can learning affect exchange rate behavior the case of the dollar in the early 1980 s this paper demonstrates that a change in parameters of the money market that is not immediately understood will affect the behavior of exchange rate forecast errors while the market is learning the analysis is applied to the behavior of u s dollar german mark forecast errors during the early 1980 s when the market appeared to systematically underpredict the strength of the dollar consistent with this observation empirical estimates of implied forecast errors based upon bayesian learning suggest that forecast errors would have been on average negative during the period as the market came to realize the increase in u s money demand

co creation with production externalities co creation the participation of customers in the design and production of goods and services has been gaining popularity in recent years in this research we incorporate firm pricing into the joint production process allowing us to study 1 production externalities between firm and customers 2 production externalities among customers and 3 optimal pricing by firms we show that given a choice a monopoly firm will opt for co creation with customers rather than deal with passive price taking consumers furthermore the firm will increase the effort it devotes to co creation as the number of potential co creating customers increases we show that the profit of a firm facing a centralized pattern of externalities among customers with an expert or lead user in the center can be higher than its profit when facing a decentralized pattern of externalities among customers and clearly dominates its profit when customers do not have any cross externalities thus we provide a different justification for the use of lead users one that depends on their network centrality and not on having lower cost more information or greater ability than the firm because the decentralized pattern has more links than the centralized pattern our results demonstrate the importance of the pattern of links between customers and not just their number in determining the profitability of co creation furthermore we find that the lead user s externality spillover to other connected users her neighbors acts as a force multiplier on the efforts exerted by all participants in equilibrium specifically a higher spillover from the lead user increases the efforts of the firm the neighbors and the lead user herself and this may lead to beneficial outcomes for all finally we show that in co creation environments a monopolist firm may benefit by committing to a single price rather than exercising price discrimination this is because the pricing structure affects customers incentive to invest effort in the innovation production stage

customer referral incentives and social media we study how to optimally attract new customers using a referral program whenever a consumer makes a purchase the firm gives her a link to share with friends and every purchase coming through that link generates a referral payment the firm chooses the referral payment function and consumers play an equilibrium in response the optimal payment function is nonlinear and not necessarily monotonic in the number of successful referrals if we approximate the optimal policy using a linear payment function the approximation loss scales with the square root of the average consumer degree using a threshold payment the approximation loss scales proportionally to the average consumer degree combining the two using a linear payment function with a threshold bonus we can achieve a constant bound on the approximation loss this paper was accepted by noah gans stochastic models and simulation

optimal pricing in networks with externalities we study the optimal pricing strategies of a monopolist selling a divisible good service to consumers who are embedded in a social network a key feature of our model is that consumers experience a positive local network effect in particular each consumer s usage level depends directly on the usage of her neighbors in the social network structure thus the monopolist s optimal pricing strategy may involve offering discounts to certain agents who have a central position in the underlying network our results can be summarized as follows first we consider a setting where the monopolist can offer individualized prices and derive a characterization of the optimal price for each consumer as a function of her network position in particular we show that it is optimal for the monopolist to charge each agent a price that consists of three components i a nominal term that is independent of the network structure ii a discount term proportional to the influence that this agent exerts over the rest of the social network quantified by the agent s bonacich centrality and iii a markup term proportional to the influence that the network exerts on the agent in the second part of the paper we discuss the optimal strategy of a monopolist who can only choose a single uniform price for the good and derive an algorithm polynomial in the number of agents to compute such a price third we assume that the monopolist can offer the good in two prices full and discounted and we study the problem of determining which set of consumers should be given the discount we show that the problem is np hard however we provide an explicit characterization of the set of agents who should be offered the discounted price next we describe an approximation algorithm for finding the optimal set of agents we show that if the profit is nonnegative under any feasible price allocation the algorithm guarantees at least 88 of the optimal profit finally we highlight the value of network information by comparing the profits of a monopolist who does not take into account the network effects when choosing her pricing policy to those of a monopolist who uses this information optimally

a note on exchange rate expectations and nominal interest differentials a test of the fisher hypothesis this note tests the hypothesis that nominal interest differentials between similar assets denominated in different currencies can be explained entirely by the expected change in the exchange rate over the holding period this proposition often called the fisher open hypothesis or the hypothesis of perfect asset substitutability has been a major component of recent theories of exchange rate determination and has important implications for monetary policy 1 the fisher hypothesis differs from the covered interest parity theorem enunciated by keynes 11 while covered interest parity equates the nominal interest differential between financial centers to a known premium or discount on forward foreign exchange and is thus in principle riskless fisher parity involves risk in an essential way the two conditions are equivalent only when forward exchange rates equal expected future spot rates recent theoretical work for example that of grauer litzenberger and stehle 8 kouri 12 and frankel 6 shows that this need not be the case when market participants are risk averse thus while covered interest parity must always hold exactly in an informationally efficient asset market with no transactions costs fisher parity need not nominal interest differentials may reflect risk premia in addition to expected exchange rate movements 2 it should be emphasized at the outset that the tests conducted in this paper are really joint tests of the fisher hypothesis and a weak form of foreign exchange market informational efficiency levich 14 has argued that tests of market efficiency are always joint tests involving some hypothesized structure of normal equilibrium returns below we assume informational efficiency and instead test fisher s hypothesized arbitrage condition that nominal interest differentials equal expected percentage changes in exchange rates

the persistence of the peso problem when policy is noisy abstract the peso problem the market s belief that a discrete event may occur has frequently been blamed for the persistence of on average mistaken forecasts of macroeconomic variables this paper demonstrates how beliefs that a policy process may have switched can induce apparent ex post biased forecasts of exchange rates even after the switch has occurred furthermore during this peso problem period exchange rates may appear to contain a speculative bubble component since they will systematically deviate from the levels implied by observing fundamentals ex post and the conditional variance of exchange rates will exceed the variance implied by observing fundamentals

learning and the volatility of exchange rates abstract this paper investigates the implications for the volatility of exchange rates of specifying market uncertainty as parameter uncertainty private agents learn by means of bayes rule about a parameter of the stochastic process generating the exogenous variables learning is shown to magnify the reaction of exchange rates to random shocks to the market fundamentals this magnification effect of learning can explain the rejections of the econometric tests on the variance bounds and on the absence of bubbles that have been reported in the literature

an alternative approach to the american demand for money with a decade of evidence behind it the profession seems to have agreed on the fact that a structural break shifted the american demand for money shortly after 1973 it is difficult to pinpoint the source of the trouble precisely let alone to explain the event with an econometric model in their survey judd and scadding 1982 tentatively concluded that financial innovation is the source of the problem while this conclusion has not been universally accepted the instability of the money demand function is largely taken as a given stylized fact the primary goal of this article is to provide an alternative solution to the case of the missing money using the methods of hendry 1979 it should be stressed at the outset that as this paper deals with a problem in the applied literature it is unabashedly empirical in nature the paper attempts to explain an empirical difficulty without presenting a new theoretical model of money demand rather in the context of the standard transactions demand theory for narrow money a number of questions are analyzed with an atypical econometric model was there actually a shift or a series of shifts in the demand for money if not why have other investigators concluded that there was in fact a shift most importantly what function seems to be the most reasonable approximation to the data generation process during the period in question

pricing in social networks we analyze the problem of optimal monopoly pricing in social networks where agents care about consumption or prices of their neighbors we characterize the relation between optimal prices and consumers centrality in the social network this relation depends on the market structure monopoly vs oligopoly and on the type of externalities consumption versus price we identify two situations where the monopolist does not discriminate across nodes in the network linear monopoly with consumption externalities and local monopolies with price externalities we also analyze the robustness of the analysis with respect to changes in demand and the introduction of bargaining between the monopolist and the consumer

bertrand competition under network externalities abstract two firms engage in price competition to attract buyers located on a network the value of the good of either firm to any buyer depends on the number of neighbors on the network who adopt the same good when the size of externalities increases linearly with the number of adoptions we identify the set of pricing strategies that are consistent with an equilibrium in which one of the firms monopolizes the market the set includes marginal cost mc pricing as well as bipartition pricing which offers discounts to some buyers and charges markups to others we show that mc pricing fails to be an equilibrium under non linear externalities in a general network but identify conditions for an equilibrium with bipartition pricing to be robust against perturbations in the externalities from linearity the analysis is applied to platform competition in a two sided market under local and approximately linear externalities

non cooperative bargaining theory an introduction the paper provides an informal introduction to some of the main themes of the recent literature on non cooperative or sequential bargaining models it focuses in particular on the relationship between the new approach and the traditional axiomatic approach exemplified by nash bargaining theory it illustrates the new insights offered by the non cooperative approach by reference to a detailed analysis of the manner in which the presence of an outside option available to one of the parties will affect the negotiated outcome finally the difficulties which arise in extending this analysis to two person bargaining with incomplete information and to n person bargaining are discussed this is a revised version of the fourth review of economic studies lecture presented in april 1985 at the joint meeting of the association of university teachers of economics and the royal economic society held in oxford the choice of lecturer is made by a panel whose members are currently professors hahn mirrlees and nobay and the paper is refereed in the usual way this paper aims to provide an informal and elementary introduction to an approach to bargaining which has received a great deal of attention over the past few years the approach involves writing down some particular sequence of moves offers and replies to be made over time in the course of negotiations and then looking for a non cooperative equilibrium in the game thus specified in practice a perfect equilibrium or in games of incomplete information a sequential equilibrium while the approach appears at first sight to be very different in spirit from the traditional axiomatic approach in which a bargaining solution is specified by appealing to a number of general requirements which are deemed appropriate on the basis of some a priori considerations the two approaches are in fact complementary while the

pricing network effects the increase in the information that firms can collect or purchase about network effects across consumers motivates two important questions how does a firm s pricing strategy react to detailed information on network effects are the availability and use of such information beneficial or detrimental to consumer surplus we develop a model in which a monopoly sells a network good and price discriminates based on information about consumers influence and consumers susceptibility to influence the monopoly optimally offers consumers price discounts for their influence and charges price premia for their susceptibility the price premia and the price discounts are simple functions of the pattern of network effects we determine under which conditions relative to uniform price consumer surplus increases and we characterize the value of information on network effects for the monopoly

optimal pricing for a multinomial logit choice model with network effects we consider a seller s problem of determining revenue maximizing prices for an assortment of products that exhibit network effects customers make purchase decisions according to a multinomial logit choice model modified to incorporate network effects so that the utility each individual customer gains from purchasing a particular product depends on the market s total consumption of that product in the setting of homogeneous products we show that if the network effect is comparatively weak then the optimal pricing decision of the seller is to set identical prices for all products however if the network effect is strong then the optimal pricing decision is to set the price of one product low and to set the prices of all other products to a single high value this boosts the sales of the single low price product in comparison to the sales of all other products we also obtain comparative statics results that describe how optimal prices and sales levels vary with a parameter that determines the strengt

social norms in networks abstract although the linear in means model is the workhorse model in empirical work on peer effects its theoretical properties are understudied in this study we develop a social norm model that provides a microfoundation of the linear in means model and investigate its properties we show that individual outcomes may increase decrease or vary non monotonically with the taste for conformity equilibria are usually inefficient and to restore the first best the planner needs to subsidize tax agents whose neighbors make efforts above below the social norms thus giving more subsidies to more central agents is not necessarily efficient we also discuss the policy implications of our model in terms of education and crime

local network externalities and market segmentation this paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction it departs from the standard katz shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents it shows that even if rival firms engage in bertrand competition this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits the analysis also shows that some graphs or network structures do not permit such segmentation while for others there are easy to interpret conditions under which market segmentation obtains in equilibrium c 2009 elsevier b v all rights reserved

pricing and referrals in diffusion on networks abstract when a new product or technology is introduced potential consumers can learn its quality by trying it at a risk or by letting others try it and free riding on the information that they generate we propose a dynamic game to study the adoption of technologies of uncertain value when agents are connected by a network and a monopolist seller chooses a profit maximizing policy consumers with low degree few friends have incentives to adopt early while consumers with high degree have incentives to free ride the seller can induce high degree consumers to adopt early by offering referral incentives rewards to early adopters whose friends buy in the second period referral incentives thus lead to a double threshold strategy by which low and high degree agents adopt the product early while middle degree agents wait we show that referral incentives are optimal on certain networks while inter temporal price discrimination is optimal on others

optimal contracting in networks abstract we study optimal contracting between a firm selling a divisible good that exhibits positive externality and a group of agents in a social network the extent of externality that each agent receives from the consumption of neighboring agents is privately held and is unknown to the firm by explicitly characterizing the optimal multilateral contract we demonstrate how inefficiency in an agent s trade propagates through the network and creates unequal and network dependent downward distortion in other agents trades furthermore we describe bilateral contracts non linear pricing schemes and characterize their explicit dependence on the network structure we show that the firm will benefit from uncertainty in an agent s valuation of other agents externality we describe the profit gap between multilateral and bilateral contracts and analyze the consequences of the explicit dependence of the contracts on network structure when the network is balanced in terms of homogeneity of agents influence network structure has no impact on the firm s profit for bilateral contracts on the other hand when the influences are heterogeneous with high dispersion as in core periphery networks the restriction to bilateral contracts can result in profit losses that grow unbounded with the size of networks

the monetary approach to exchange rate in an efficient foreign exchange market tests based on volatility the variance bounds on exchange rate movements implied by the monetary approach to exchange rate in an efficient foreign exchange market is shown to be violated by sample data the paper also presents evidence showing that the forecast errors implied by the monetary model can be forecasted using historical data the results are interpreted to suggest either the incompatibility of the monetary approach with sample data or an inefficient foreign exchange market or both models of exchange rate determination based on the monetary approach to the balance of payments imply when coupled with an interest rate parity relation and the assumption of an efficient foreign exchange market that exchange rates are related to a long average of money stocks differentials 1 2 the long average is analogous to the difference across countries of the long average of expected future money stocks which was supposed to characterize the price level of a single country see e g sargent and wallace 20 since long averages are known to have certain smoothing properties it appears that the observed volatility of exchange rates may be inconsistent with these models thus alternative tests of the models may be produced which rely on those properties the aim of this paper is to determine if the observed volatility is consistent with those properties the paper is the first to use tests based on the volatility of the exchange rate in an efficient market model of the monetary approach the first set of tests is based on the property of implied variance bounds for exchange rate movements and the second set consists of the more familiar efficient market tests of forecastability the empirical results violate these two sets of tests of the model thus casting doubt on the model even though the claim that exchange rates are too volatile has been commonly made few direct attempts have been made in the past to determine the validity of the claim some studies have presented estimates of variances of spot and forward rates but lacking an objective criterion to determine what constitutes

housing booms and media coverage this article analyses news media coverage of the housing market building on theories of media influence where word of mouth is the final mechanism of opinion change but media initiate discourse i examine the relationship between news media and the recent uk house price boom over 30 000 articles on the uk housing market from the period 1993 to 2008 are analysed and it is found that media granger caused real house price changes suggesting the media may have influenced opinions on the housing market however media sentiment on the housing market did not change with the secular increase in house prices in the 2000s suggesting that the media did not contribute to the uk s housing boom and may have helped constrain it