc demand difficult to model pcs are a differentiated durable good in constant technological evolution moreover buyers make multiple discrete choices firms according to our data spread their purchases of pcs over different brands at the same time they buy pcs in blocks several units of each brand that they have chosen the aim of the paper is to present a model that captures these features and to use this model to estimate the welfare gains from computerization classical discrete choice models allow one choice among mutually exclusive alternatives in contrast the proposed framework allows users to demand multiple units and multiple brands the model can be applied to other cases of multiple discrete choices e g the composition of airline fleets car holdings per household the fields of the faculty in economics departments household cereals consumption or any other good consumed in more than one variety during a relevant time period although pervasive multiple discrete choice problems have received little attention because of their complexity a central issue regarding the pc market is the current controversy in the economics literature about the computerization puzzle this puzzle stems from the empirical finding that computerization has had no effect on firm productivity griliches and siegel 1991 and morrison and berndt 1990 contrary to those results hendel 1994 and lichtenberg 1995 using more disaggregate data than most previous studies report excess returns to computerization this indicates that data aggregation may have created the computerization puzzle in this paper i present a model consistent with the basic

the welfare effects of bundling in multichannel television markets we measure how the bundling of television channels affects short run welfare we estimate an industry model of viewership demand pricing bundling and input market bargaining using data on ratings purchases prices bundles and input costs we conduct simulations of a la carte policies that require distributors to offer individual channels for sale to consumers we estimate that negotiated input costs rise by 103 0 percent under a la carte these higher input costs offset consumer benefits from purchasing individual channels mean consumer and total surplus change by an estimated 5 4 to 0 2 percent and 1 7 to 6 0 percent respectively jel d12 l11 l51 l82 m31

the use of full line forcing contracts in the video rental industry bundling is at the forefront of many policy debates as new technologies allow firms to implement more complex bundling arrangements realistic analyses of bundling particularly between suppliers and retailers require detailed data on both supply arrangements and consumer demand we analyze firms use of bundling as a vertical restraint known as full line forcing using extensive supply and demand data from the video rental industry our model captures key details of the market that determine firms contractual choices and sheds light on the implications of these decisions the empirical approach provides a model for how to analyze bundling when detailed data are available jel d86 l14 l81 l82

music for a song an empirical look at uniform song pricing and its alternatives economists have well developed pricing theories that challenge the wisdom of the common practice of uniform song pricing this paper explores the profit and welfare implications of various alternatives including song specific pricing various forms of bundling two part tariffs nonlinear pricing and third degree price discrimination using survey based data on nearly 500 students valuations of 50 popular songs in early january 2008 we find that various alternatives including simple schemes such as pure bundling and two part tariffs can raise both producer and consumer surplus revenue could be raised by nearly 10 percent relative to profit maximizing uniform pricing and by over a fifth relative to current 0 99 uniform pricing moreover revenue could be increased by a tenth while maintaining consumer surplus at the high level accompanying current 0 99 uniform song pricing while person specific uniform pricing can raise revenue by three quarters none of the non discriminatory schemes raise revenue s share of surplus above 35 percent even with sophisticated pricing much of the area under the demand curve for this product cannot be appropriated as revenue

sticker shocks using vat changes to estimate upper level elasticities of substitution we estimate the upper level elasticity of substitution between goods and services of a nested aggregate ces preference specification we show how this elasticity can be derived from the long run response of the relative price of a good to a change in its vat rate we estimate this elasticity using new data on changes in vat rates across 74 goods and services for 25 european union countries from 1996 through 2015 depending on the level of aggregation we find a vat pass through rate between 0 4 and 0 7 this implies an upper level elasticity of 3 at the lowest level of aggregation with 74 categories and 1 cobb douglas preferences at a high level of aggregation that distinguishes 10 categories of goods and services

to bundle or not to bundle commodity bundling is studied in an environment where the dispersion of valuations unambiguously decreases when two or more goods are sold as a bundle only bundling is more likely to dominate separately selling the goods if marginal costs are low relative to the average valuation or if the distribution of valuations is very peaked around the mean

tying investment and the dynamic leverage theory the idea that an incumbent supplier may tie two complementary products to fend off potential entrants is popular among practitioners yet is not fully understood in formal economic theory this article makes sense of the argument by formally deriving a dynamic version of the old leverage doctrine we show that when an incumbent monopolist faces the threat of entry in all complementary components tying may make the prospects of successful entry less certain discouraging rivals from investing and innovating tie in sales may reduce consumer and total economic welfare copyright 2001 by the rand corporation

when should sellers use auctions the simultaneous bid auction is a standard method for sellers to solicit offers from buyers a simple alternative is for a seller to ask buyers to make offers sequentially if it is costly for buyers to participate the sequential mechanism will tend to be more efficient than the simultaneous auction because later potential buyers can condition their participation decisions on earlier bids however the sequential mechanism s greater efficiency may not produce higher revenues because while the possibility of deterring later potential entrants can lead early bidders to bid aggressively the fact that later firms might be deterred will tend to reduce revenues the relative revenue performance of the mechanisms will therefore depend on whether the threat of potential future competition which can raise bids in the sequential mechanism is more valuable to the seller than actual competition which will tend to be greater in the simultaneous auction the relative revenue performance of these alternative mechanisms has direct implications for how assets should be sold in the case of how to structure the sale of corporations this question has attracted attention from practitioners and commentators since the delaware supreme court s 1986 revlon decision charged a board overseeing the sale of a company with the duty of getting the best price for the stockholders revlon v mcandrews and forbes holdings 1986 in practice

a strategic motivation for commodity bundling the analytical literature on commodity bundling explains the practice of selling two or more differentiated products in a single package as a surrogate for direct price discrimination in contrast this paper shows that imperfect competition creates a strategic incentive to bundle the profitability of bundling whether it adversely affects rival producers and whether it yields an overall efficiency gain depends inter alia on the nature of product market competition the role of complementarity in explaining why firms bundle is also explored copyright 1990 by blackwell publishing ltd

pricing regulation and imperfect competition on the massachusetts health insurance exchange abstract we analyze insurance pricing regulation under imperfect competition on the massachusetts health insurance exchange differential markups lead to price variation apart from cost variation coarse insurer pricing strategies identify consumer demand younger consumers are twice as price sensitive as older consumers older consumers thus face higher markups over costs modified community rating links prices for consumers differing in both costs and preferences and changes the marginal consumer firms face stricter regulations transfer resources from low cost to high cost consumers reduce firm profits and increase overall consumer surplus

multiproduct nonlinear pricing typically work on mechanism design has assumed that all private information can be captured in a single scalar variable this paper explores one way in which this assumption can be relaxed in the context of the multiproduct nonlinear pricing problem it is shown that the firm will choose to exclude some low value consumers from all markets a class of cases that allow explicit solution is derived by making use of a multivariate form of integration by parts in such cases the optimal tariff is cost based

bank capital shocks dynamic effects on securities loans and capital abstract we used quarterly data for individual banks to estimate recent dynamic responses to bank capital shocks while it took bank capital and securities only one year to adjust to capital shocks liabilities and most loan categories took two to three years to complete their adjustments compared with those in the late 1980s capital shocks were twice as large and portfolio responses to capital shocks tended to be more rapid in the early 1990s larger banks adjusted each component of their portfolios faster than smaller banks capital shocks caused banks with capital shortfalls to contract more and more quickly in the 1990s than they had in the 1980s

profitability of product bundling using copulas to model the stochastic dependence of values this article establishes new general conditions for the profitability of product bundling a multiproduct monopolist generally achieves higher profit from mixed bundling than from separate selling if consumer values for two of its products are negatively dependent are independent or have sufficiently limited positive dependence the profitability of monopoly bundling also extends to situations where a multiproduct firm competes with a single product rival

antitrust and the new industrial economics my assignment here is to assess the implications of recent theoretical work in industrial economics for antitrust in the united states i don t have space enough to present a comprehensive survey of that work nor even to catalog all recent developments with apparent antitrust implications i attempt instead to describe the general character of those implications limiting myself to a few illustrative specifics industrial economics affects antitrust policy in three different ways first it is used in positive analysis aimed at determining whether or not current law has been violated in specific cases and at assessing damages due injured parties second it should be used in evaluating the desirability of relief that might be imposed in particular cases in order to alter structure or conduct if a violation is found finally the tools and results of industrial economics are important inputs in the formulation of general rules of law i argue here that the new industrial economics can contribute a lot to the positive analysis of individual cases but it has much less to say about the desirability of particular relief or of general rules of law a final section briefly examines some implications of this situation

sellers with misspecified models principals often operate on misspecified models of their agents preferences when preferences are such that non local incentive constraints may bind in the optimum even slight misspecification of the preferences can lead to large and non vanishing losses instead we propose a two step scheme whereby the principal 1 identifies the model optimal menu and 2 modifies prices by offering to share with the agent a fixed proportion of the profit she would receive if an item were sold at the model optimal price we show that her loss is bounded and vanishes smoothly as the model converges to the truth finally two step mechanisms without a sharing rule like 2 will not yield a valid approximation

a graphical analysis of bundling by comparing the demand for a bundle and the vertical sum of the demands for its components this article analyzes the profitability and welfare consequences of bundling if it does not lower costs bundling tends to be profitable when reservation values are negatively correlated and high relative to costs if bundling lowers costs and costs are high relative to average reservation values positively correlated reservation values increase the incentive to bundle bundling and charging a price equal to the sum of the components prices lowers consumer surplus bundling can however increase consumer surplus when it results in lower prices copyright 1995 by university of chicago press

multiproduct monopoly commodity bundling and correlation of values through what selling strategy can a multiproduct monopolist maximize his profits when his knowledge about individual consumers preferences is limited one possibility extensively studied in the context of a single good monopoly is to use quantity dependent pricing as a means of discriminating among customers with differing tastes see for example oi 1971 and maskin and riley 1984 an alternative technique for price discrimination first suggested by stigler 1968 and analyzed further by adams and yellen 1976 is for the monopolist to package two or more products in bundles rather than selling them separately through a series of examples adams and yellen illustrate that bundling can serve as a useful price discrimination device even when all consumers willingnesses to pay for each of the goods individually are unaffected by whether they are also consuming the other product a typical example is illustrated in figure i adapted from figure iv in adams and yellen where there are two goods three consumers ab c who consume at most one unit of each good with reservation values for each good that are independent of whether the other good is consumed and zero costs of production there a bundle offered at a price of 100 fully extracts all potential surplus which would be impossible pricing the goods independently unfortunately though these authors do not provide any general characterization of the circumstances in which bundling is actually a multiproduct monopolist s optimal strategy their examples however such as figure i create the impression that the profitable use of bundling

commodity bundling by single product monopolies consider two products that have independent demands in the sense that all individual buyers consider them neither substitutes nor complements then if the two products are priced separately the demand for either is independent of the price of the other in his classic analysis of block booking of feature films george stigler shows that it may be profitable for a monopoly seller of two such products to bundle them by requiring a buyer to take both in order to get either his work provides a rationale for tying arrangements that does not depend on technological or other dependencies among the products involved 2 adams and yellen extend the analysis of multiproduct monopoly with independent demands 3 they discuss two different bundling strategies pure bundling in which the seller only offers the products in fixed proportions and mixed bundling in which buyers may either buy the products separately or purchase a bundle with fixed proportions of each in this note i consider a single product monopoly and investigate the profit and welfare implications of bundling its product for some other

shocks to bank capital evidence from uk banks at home and away this article assesses how shocks to bank capital may influence a bank s portfolio behaviour using novel evidence from a uk bank panel data set from a period that predates the recent financial crisis focusing on the behaviour of bank loans we extract the dynamic response of a bank to innovations in its capital and in its regulatory capital buffer we find that innovations in a bank s capital in this precrisis sample period were coupled with a loan response that lasted up to 3 years the international presence of uk banks allows us to identify a specific driver of capital shocks in our data independent of bank lending to uk residents specifically we use write offs on loans to nonresidents to instrument bank capital s impact on uk resident lending a fall in capital brought about a significant drop in lending in particular to private nonfinancial corporations pnfc in contrast household lending increased when capital fell which may indicate that in this precrisis period banks substituted into l

calibrated incentive contracts this paper studies a dynamic agency problem which includes limited liability moral hazard and adverse selection the paper develops a robust approach to dynamic contracting based on calibrating the incentive properties of simple benchmark contracts that are attractive but infeasible due to limited liability constraints the resulting dynamic contracts are detail free and satisfy robust performance bounds independently of the underlying process for returns which need not be i i d or even ergodic publication abstract

capturing strategic rent full line forcing brand discounts aggregate rebates and maximum resale price maintenance this paper examines the implications of a retailer s shelf space stocking decisions on the optimal marketing strategy of an upstream multiproduct monopolist when the retailer s opportunity cost of shelf space is known full line forcing brand discounts and maximum resale price maintenance are sufficient to achieve the monopolist manufacturer s first best profit when these strategies are adopted the retailer s profit is reduced to the scarcity rents obtainable on her shelf space when the retailer s opportunity cost of shelf space is unknown the use of aggregate rebates can act as a screening device to maximize channel profit copyright 1991 by blackwell publishing ltd

differentiated regulation the case of auto emissions standards this paper presents an analysis of automotive emissions regulation that explicitly considers the link between regulation and the composition of the vehicle stock the adoption of more stringent emissions standards for new vehicles is shown to prolong the retention of old high emission rate vehicles in the fleet for this reason tighter new source standards actually increase aggregate emissions in the short run this result is of general as well as specific interest given the widespread use of differentiated regulatory tools incorporating a bias against new sources in many regulatory programs 3 references 1 table

quality based price discrimination and tax incidence the market for gasoline and diesel cars in europe the existing tax policies toward gasoline and diesel cars in european countries provide a unique opportunity to analyze quality based price discrimination and the implied tax incidence in my econometric framework consumers choose the type of engine based on their annual mileage prices are set by the manufacturers the relative pricing of gasoline and diesel cars appears to be consistent with monopolistic price discrimination effectively segmenting low mileage from high mileage consumers on average about 75 to 90 of the price differentials between gasoline and diesel cars can be explained by markup differences i draw implications for the effectiveness and the revenue effects of tax policy

multiple discreteness and product differentiation demand for carbonated soft drinks for several of the largest supermarket product categories such as carbonated soft drinks canned soups ready to eat cereals and cookies consumers regularly purchase assortments of products within the category consumers often purchase multiple products and multiple units of each alternative selected on a given trip this multiple discreteness violates the single unit purchase assumption of multinomial logit and probit models the misspecification of such demand models in categories exhibiting multiple discreteness would produce incorrect measures of consumer response to marketing mix variables in studying product strategy these models would lead to misleading managerial conclusions we use an alternative microeconomic model of demand for categories that exhibit the multiple discreteness problem recognizing the separation between the time of purchase and the time of consumption we model consumers purchasing bundles of goods in anticipation of a stream of consumption occasions before the next trip we apply the model to a panel of household purchases for carbonated soft drinks