the effective tax rate and the pretax rate of return abstract this paper presents new estimates of the taxes paid on nonfinancial corporate capital on the pretax rate of return to capital and on the effective tax rate the basic time series show that both the pretax rate of return and the effective tax rate have varied substantially in the past quarter century an explicit analysis indicates that after adjusting for different aspects of the business cycle pretax profitability was between one and 1 5 percentage points lower in the 1970s than in the 1960s the rate of profitability in the 1960s was also about one half of a percentage point greater than the profitability in the 7 years of the 1950s after the korean war changes in productivity growth in inflation in relative unit labor costs and in other variables are all associated with changes in profitability none of these variables however can explain the differences in profitability between the 1950s 1960s and 1970s looking at broad decade averages the effective tax rate and the pretax rate of return move in opposite directions lower pretax profits occuring when the tax rate is high there thus appears to have been no tendency for pretax profits to vary in a way that offsets differences in effective tax rates

the relation between tax rates and pre tax returns direct evidence from the 1981 and 1986 tax rate reductions abstract this study documents one effect of the theory of implicit taxes providing evidence that a change in the tax rate results in a change in pre tax returns yield spreads of pairs of treasury bills maturing in the last week of december and the first week of january are examined year ends not affected by rate changes show a significant positive yield spread between these pairs of bills reflecting an upward sloping yield curve however for year ends coinciding with the tax rate reductions of 1981 and 1986 there is a significant negative yield spread between these pairs of bills

supply side interventions and redistribution we evaluate the eect on welfare of shifting the burden of capi tal income taxes to labor taxes in a dynamic equilibrium model with heterogeneous agents and constant tax rates we calibrate and simu late the economy we nd that lowering capital taxes has two eects i it increases e ciency in terms of aggregate production and ii it redistributes wealth in favor of those agents with a low wage wealth ratio when the parameters of the model are calibrated to match the distribution of income in terms of the wage wealth ratio the redis tributive eect dominates and agents with a high wage wealth ratio would experience a large loss in utility if capital income taxes were eliminated

the incidence and allocation effects of a tax on corporate distributions abstract to study the effects of double taxation first at the corporation level then at the shareholder level this paper analyzes a model with a tax on all corporate distributions to equity owners and no other taxes contrary to the common view the tax is shown to have no subtitution effect and in particular no effect on the corporate choice between debt and equity via retained earnings finance the analysis opens to question certain arguments commonly used to support integration of corporation and individual income taxes via dividend relief

forms of trust and conditions for their stability of the three principal approaches to trust we decided to investigate in greater detail the one in which trust is regarded as a belief that the individuals involved hold about a relationship trust was defined as a delegatory relationship based on anticipation of the delegatee s behaviour we reached four main conclusions first the solution to the problem posed by the indeterminacy of trust lies in the differentiation and hierarchisation of the various forms of trust contractual organisational and tacit on the basis of their degree of irreversibility and stability second contractual trust is unstable because it comes up against the problem of guarantees of individual intentions this leads to the third conclusion rational evaluation by individuals cannot by itself establish trust which is based on collective beliefs practices and rules fourth we identified two conditions for the stability of trust the creation of irreversibilities through adherence to a rule and the creation of a confidence interval within which different interpretations of contradictory individual strategies are tolerated thus the viability of the various forms of trust depends on the ability of institutions and organisations to create rules that are likely when applied to produce an interval in which tolerance of mutual intentions is the norm these analyses of trust hence highlight the role of time and period of time in the notion of trust

debt and taxes in the theory of public finance if a specified amount of government spending must be financed how should that finance be divided between taxes and government borrowing in the case of a temporary increase in government spending it has been argued that debt finance is optimal because the small increments in all future tax rates to finance interest payments involves a smaller excess burden than the single large tax rate increase that would be required to avoid an initial increase in the national debt this argument ignores the excess burden of debt finance that results if the initial capital stock is smaller than optimal e g because of taxes or capital income the first section of the present paper shows how the debt finance advantage of a small increase in tax rates can be explicitly balanced against the disadvantage of the excess burden that arises from additional debt the analysis shows that with plausible parameter values the excess burden of debt finance is likely to outweigh the advantage of avoiding a large single tax change and therefore that financing a temporary increase in government spending by an immediate tax increase is likely to be preferable to debt financing the second section examines the appropriate response to a permanent increase in government spending and shows that such spending cannot be financed by a permanent increase in government debt moreover whenever the golden rule level of capital intensity is an optimality condition independent of the level of government spending any increase in government spending should be matched by an equal increase in tax revenue this abstract was borrowed from another version of this item

context dependent preferences and innovation strategy disruptive innovations introduce a new performance dimension into a product category but often suffer from inferior performance on key performance dimensions of their existing substitutes hence the followers of these innovations face an important decision to make they must choose to improve the new technology either on the key performance dimension shared with the old technology or on the new performance dimension this paper investigates which path firms should choose when they face such a dilemma in the absence of any cost or capability issues in doing so we integrate customer response into the theory of technological evolution and allow preferences on the product choices to be context dependent we show that context dependent preferences may encourage the follower to improve the new technology on the new performance dimension later we extend our game to a dynamic one and show that the context dependent preferences may cause the pioneer to innovate less this paper was accepted by j miguel villas boas marketing

is the united states really underinvesting in agricultural research that the level of public investment in u s agricultural research is too low is widely accepted this paper argues that there are two important limitations to the evidence assembled in support of the underinvestment hypothesis a many authors have compared the social rate of return to public investments with the private rate of return to private investments b costs of public expenditures on agricultural research have been underestimated by a failure to account for the marginal excess burden of the tax collection system taking these two factors into account evidence in support of the underinvestment hypothesis is weakened considerably

designing price contracts for boundedly rational customers does the number of blocks matter when designing price contracts one of the major questions confronting managers is how many blocks there should be in the contract we investigate this question in the setting of a manufacturer retailer dyad facing a linear deterministic consumer demand theoretical marketing models predict that the manufacturer s profits rise dramatically when the number of blocks in the contract is increased from one to two because both channel efficiency and its share of channel profits increase however increasing the number of blocks to three yields no incremental profits we test these predictions experimentally and find that increasing the number of blocks from one to two raises channel efficiency but not the manufacturer s share of profits surprisingly having three blocks in the contract increases channel efficiency even further and also gives the manufacturer a slightly higher share of profits we show that these results can be explained by a quantal response equilibrium model in which the manufacturer accounts for noisy best response due to nonpecuniary payoff components in the retailer s utility we also show that the retailer is sensitive to the counterfactual profits it could have earned if it were charged a lower marginal price for earlier blocks in the multiple block contract

household production and the excess sensitivity of consumption to current income empirical research on the permanent income hypothesis pih has found that consumption growth is excessively sensitive to predictable changes in income this finding is interpreted as strong evidence against the pih we propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium model of household production in which permanent income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors although the pih is true this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth

policy impacts under rational expectations abstract this paper re examines for the u s the validity of the macro rational expectations mre hypothesis in contrast to most previous studies in this area the paper a considers the potential real effects of both monetary and fiscal policies b allows for possible endogeneity of these policies and c uses a joint non linear estimation methodology to distangle the hypothesis of rationality from that of neutrality the empirical results reject the joint mre hypothesis for both policies the results also indicate that policy non neutrality is the culprit behind such rejection this evidence offers further empirical support for macro rational expectations models where monetary and fiscal policies can due to some rigidities play a key role in stabilizing the real economy

findings biased but efficient an investigation of coordination facilitated by asymmetric dominance in several marketing contexts strategic complementarity between the actions of individual players demands that players coordinate their decisions to reach efficient outcomes yet coordination failure is a common occurrence we show that the well established psychological phenomenon of asymmetric dominance can facilitate coordination in two experiments thus we demonstrate a counterintuitive result a common bias in individual decision making can help players to coordinate their decisions to obtain efficient outcomes further limited steps of thinking alone cannot account for the observed asymmetric dominance effect the effect appears to be due to increased psychological attractiveness of the dominating strategy with our estimates of the incremental attractiveness ranging from 3 6 a learning analysis further clarifies that asymmetric dominance and adaptive learning can guide players to an efficient outcome

the effect of large government deficits on interest rates and equity returns with the current economic expansion in the united states now beginning its third year the persistence of federal government budget deficits on a historically unprecedented scale has clearly become the chief distinguishing characteristic of this business cycle both economically and politically the budget for the 1978 fiscal year submitted to congress by president reagan acknowledges that after a small improvement in 1984 the 1985 deficit will exceed even the record 208 billion mark posted in the immediate post recession environment of 1983 more important the president s new budget indi cates that even with a strong economy and even after 50 billion of proposed spending cuts the 1985 deficit will show no improvement over 1984

taxes organizational form and the deadweight loss of the corporate income tax abstract by changing the relative gain to incorporation corporate taxation can play an important role in a firm s choice of organizational form general equilibrium models have shown that substantial shifting of organizational form in response to tax rates implies a large deadweight loss of taxation this paper estimates the impact of taxes on organizational form using data from 1900 1939 the results indicate that the effect of taxes is significant but small a corporate rate increase of 0 10 raises the non corporate share of capital 0 002 0 03 the implied deadweight loss of the corporate income tax is around 5 10 of revenue

the indexation of interest depreciation and capital gains and tax reform in the united states abstract the treasury s 1984 tax plan suggests features of a comprehensive income tax including the indexation of interest depreciation and capital gains the 1985 president s proposal retains some of these indexing provisions but the tax reform act of 1986 does not this paper looks at the incentives under these tax regimes to make marginal investments in the corporate sector noncorporate sector and owner occupied housing it finds that inflation in the old system caused effective tax rates to rise for some assets and fall for others under the treasury or president s proposals the interference of inflation is virtually eliminated also the effects of inflation are substantially reduced by the 1986 act because mismeasured depreciation and interest deductions are taken at much lower rates

cooperation in games with forgetfulness companies and managers are apt to forget information yet classic game theory analysis assumes that all players have perfect recall this paper expands the literature by examining how introducing forgetfulness into a multiplayer game theoretic framework can help or hinder cooperative behavior we find that forgetfulness impacts the ability of firms to cooperate in countervailing directions on one hand forgetfulness can diminish the ability to punish deviators making cooperation more difficult on the other hand under some conditions forgetfulness can make meting out severe punishments even below stage minimax punishments credible and decrease the ability for players to effectively deviate facilitating cooperation even in circumstances where cooperation cannot be sustained under perfect recall we apply our model to a number of strategic games that commonly appear in the literature this paper was accepted by preyas desai marketing

designing pricing contracts for boundedly rational customers does the framing of the fixed fee matter the format of pricing contracts varies substantially across business contexts a major variable being whether a contract imposes a fixed fee payment this paper examines how the use of the fixed fee in pricing contracts affects market outcomes of a manufacturer retailer channel standard economic theories predict that channel efficiency increases with the introduction of the fixed fee and is invariant to its framing we conduct a laboratory experiment to test these predictions surprisingly the introduction of the fixed fee fails to increase channel efficiency moreover the framing of the fixed fee does make a difference an opaque frame as quantity discounts achieves higher channel efficiency than a salient frame as a two part tariff although these two contractual formats are theoretically equivalent to account for these anomalies we generalize the standard economic model by allowing the retailer s utilities to be reference dependent so that the up front fixed fee payment is perceived as a loss and the subsequent retail profits as a gain we embed this reference dependent utility function in a quantal response equilibrium framework where the retailer is allowed to make decision mistakes due to computational complexity the key prediction of this behavioral model is that channel efficiency decreases with loss aversion for sufficiently nash rational retailers consistent with this prediction the estimated loss aversion coefficient is 1 37 in the two part tariff condition significantly higher than 1 27 in the quantity discount condition at the same time loss aversion dominates contract complexity in explaining the data lastly we conduct a follow up experiment to confirm the central role of loss aversion as a behavioral driver in one condition the retailer becomes less loss averse when we temporally compress the fixed fee payment and the realization of retail profits which supports the loss aversion theory in the other condition the retailer s contract acceptance rate does not decline when we reward the manufacturer a higher cash payment for each experimental point earned which rules out the competing hypothesis that the retailer rejects contract offers due to fairness concerns

tax distortions to the choice of organizational form income from corporate and noncorporate firms is treated very differently under the tax law in theory given existing tax law the noncorporate sector should consist of very profitable firms owned by low tax bracket investors and firms with tax losses owned by high tax bracket investors but the degree to which firms change their form of organization in response to taxes and the resulting excess burden depends as well on nontax factors given the role of taxes we estimate what size the nontax advantage to incorporating must take in each industry so that the forecasted choices for organizational form aggregated over investors in different tax brackets are consistent with the aggregate evidence while the estimated nontax costs are large in some industries noncorporate activity tends to be concentrated where the costs are small leading to little excess burden from the tax distortion to organizational form

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

the ineffectiveness of effective tax rates on business investment a critique of feldstein s fisher schultz lecture abstract in his fisher schultz lecture martin feldstein 1982 examined the effects of non neutral tax rules on business investment by estimating three econometric models and he concluded that the rising rate of inflation has because of the structure of existing u s tax rules substantially discouraged investment in the past 15 years in a detailed examination of feldstein s effective tax rate model and a less extensive review of his other formulations neoclassical and return over cost we advance a number of important and independent criticisms and find that these three models fail to support feldstein s conclusion that taxes have exerted a significantly depressing effect on net investment during the recent inflation episode

limited memory categorization and competition this paper investigates the effects of a limited consumer memory on the price competition between firms it studies a specific aspect of memory namely the categorization of available price information that the consumers may need to recall for decision making this paper analyzes competition between firms in a market with uninformed consumers who do not compare prices informed consumers who compare prices but with limited memory and informed consumers who have perfect memory consumers aware of their memory limitations choose how to encode the prices into categories whereas firms take the limitations of consumers into account in choosing their pricing strategies two distinct types of categorization processes are investigated 1 a symmetric one in which consumers compare only the labels of price categories from the competing firms and 2 an asymmetric one in which consumers compare the recalled price of one firm with the actual price of the other we find that the equilibrium partition for the consumers calls for finer categorization toward the bottom of the price distribution thus consumers have a motivation to invest in greater memory resources in encoding lower prices to induce firms to charge more favorable prices the interaction between the categorization strategies of the consumers and the price competition between the firms is such that small initial improvements in recall move the market outcomes quickly toward the case of perfect recall even with few memory categories the expected price consumers pay and their surplus is close to the case of perfect recall there is thus a suggestion in this model that market competition adjusts to the memory limitations of consumers

optimal taxation in a growth model with public consumption and home production in a neoclassical growth model with public consumption we show the following pareto optimal tax rules the government should tax leisure and private consumption at the same rate and subsidize net investment at the same rate it taxes net capital income also it should tax capital income more heavily than labor income in an extension for home production the additional rule is to tax investment for home production at the same rate of the tax on private market consumption these tax and subsidy rates should be constant over time except the initial tax rate on capital income

sell probabilistic goods a behavioral explanation for opaque selling probabilistic or opaque selling whereby a seller hides the exact identity of a product until after the buyer makes a payment has been used in practice and received considerable attention in the literature under what conditions and why is probabilistic selling attractive to firms the extant literature has offered the following explanations to price discriminate heterogeneous consumers to reduce supply demand mismatches and to soften price competition in this paper we provide a new explanation to exploit consumer bounded rationality in the sense of anecdotal reasoning we build a simple model where the firm is a monopoly consumers are homogeneous and there is no demand uncertainty or capacity constraint this model allows us to isolate the impact of consumer bounded rationality on the adoption of opaque selling we find that although it is never optimal to use opaque selling when consumers have rational expectations it can be optimal when consumers are boundedly rational we show that opaque selling may soften price competition and increase the industry profits as a result of consumer bounded rationality our findings underscore the importance of consumer bounded rationality and show that opaque selling might be even more attractive than previously thought

the simple macroeconomics of profit sharing this paper is in the spirit of the temporary equilibrium approach to macroeconomics it basically extends that framework to cover a profit sharing system and then compares the macroeconomic characteristics with those of the more familiar wage system a first preliminary step is to demonstrate how a microeconomic model of monopolistic competition can be built up into a junior member of the keynesian macro family the methodology is to create from first principles including a careful formulation of a monopolistically competitive product market structurea natural underpinning for the standard aggregate demand specification the primary goal of the paper is to apply the integrated monopolistic competitionkeynesian type apparatus described above to investigate the macroeconomic properties of a profit sharing economy the existence of a consistent general framework covering both cases invites meaningful comparisons that indicate clearly why an economy based on profit sharing principles possesses natural immunity to stagflation by contrast the wage economya system we have largely accepted without critically examining its macroeconomic consequences is more prone to suffer from unemployment and inflation the policy implications for aggregate demand management in wage and share systems are analyzed and contrasted in writing this paper my philosophy has been to not shirk from using those reasonable parameterizations and functional forms which yield nice crisp results and permit me to focus sharply on the essential logic of basic issues it is certainly possible to present the main results in a somewhat more general formulation as the astute reader will appreciate but i fear only at some cost of distracting attention from those central features i wish to highlight

collective wage bargaining and the role of institutional stability a cross national comparison of macroeconomic performance since the advent of the economic crisis interest in the efficacy of collective wage bargaining institutions has increased as the labour market was required to bear the burden of economic adjustment and became an important policy field for institutional reform in many countries in this article the role of institutional stability trust and certainty for the efficacy of collective bargaining systems is investigated and their effects on macroeconomic outcomes inflation and unemployment are analysed we argue that stability of the institutional framework of collective bargaining is of major importance for its efficacy as it reduces uncertainty and provides the necessary basis for trust among bargaining actors thus we hypothesise that institutional change and instability are associated with significant transaction costs and have at least temporarily negative effects on economic outcomes the hypotheses are confirmed by an empirical analysis which uses data of 34 industrialised countries from 1965 to 2014

behavior based pricing an analysis of the impact of peer induced fairness firms tracking consumer purchase information often use behavior based pricing bbp i e price discriminate between consumers based on preferences revealed from purchase histories however behavioral research has shown that such pricing practices can lead to perceptions of unfairness when consumers are charged a higher price than other consumers for the same product this paper studies the impact of consumers fairness concerns on firms behavior based pricing strategy profits consumer surplus and social welfare prior research shows that bbp often yields lower profits than profits without customer recognition or behavior based price discrimination by contrast we find that firms profits from conducting bbp increase with consumers fairness concerns when fairness concerns are sufficiently strong practicing bbp is more profitable than without customer recognition however consumers fairness concerns decrease consumer surplus in addition when consumers fairness concerns are sufficiently stron

home production meets time to build an innovation in this paper is to introduce a time to build technology for the production of market capital into a model with home production our main finding is that the two anomalies that have plagued all household production models the positive correlation between business and household investment and household investment s leading business investment over the business cycle are resolved when time to build is added

on price recognition and computational complexity in a monopolistic model a single seller of an indivisible good operates in a market with many consumers who differ in their ability to process information the consumers constraints are modeled in two submodels the first in terms of the limits on the number of sets in the partition of the price space and the second in terms of the limits on the complexity of the operation he can use to process a price offer for the construction of the second submodel the tool of a perceptron is borrowed from the parallel computation literature assuming a negative correlation between the seller s cost of supply of the good and the consumer s ability to process information i demonstrate that the heterogeneity of consumer s abilities can be used by the seller to profitably discriminate among them

add on pricing by asymmetric firms this paper uses an analytical model to examine the consequences of add on pricing when firms are both horizontally and vertically differentiated and there is a segment of boundedly rational consumers who are unaware of the add on fees at the time of initial purchase we find that consumers who know the add on fees can be penalized and increasingly so by the existence of boundedly rational consumers our consideration of quality asymmetries on base goods and add ons plus the inclusion of boundedly rational consumers leads to several novel findings regarding firm profits when quality asymmetry is on base goods only and with boundedly rational consumers add on pricing can diminish profit for a qualitatively superior firm and increase profit for an inferior firm i e a lose win result compared to when add on pricing is prohibited or infeasible when quality asymmetries exist on both base goods and add ons and without boundedly rational consumers the opposite win lose result prevails when quality asymmetries exist on both base goods and add ons and with boundedly rational consumers the result can be win win win lose or lose win depending on the magnitude of quality differentiation on add ons this paper was accepted by j miguel villas boas marketing

a memory based model of bounded rationality in order to investigate the impact of limited memory on human behavior i develop a model of memory grounded in psychological and biological research i assume that people take their memories as accurate and use them to make inferences the resulting model predicts both over and underreaction but provides enough structure to predict when each effect dominates i then use this framework to study the consumption decision the results match empirical work on consumption predictability as well as differences in the marginal propensity to consume from different income streams most importantly because it ties the extent of bias to a measurable aspect of the stochastic process being forecasted the model makes testable empirical predictions

how much do taxes discourage incorporation the double taxation of corporate income should discourage firms from incorporating we investigate the extent to which the aggregate allocation of assets and taxable income in the united states between corporate and noncorporate firms responds to the size of this tax distortion during the period 1959 1986 in theory profitable firms should shift out of the corporate sector when the tax distortion is large and conversely for firms with tax losses our empirical results provide strong support for these forecasts and imply that the resulting excess burden equals 16 percent of business tax revenue one of the most basic distortions created by the double taxation of corporate income in the united states is the disincentive to incorporate even in most countries with integrated or partially integrated tax systems there are differential taxes across organizational forms however obvious this distortion may be most articles investigating the distortions created by the corporate tax have taken as exogenous a firm s choice whether or not to incorporate assuming for example that some industries are inherently corporate while others are inherently noncorporate a variety of nontax factors described below can certainly influence a firm s choice of organizational form causing some to favor incorporating and others not but are these nontax factors so dominant that taxes do not in practice influence a firm s choice of organizational form as gravelle and kotlikoff 1989 1993 emphasize tax induced changes in firms choices of organizational form in principle can create large excess burdens the size of these excess burdens in practice depends on the extent to which firms respond to these tax incentives in this article we calculate how the tax distortion discouraging firms from incorporating has varied over time then estimate the extent to which the allocation of assets and taxable income between corporate and noncorporate

price uncertainty and consumer search a structural model of consideration set formation we offer an econometric framework that models consumer s consideration set formation as an outcome of her costly information search behavior because frequently purchased products are characterized by frequent price promotions of varying depths of discounts a consumer faces significant uncertainty about the prices of the brands the consumers engage in a fixed sample search strategy that results in their discovering the posted prices of a subset of the available brands this subset is referred to as the consumer s consideration set the proposed model is estimated using the scanner data set for liquid detergents our key empirical results are i consumers zincur significant search costs to discover the posted prices of the brands ii whereas in store displays and feature ads do not influence consumers quality perceptions of the brands they significantly reduce search costs for observing the prices of the brands iii per capita income of consumer s household significantly increases her search costs and iv the consumers price sensitivity is seriously underestimated if we were to assume that consumers get to know all the posted prices at zero cost the proposed model is also estimated for the ketchup category to enable us to do cross category comparisons of consumers price search behavior

game theory and empirical generalizations concerning competitive promotions this paper offers the generalization that competitive promotions are mixed strategies first an empirical regularity is established that promotions are independent across competitors this regularity is then elaborated on in the context of a promotion game the promotion game is linked to observable outcomes and a classification of possible situations is developed in particular the classification includes the prisoners dilemma battle of the sexes and marketing models of promotion competition the evidence for the generalization comes from a variety of product markets spanning trade promotions retail price reductions and retail promotions such as advertised specials the product markets include coffee baby diapers toilet tissue saltines dishwashing fluid ketchup and detergents among others the data in some cases were from cooperating grocery chains and in others from iri scanner panels the evidence from extant research and from new analyses is presented each situation is identified as be

the impact of prior decisions on subsequent valuations in a costly contemplation model this paper develops and tests a model of how recall of information from past decisions affects subsequent related decisions a boundedly rational individual has to determine her willingness to pay for a good that she previously considered purchasing at a given price or provide valuations for a set of goods that she previously ranked in order of preference the individual is ex ante uncertain about her utility from consumption of the goods and can exert costly cognitive effort to reduce this uncertainty we show that incorporating information from a prior decision has three primary effects a valuations are expected to exhibit higher variance in particular the spread of valuations between the most and least preferred alternatives increases b decision makers will in expectation exert more effort during the valuation phase and c the relative impact of prior decisions on valuation spread increases the more each attribute contributes to overall utility the model predictions are then tested in a series of controlled lab experiments

anticipated regret and product innovation when a firm introduces a product with new features some consumers may find it difficult to assess their valuations for these new attributes their purchase decisions made under such uncertainty may lead to postpurchase regret it has been experimentally shown that consumers may anticipate their potential postpurchase regret and make their current choices to mitigate or minimize it that is a consumer s anticipated regret can significantly impact his purchase decision given the trend that firms in various markets invoke regret to stimulate sales this paper analytically explores whether and how anticipated regret affects competing firms profits and product innovation our analyses reveal that the presence of anticipated regret can increase or decrease firms profits and foster or hinder product innovation depending on whether it makes the consumer segments more or less polarized in other words anticipated regret has a nonmonotonic effect on firms profits and the entrant s optimal quality therefore