learning wage dynamics and firm specific human capital we introduce a dynamic and fully strategic model of wage determination in the presence of firm specific human capital in this model human capital is interpreted as information we show that equilibrium exists and is efficient and that it gives rise to a unique distribution of the social surplus we show further that the equilibrium wage is determined by three factors consideration of these factors allows us to determine when and how the market mechanism enables the worker to capture some of the returns to firm specific human capital we relate our findings to the ongoing empirical debate concerning the return to tenure

competitive targeted advertising with price discrimination this paper investigates the eects of price discrimination by means of targeted advertis ing in a duopolistic market where the distribution of consumers preferences is discrete and where advertising plays two major roles it is used by rms as a way to transmit relevant information to otherwise uninformed consumers and it is used as a price discrimination device we compare the rms optimal marketing mix advertising and pricing when they adopt mass advertising non discrimination strategies and targeted advertising price discrim ination strategies if rms are able to adopt targeted advertising strategies we nd that the symmetric price equilibrium is in mixed strategies while the advertising is chosen deter ministically our results also unveil that as long as we allow for imperfect substitutability between the goods rms do not necessarily target more ads to their own market in par ticular rms optimal marketing mix leads to higher advertising reach in the rival s market than in the rms own market provided that advertising costs are su ciently low in relation to the consumer s reservation value the comparison of the optimal marketing mix under mass advertising strategies and targeted advertising strategies reveals that targeted adver tising might constitute a tool to dampen price competition in particular if advertising costs are su ciently low in relation to the value of the goods we obtain that average prices with non discrimination mass advertising are below those with price discrimination and targeted advertising regardless of the market segment accordingly when i goods are imperfect substitutes ii advertising is not too expensive and iii targeted advertising constitutes an eective price discrimination tool price discrimination through targeted advertising may be detrimental to social welfare since it boosts industry pro ts at the expense of consumer surplus

the quantitative analytics of the basic neomonetarist model this paper constructs a dynamic macroeconomic model with less than perfect price flexibility which has a classical side consistent with real business cycle theory augmented by investment adjustment costs increasing returns to scale and a new flexible formalization of imperfect competition something akin to the classical dichotomy is justified by a mode of approximation appropriate for a model in which one state variable adjusts quickly while another state variable adjusts slowly even with investment adjustment costs monetary expansions are found to raise the real interest rate the determinants of real rigidity and the macroeconomic rate of price adjustment are investigated copyright 1995 by ohio state university press

the heckscher ohlin model with monopolistic competition and general preferences abstract i extend the neoclassical 2 2 2 trade model to general preferences over a variety of goods supplied under monopolistic competition in a sector while the other sector is perfectly competitive non homothetic preferences deliver pricing to market incomplete pass through and market size effects under realistic conditions the differentiated goods are sold at a higher price in the capital abundant country

dynamics of brand competition effects of unobserved social networks brand competition is modelled using an agent based approach in order to examine the long run dynamics of market structure and brand characteristics a repeated game is designed where myopic firms choose strategies based on beliefs about their rivals and consumers consumers are heterogeneous and can observe neighbour behaviour through social networks although firms do not observe them the social networks have a significant impact on the emerging market structure presence of networks tends to polarize market share and leads to higher volatility in brands yet convergence in brand characteristics usually happens whenever the market reaches a steady state scale free networks accentuate the polarization and volatility more than small world or random networks unilateral innovations are less frequent under social networks

oligopoly game price makers meet price takers abstract the paper studies an oligopoly game where firms can choose between price taking and price making strategies on a mixed market price takers are always better off than price makers though the profits of both types decline in the number of price takers we investigate and confront two possibilities of firms decisions about their types forward looking equilibrium reasoning and backward looking individual learning we find that the cournot outcome is the only equilibrium prediction and it is learnable if firms are sufficiently sensitive to profit differences however with a larger number of firms a unilateral deviation from cournot behavior becomes profitable under learning this incentive creates a space for permanent oscillations over different markets with a positive but low number of price takers

the role of free entry in an oligopolistic heckscher ohlin model retaining the basic properties of the heckscher ohlin trade model namely free entry and exit fully integrated international commodity markets and the same number of sectors with that of factors the authors develop a two country model with cournot oligopoly in this economy factor price equalization and the standard heckscher ohlin theorem on comparative advantage hold between two countries which are identical except for size however autarkic prices are different even though the level of trade is zero under the free trade regime nevertheless free trade reduces the oligopoly price and increases welfare copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a segment level model of category volume and brand choice it is an everyday marketplace occurrence that brands lose and gain share however a brand s sales gain or loss can be attributable to very different factors and thus understanding the sources of sales gain or loss would seem to be an important aspect of a brand manager s job the primary purpose of this research is to develop a model that can answer the following questions i what are the sources of gain or loss of a brand s sales due to category volume and brand switching ii what consumer and marketing characteristics affect consumers purchase frequency of the product category and that of different brands iii do all consumers behave similarly or are there distinct segments which respond to marketing actions differently iv if such segments exist what is the size and composition of each segment and what is the appropriate strategy for each group of consumers our modeling approach which decomposes a brand s sales into category volume and brand choice components has many similarities and also several differences with traditional approaches similar to the nbd and dirichlet models we assume that a consumer s category purchase rate follows a poisson distribution and the number of purchases per brand follows a multinomial distribution our model differs from traditional models by including marketing mix variables by accounting for loyal or near loyal consumers by explicitly incorporating consideration sets and by segmenting consumers on the basis of their brand perceptions and their responses to marketing mix variables we account for consumer hetereogeneity by identifying homogeneous latent segments that capture differences in consumers response to marketing variables in both brand choice and category volume behavior calibration of the category volume and brand choice models and the separation of loyalty and switching segments are done simultaneously so that there is no need to assume any specific hierarchy and in contrast to the usual assumption of independence between choice and volume which may be unreasonable at the aggregate level the requirement is that choice and volume decisions be independent only at the segment level we investigate the properties of our model in the context of a national survey of supermarket purchases of jumbo paper towels 2 500 households were surveyed who were asked to provide information on rolls of paper towels bought in the last 4 weeks rolls of each brand of paper towel bought in the last 4 weeks brand usually bought brands that a household bought or would consider buying average price paid or expected for each brand bought or considered ratings on 20 brand attributes e g strength absorbency etc and demographic information e g family size we found that not only did the modeling framework outperform a variety of competing models it also provided insights into the competitive structure in this market the loyal segments could be distinguished on the basis of price sensitivity less than 10 of the loyal households were price insensitive and in general households showed increasing price sensitivity in their category volume decisions if they had more children and were heavier users of paper towels this was consistent across all brands the model estimates that about 71 of the households are switchers and five switching segments are needed to characterize household purchase patterns two of the largest switching segments labeled as price sensitive and value segments are very price sensitive in both their brand choice and category volume components in both these segments private label brands are dominant with about 30 share segments also emerged on the basis of strength absorbency and tearing ease of paper towels interestingly we found that brand shares within these segments are quite consistent with the objective quality ratings of brands as given by consumer reports finally price elasticity analysis for one of the brands bounty reveals that a 5 drop in bounty s price increases its sales by 13 6 almost half of this increase comes from brand switching with the other half coming from increases in category volume e g stockpiling bounty gains the most from the price sensitive segments price and value segments private labels are hurt least by bounty s price cut

will the consistent organic food consumer step forward an empirical analysis the organic food market has reached a significant value in developed countries but market shares vary substantively between product categories this article investigates general patterns in the sequence of adoption of organic products based on a major danish retailer s panel scanner data all registered transactions over 20 months from 8 704 randomly selected customers with a loyalty card are analyzed using a hidden markov model capturing the dynamics in consumers purchases the model identifies latent states representing identifiable accessible and actionable dynamic customer segments and captures the movements between states or segments a pattern emerges that is consistent with the theory of behavioral spillover and inconsistent with the theory of moral licensing including a tendency to buy organic products in an increasing number of product categories over time the order in which organic products are adopted is inversely related to the behavioral costs of adopting them the employed approach provides a firm basis for personalized communication aiming to increase cross selling of organic products increase the sale of less popular organic products and accelerate movements from segments buying few organic products to segments buying organic more consistently

market organisation and trading relationships in this paper we give a theoretical model of buyers behaviour on a market for a perishable good where no prices are posted we show that if buyers learn from their own previous experience there is a sharp division between those who learn to be loyal to certain sellers and those who continue to shop around this feature remains in more general models which are simulated and is consistent with empirical data from the marseille fish market

understanding price effects for new nondurables how price responsiveness varies across depth of repeat classes and types of consumers abstract the objective of this study is to gain insights into the effectiveness of consumer price promotions on trial repeat processes of newly introduced brands of consumer packaged goods using a consumer risk perception perspective we develop a theoretical framework that relates the effectiveness of consumer price promotions to the depth of repeat cycle the level of a consumer s brand loyalty and usage intensity to evaluate the theory we calibrate a multiple spell hazard rate model for several new product introductions in different product categories the results show that promotional price sensitivities are generally higher for repeat purchases than for trial in addition the results indicate that loyals are less price sensitive than nonloyals finally heavy users in the product class are found to be more price sensitive than light users at the trial stage

consumer demand for fair trade evidence from a multistore field experiment abstract we provide new evidence on consumer demand for ethical products from experiments conducted in a u s grocery store chain we find that sales of the two most popular coffees rose by almost 10 when they carried a fair trade label as compared to a generic placebo label demand for the higher priced coffee remained steady when its price was raised by 8 but demand for the lower priced coffee was elastic a 9 price increase led to a 30 decline in sales while consumers attach value to ethical sourcing there is significant heterogeneity in willingness to pay for it

price formation on the marseille fish market evidence from a network analysis abstract the empirical analysis of fish markets always reveals strong price dispersion for homogeneous or very similar goods the problem is how to explain this price dispersion on a market where there is no evident arbitrage explanations proposed by different authors include differences in organization the characteristics of the good and the influences of social interactions between buyers and sellers in line with the last of these three approaches we consider the fish market of marseille as a seller seller network we start by examining the influence of market interactions through a static and then a dynamic econometric model we then analyze the role of the seller s position in the network we bring to light a surprising paradox in that the sellers who share the most buyers with competitors i e the most central sellers charge the highest prices

modeling urban housing market dynamics can the socio spatial segregation preserve some social diversity addressing issues of social diversity we introduce a model of housing transactions between agents who are heterogeneous in their willingness to pay a key assumption is that agents preferences for a location depend on both an intrinsic attractiveness and on the social characteristics of the neighborhood the stationary space distribution of income is analytically and numerically characterized the main results are that socio spatial segregation occurs if and only if the social influence is strong enough but even so some social diversity is preserved at most locations comparison with data on the paris housing market shows that the results reproduce general trends of price distribution and spatial income segregation

do ethical values work a quantitative study of the impact of fair trade coffee on consumer behavior this study investigates the large french fair trade ft market and the importance of ft coffee within it in an attempt to identify some general features of ft consumers on the basis of 7 587 transactions the authors also determine the impact of ft characteristics on customer behavior the main result is somewhat surprising ft coffee purchases seem to involve a temporary commitment as ft coffee consumers appear less loyal than traditional coffee consumers the authors derive some business and academic implications

a larger slice or a larger pie an empirical investigation of bargaining power in the distribution channel this research aims to provide insights into the determinants of channel profitability and the relative power in the channel by considering consumer demand and the interactions between manufacturers and retailers in an equilibrium model we use the nash bargaining solution to determine wholesale prices and thus how margins are split in the channel equilibrium margins are a function of demand primitives and of retailer and manufacturer bargaining power bargaining power is itself a function of exogenous retail and manufacturer characteristics the parties bargaining positions are determined endogenously from the estimated substitution patterns on the demand side the more they have to lose in a negotiation relative to an outside option the weaker the bargaining position we use the proposed bargaining model to investigate the role of the three main factors that have been blamed for the power shift from manufacturers to retailers in recent years firm size increases store brand introductions and service level differentiation in our empirical analysis of the german market for coffee we find that bargaining power varies among the different manufacturer retailer pairs this result suggests that bargaining power is not an inherent characteristic of a firm but rather depends on the negotiation partner we are able to confirm empirically previous theoretical findings that there can be cases where the slice of the pie that goes to one of the channel members may decrease but the overall pie increases and compensates for the smaller share of profits

meso comes to markets comment on markets come to bits mirowski s research programme of markomata formally sets out to model the diversity of market forms by making use of the mathematical theory of automata and then to taxonomize and organize these entities by means of a theory of evolution mirowski this issue this suggests a new sort of economics in which it is markets that evolve not people systems that evolve not agents prosthesis that evolve not preferences and rules that evolve not information economies evolve people do not this proposition is both obvious and true making it an excellent foundation for an evolutionary social science so if we are to take mirowski s program seriously as a general framework for economic analysis which we think we certainly should then it is important to recognize that although mirowski s unified rubric of markomata elides agency and is instead based upon john von neumann s theory of automata as a model for the study of social institutions the separate lines of research into markets as computational entities are all still very much but a microeconomics markomata is a theory of the core microeconomic building blocks of an economic system as well as a theory of their evolutionary principles i e a microeconomics but it is not yet a theory of the whole economy yet it is our view that mirowski s markomata program can indeed be the basis for such a general theory when analytically expounded in terms of the new evolutionary economic framework of micro meso macro dopfer et al 2004 and dopfer 2005 in which market automata mirowski and somefun 1998 and potts 2001 are abstracted as a special central instance of generic meso rules dopfer and potts 2004 which is to suggest that the mirowski framework of markomata can be yet further developed

adaptive learning models of consumer behavior abstract in a model of dynamic duopoly optimal price policies are characterized assuming consumers learn adaptively about the relative quality of the two products a contrast is made between belief based and reinforcement learning under reinforcement learning consumers can become locked into the habit of purchasing inferior goods such lock in permits the existence of multiple history dependent asymmetric steady states in which one firm dominates in contrast belief based learning rules must lead asymptotically to correct beliefs about the relative quality of the two brands and so in this case there is a unique steady state

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

a model of brand choice and purchase quantity price sensitivities many consumer decisions involve a discrete choice and a continuous outcome examples of such decisions are whether to own a home or rent one and how much to spend which brand of orange juice to buy and how many ounces to buy in cases like these the choice decision is typically modeled separately say using a logit model and the continuous outcomes modeled separately using regression analysis however the continuous outcomes may not be independent of the discrete choice and vice versa and modeling the two decisions independently can lead to inefficient choice parameter estimates and biased and inconsistent regression parameter estimates in this paper we present a methodology from the limited dependent variable literature to model the dependence between the choice and quantity decisions our substantive interest is in the role of price in the choice and quantity decisions when choosing among alternatives we argue that consumers consider prices of all the competitive brands in the quantity decision on the other hand only the price of the chosen alternative is expected to impact how much of the alternative is purchased the analysis of three brands using disaggregate level panel data strongly supports our hypothesis about the role of competitive prices in the choice and quantity decisions

an empirical analysis of the relationship between brand loyalty and consumer price elasticity this empirical paper explores the relationship between consumer brand preference or loyalty and price elasticity in purchase behavior this behavior is conceptualized as resulting from two distinct but related decisions namely a brand choice decision and a purchase quantity decision we argue that loyal consumers will be less price sensitive in the choice decision than nonloyal consumers however this direction is expected to be reversed in the quantity decision with loyal consumers expected to be more price sensitive than nonloyal consumers we model the choice and quantity decisions jointly using the limited dependent variable framework described in krishnamurthi and raj the data used are diary panel data on a frequently purchased product class from burke and caffeinated ground coffee scanner data from iri we show that loyals are less price sensitive than nonloyals in the choice decision but more price sensitive in the quantity decision managerial implications of the differing elasticities are disc

marginal contribution reciprocity and equity in segregated groups bounded rationality and self organization in social networks we study the formation of social networks that are based on local interaction and simple rule following agents evaluate the profitability of link formation on the basis of the myerson shapley principle that payoffs come from the marginal contribution they make to coalitions the np hard problem associated with the myerson shapley value is replaced by a boundedly rational spatially myopic process agents consider payoffs from direct links with their neighbours level 1 which can include indirect payoffs from neighbours neighbours level 2 and up to m levels that are far from global agents dynamically break away from the neighbour to whom they make the least marginal contribution computational experiments show that when this self interested process of link formation operates at level 2 neighbourhoods agents self organize into stable and efficient network structures that manifest reciprocity equity and segregation reminiscent of hunter gather groups a large literature alleges that this is incompatible with self interested behaviour and market oriented marginality principle in the allocation of value we conclude that it is not this valuation principle that needs to be altered to obtain segregated social networks as opposed to global components but whether it operates at level 1 or 2 of social neighbourhoods remarkably all m 2 neighbourhood calculations for payoffs leave the efficient network structures identical to the case when m 2

the complexity of exchange the computational complexity of two classes of market mechanisms is compared first the walrasian interpretation in which prices are centrally computed by an auctioneer recent results on the computational complexity are reviewed the non polynomial complexity of these algorithms makes walrasian general equilibrium an implausible conception second a decentralised picture of market processes is described involving concurrent exchange within transient coalitions of agents these processes feature price dispersion yield allocations that are not in the core modify the distribution of wealth are always stable but path dependent replacing the walrasian framing of markets requires substantial revision of conventional wisdom concerning markets

market diffusion with two sided learning we analyze the diffusion of a new product of uncertain value in a duopolistic market both sides of the market buyers and sellers learn the true value of the new product from experiments with it buyers have heterogeneous preferences over the products and sellers compete in prices the pricing policies and market shares in the unique markov perfect equilibrium are obtained explicitly the dynamics of the equilibrium market shares display excessive sales of the new product relative to the social optimum in early stages and too low sales later on the diffusion path of a successful product is s shaped

choice set heterogeneity and the role of advertising an analysis with micro and macro data abstract the authors show how to use microlevel survey data from a tracking study on brand awareness in conjunction with data on sales and advertising expenditures to improve the specification estimation and interpretation of aggregate discrete choice models of demand in a departure from the commonly made full information assumption they incorporate limited information in the form of choice sets to reflect that consumers may not be aware of all available brands at purchase time they find that both the estimated brand constants and the price coefficient are biased downward when consumer heterogeneity in choice sets is ignored these biased estimates can lead firms to make costly price setting mistakes in addition the tracking data enable the authors to identify separately two processes by which advertising influences market shares they find that advertising has a direct effect on brand awareness inclusion in choice set in addition to its effect on consumer preferences increase in utility this

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

the original management incentive schemes during the 1990s the structure of pay for top corporate executives shifted markedly as the use of stock options greatly expanded by the early 2000s as the dot com boom ended and the nasdaq stock index melted down these modern executive incentive schemes were being sharply questioned on many grounds for encouraging excessive risk taking and a short run orientation for being an overly costly and inefficient method of providing incentives and even for tempting managers of firms like enron worldcom and tyco to commit fraud in order to ensure a high stock price at the time of exercise this article examines executive incentive schemes developed by du pont and general motors in the 1920s the original incentive schemes linking executive compensation to stock prices the author argues that these plans were well designed to pre empt and address many of the criticisms of modern day executive stock option plans

a strategic model of social and economic networks we study the stability and efficiency of social and economic networks when self interested individuals can form or sever links first for two stylized models we characterize the stable and efficient networks there does not always exist a stable network that is efficient next we show that this tension persists generally to assure that there exists a stable network that is efficient one is forced to allocate resources to nodes that are not responsible for any of the production we characterize one such allocation rule the equal split rule and another rule that arises naturally from bargaining of the players

the ramsey model with monopolistic competition and general preferences abstract i extend the ramsey model of consumption and growth to general preferences over a variety of goods supplied under monopolistic competition and derive the implications for markup variability and macroeconomic dynamics the model delivers a modified euler equation that affects the short run dynamics of consumption when the relative risk aversion is decreasing monopolistic competition generates countercyclical markups and compared to perfect competition magnifies the impact of shocks on consumption through new intertemporal substitution mechanisms

consumer learning brand loyalty and competition in several markets consumers can gain further information regarding how well a product fits their preferences only by experiencing it after purchase this could then generate loyalty for the products tried first this paper considers a model in which consumers learn in the first period about the product they buy and then make choices in the second period about the competing products given what they learned in the first period the paper finds that if the distribution of valuations for each product is negatively positively skewed a firm benefits is hurt in the future from having a greater market share today the brand loyalty characteristic with negative skewness two effects are identified on one hand marginal forward looking consumers are less price sensitive than myopic consumers and this is a force toward higher prices on the other hand forward looking firms realize that they gain in the future from having a higher market share in the current period and compete more aggressively in prices for similar discount factors for consumers and firms the latter effect dominates the paper also characterizes the importance of consumer learning effects on the market outcome

are supermarkets squeezing small suppliers evidence from negotiated wholesale prices we thank gregory s crawford for his encouragement and insightful comments we also thank victor aguirregabiria ozlem bedre meghan busse jean pierre dub e david genesove margaret kyle rafael moner colonques ariel pakes michelle sovinsky michael waterson ali yurukoglu and the seminar participants at the nber io winter meetings 2012 cepr jie conference on applied io 2012 hebrew university toulouse school of economics universidad diego portales universidad de chile the university of warwick and university of zurich noton acknowledges financial support from the institute for research in market imperfections and public policy icm is130002 ministerio de economia an earlier version of this article circulated under the title revealing bargaining power through actual wholesale prices

an empirical investigation of the welfare effects of banning wholesale price discrimination rand 054 rand2007 cls 1994 07 13 v1 2u standard latex document class rand rand 054 dispatch 12 7 2008 ce n a journal msp no no of pages 26 pe sharon rand journal of economics vol 40 no 1 spring 2009 pp 20 45 an empirical investigation of the welfare effects of banning wholesale price discrimination sofia berto villas boas economic theory does not provide sharp predictions on the welfare effects of banning wholesale price discrimination if downstream cost differences exist then discrimination shifts production inefficiently toward high cost retailers so a ban increases welfare if differences in price elasticity of demand across retailers exist discrimination may increase welfare if quantity sold increases so a ban reduces welfare using retail prices and quantities of coffee brands sold by german retailers i estimate a model of demand and supply and separate cost and demand differences simulating a ban on wholesale price discrimination has positive welfare effects in this market and less if downstream cost differences shrink or with less competition introduction wholesale price discrimination means that an upstream firm sets different prices for the same product for various downstream retailers wholesale price discrimination is commonly practiced in many markets examples include markets such as petroleum distribution steel heavy trucking tobacco and pharmaceuticals in several countries milk and other dairy products are sold using government administered or sanctioned discriminatory pricing schemes wholesale price discrimination practices are also used for services such as loans insurance and advertising 1 competition authorities have been concerned with wholesale price discrimination the european union treaty s article 82 c prohibits practices where a dominant firm would place trading partners at a competitive disadvantage the u s robinson patman act forbids discriminat ing in price between different purchasers where the effect may be to lessen competition unless the university of california berkeley sberto are berkeley edu i thank the editor igal hendel and two anonymous referees for many helpful comments and max auffhammer cyndi berck peter berck gal hochman silke januszewski forbes george judge kai uwe k uhn diana lazo mark muendler aviv nevo ariel pakes jeff perloff andrew sweeting miguel villas boas and participants at uc san diego university of michigan the inra idei conference in toulouse and the university of british columbia summer conference in industrial organization for their suggestions i thank daniel klapper for letting me have access to the data support from the giannini foundation and from an aes grant are gratefully appreciated see for gasoline markets texaco v hasbrouck 496 us 543 no 87 2048 1990 and the new york state motor fuel marketing practices act for steel chan hall and rust 2003 for heavy trucking volvo trucks north america inc v reeder simco gmc inc docket no 04 905 for tobacco brooke group ltd v brown and williamson tobacco corp 509 us 209 no 92 466 1993 for wholesale pharmaceuticals see http www datcp state wi us trade business unfair comp drug price jsp for dairy markets see for example gardner 1984 and for services see givens 1983 c 2009 rand copyright

a multiplicative fixed effects model of consumer choice the issue of consumer heterogeneity in discrete choice analysis has been attracting much attention recently research has suggested that heterogeneity can result in biased parameter estimates which in turn can lead to incorrect conclusions among the many methods proposed in the literature to handle heterogeneity fixed effects models seem to be the most attractive from a substantive point of view however in order to provide consistent estimates these models typically require long purchase histories this difficult constraint has prevented their widespread use in this paper we propose a new model which offers the benefits of fixed effects models without requiring long purchase histories our approach differs from the classic formulation in two ways first we calibrate the common and fixed effects sequentially rather than simultaneously this two stage estimation permits us to obtain unbiased estimates of the common parameters even when the sample has households with very few observations second we incorporate the fixed effects in a multiplicative rather than in an additive form our assumptions regarding the error term result in a probit model with heteroskedastic and temporally correlated random utilities we develop a method of moments based estimator to calibrate parameters of models with this type of error structure this procedure exploits the property that the method of moments yields estimates which are asymptotically as efficient as the maximum likelihood estimates given an appropriate starting point and a matrix of instruments this is a very general procedure in that its mechanics are not tied to the proposed model it can be readily applied to other problems where probit models are used to analyze data with serial correlation this is a methodological contribution of the paper the model and estimation procedure are illustrated on the a c nielsen scanner data base for the liquid detergent category our results indicate that the proposed model can provide a better fit than random effects and loyalty based models and better predictive performance than random effects models from a substantive perspective our analysis provides the following findings a the distribution of price sensitivities has a low variance thus most households have very similar price sensitivity in this category b the promotion response distribution has a high variance suggesting that there are some households that are highly responsive to promotions while there are quite a few households that are less influenced by promotions c preferences and price sensitivity have a negative covariance which is an indication that a reduction in preference for a brand is associated with an increase in price sensitivity and vice versa d preferences and promotion response have a positive covariance thus as the preference for a brand increases response to promotions by the brand also increases and e price sensitivity and promotion response have a negative covariance implying that as households become more price sensitive purchases may be driven more by price than by promotions in other words rather than responding to promotions such as displays and features as signals of a reduced price price sensitive households actively evaluate prices in arriving at a choice the proposed approach can be used by theoretical as well as applied researchers of brand choice behavior specifically estimates of fixed effects provided by the model can be used to cluster households into groups with similar parameters profiling the resulting groups in terms of demographics would provide interesting insights from a theoretical perspective regarding the household characteristics that are associated with different types of response behavior it would also help managers to better target their brands using the proposed approach for cross category analyses of fixed effects would be an interesting area of future research for instance given a sample of households and their purchase histories in multiple categories the proposed model can be used to explore the relationship between household behavior and category characteristics in particular issues such as the following can be investigated by comparing household level estimates across categories a are households that are highly price sensitive in one category also price sensitive in other categories b what household characteristics are associated with high low price sensitivity or high low promotion response across categories and c in what types of categories are households likely to exhibit high low price sensitivity or high low promotion response

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

bounded rationality and the emergence of simplicity amidst complexity abstract the purpose of this essay is to explore the relationship between the simple and the complex in economics by anchoring our analysis on bounded rationality much of the conventional literature focuses on un bounded rationality of the rationality as consistency variety theorizing of bounded rationality tends to assume that the problem to be solved is independent of the nature of bounded rationality following the insights from the works of herbert simon and contributions from outside economics both bounded rationality and the environment are inextricably linked the boundaries between bounded rationality and its environment can shift the form in which bounded rationality is found depends on the complexity of the environment furthermore if local interactions between bounded rational agents result in the formation of hierarchies the complexity of the collective system will change whether this will occur depends on the nature of bounded rationality at the individual level