product and price competition in a duopoly this paper examines the role of consumer preferences costs and price competition in determining the competitive product strategy of a firm in the model studied here there are two identical firms competing on product quality and price they face consumers who prefer a higher quality product to a lower quality product but differ in how much they are willing to pay for quality the consumers can also choose a substitute if they don t like the product price offerings of the two firms for the firms a higher quality product costs more to produce than a lower quality product the paper shows that the equilibrium strategy for each firm should be to differentiate its product from its competitor with the firm choosing the higher quality choosing the higher margin as well this differentiation however is not efficient that is it is possible to choose two other products and offer them at prices that cover their marginal cost and still satisfy consumers needs better in the aggregate a monopolist by contrast would differentiate his product line efficiently this suggests that cannibalization has different effects on product strategy than competition the paper also shows that if one firm enters the market first then it can defend itself from later entrants and gain a first mover advantage by preempting the most desirable product position

quality based competition profitability and variable costs we consider the impact of variable production costs on competitive behavior in a duopoly where manufacturers compete on quality and price in a two stage game in the pricing stage we make no assumptions regarding these costs other than that they are positive and increasing in quality and no assumptions about whether or not the market is covered in the quality stage we investigate a broad family of variable cost functions and show how the shape of these functions impacts equilibrium product positions profits and market coverage we find that seemingly slight changes to the cost function s curvature can produce dramatically different equilibrium outcomes including the degree of quality differentiation which competitor is more profitable the one offering higher or lower quality and the nature of the market itself covered or uncovered our model helps to predict and explain the diversity of outcomes we see in practice something the previous literature has been unable to do

evidence on the choice of inventory accounting methods lifo versus fifo in this paper we describe various systematic properties of lifo and fifo firms accounting numbers included are assessments of these properties for firms reported annual numbers and for their as if counterparts obtained by estimating what lifo fifo firms would have reported had they used the fifo lifo inventory method instead our purpose in conducting these assessments is to provide additional evidence on tax and nontax explanations of firms choices of inventory accounting methods in the next subsection we elaborate on these two classes and suggest that the nontax explanations may have attracted adherents partly because existing empirical evidence is not entirely consistent with the tax explanation of lifo fifo choices of inventory accounting methods although data limitations prevent us from performing direct tests of these alternative explanations our empirical results

conspicuous consumption and sophisticated thinking consumers purchase conspicuous goods to satisfy not only material needs but also social needs such as prestige in an attempt to meet these social needs producers of conspicuous goods like cars perfumes and watches highlight the exclusivity of their products in this paper we propose a monopoly model of conspicuous consumption using the rational expectations framework and then examine how purchase decisions are affected by the desire for exclusivity and conformity we show that snobs can have an upward sloping demand curve but only in the presence of consumers who are weakly followers laboratory tests lend support for this model prediction and for the rational expectations framework the experimental results suggest that subjects used some degree of sophisticated thinking to arrive at their first period decisions their behavior in the subsequent trials however can be adequately captured by a purely adaptive learning mechanism we discuss the implications of consumer learning for optimal dynamic pricing policy by a monopolist

stock price reactions to lifo adoptions the association between excess returns and lifo tax savings although long a topic of accounting research little is known about the motives for or effects of voluntary changes in accounting techniques among the motives which have been suggested are attempts by managers to smooth reported earnings gordon 1964 copeland 1968 cushing 1969 white 1972 and ronen and sadan 1981 to influence man agement compensation to reduce regulatory or political costs watts and zimmerman 1978 and to avoid bond covenant restrictions holthausen 1981 while some of these motives may be consistent with a market value rule they often fail to provide unambiguous accounting change predictions e g which accounting changes result in lower regulatory costs moreover empirical verification has been constrained by the unobservability of the variables to which the managers allegedly respond the stock price reaction which should be expected for a given account ing change depends not only on its implications for the valuation of securities but also on the extent to which the implications are already known or anticipated by investors 3 ultimately our ability to detect these stock price effects if any depends on the power of our tests previous studies of the effects of accounting changes have generally not found significant stock price reactions archibald 1972 ball 1972 kaplan and roll 1972 harrison 1977 and holthausen 1981 4 for the most part these studies dealt with accounting changes which had no direct cash flow effects in contrast changes in inventory costing methods especially those involving the last in first out lifo cost flow assumption can generate potentially large changes in a firm s cash flows due to their impact on taxable earnings these cash flow effects provide not only a motive for lifo changes5 which is consistent with the market value rule but also implications for associated stock price effects if investors react to lifo s cash flow implications rather than to its effects on reported earnings then positive stock price adjustments should be associated with lifo adjustments however the evidence from previous studies of stock price reactions to lifo adoptions is inconclusive ball 1972 sunder 1973 1975 abdel khalik and mckeown 1978 brown 1980 and ricks 1982 while several factors may account for these results see section 2 it can be noted that the previous studies have considered only a dichotomous variable whether or not a firm has adopted lifo yet because the cash flow consequences of a lifo adoption decision depend on a number of firm specific factors this approach ignores potentially large differences among firms in the economic consequences of lifo adoptions most firms switching to lifo now reveal in their financial statement disclosures the tax savings which have been realized this study uses these disclosures to examine the association between unsystematic re turns and the magnitudes of first year lifo tax savings for all nyse firms which adopted or extended their use of lifo during the period 1972 80 subject to data availability 6 the research design employs within group comparisons based on cumulative monthly unsystematic excess returns with appropriate controls for unexpected earnings per formance 7 this design avoids several methodological weaknesses inherent in the previous studies and allows more definitive tests of hypotheses relating investor reactions to the income and cash flow effects of lifo adoptions as reported more fully below results based on lifo adoptions made in 1974 are consistent with a positive association between cumulative excess stock returns and the magnitudes of lifo tax savings 8 the results also provide evidence that changes in systematic risk may accompany lifo adoptions however contrary to previous studies most of the sample firms exhibit downward rather than upward changes in systematic risk section 2 reviews the previous studies of stock price reactions to lifo adoptions and suggests explanations for their results section 3 discusses the alternative approach employed in this study while section 4 describes the test methodologies employed the data and data selection procedures are described in section 5 the results and a discussion are presented in section 6 section 7 offers some conclusions

research note trading up a strategic analysis of reference group effects reference groups influence product and brand evaluations especially when the product is a publicly consumed luxury good marketers of such luxury goods need to carefully balance two important social forces 1 the desire of leaders to distinguish themselves from followers and 2 the countervailing desire of followers to assimilate with leaders in this paper we examine the theoretical implications of these social forces for firm prices product design and target consumer selection we show that the presence of reference group effects can motivate firms to add costly features which provide limited or no functional benefit to consumers furthermore reference group effects can induce product proliferation on one hand and motivate firms to offer limited editions on the other hand we find that offering a limited edition can increase sales and profits in some cases reference group effects can even lead to a buying frenzy

north south growth and the terms of trade a model on kaldorian lines this paper examines equilibrium growth and stability in the world economy using a north south model in which there is assumed to be surplus labor in both the north and south at an exogenously determined level of real wages the model allows for substitution in consumption between primary commodities and industrial goods in the north and treats the cases of both surplus and scarce land in the south in the case of an exogenous shock to the model the north south terms of trade may overshoot its equilibrium value and or converge to this value along a cyclical path there is no guarantee that the adjustment path is stable

the economic consequences of accounting choice implications of costly contracting and monitoring abstract in this paper we review research into the economic consequences of voluntary and mandatory choices of accounting techniques and standards we discuss how the predictions of extant economic consequence theories are driven by contracting and monitoring costs associated with management compensation contracts bond covenants regulation and or political visibility we review empirical tests of economic consequence theories categorize those tests and discuss their strengths and weaknesses the empirical tests reveal two systematic associations with accounting choice size a proxy for political visibility and leverage a proxy for contracting and monitoring costs of lending agreements interpretation of the results is difficult due to general limitations of the tests we conclude by suggesting some directions for future research based on our analysis of the potential payoffs associated with different types of empirical tests

the market s response to the 1974 lifo adoptions in this paper i report the results of a study of stock price reactions to lifo adoptions in 1974 and 1975 these two years were characterized by high levels of inflation and wide swings in stock prices and more than 400 firms on the new york and american stock exchanges switched to lifo previous studies see below provide conflicting results of the market s reaction to lifo adoptions these studies exhibit certain research design and small sample limitations which prevent one from resolving the issue of how the market reacts to lifo switches using a better matched pair design and a larger sample i conclude that lifo adopters suffered negative abnormal return performance during the period surrounding their annual earnings announcements while several possible explanations for this result are discussed additional research is needed to provide further insight into the nature of the market reaction to lifo adoption

an experiment on spatial competition with endogenous pricing hotelling s 1929 principle of minimum differentiation and the alternative prediction that firms will maximally differentiate from their rivals in order to relax price competition have not been explicitly tested so far we report results from experimental spatial duopolies designed to address this issue the levels of product differentiation observed are systematically lower than predicted in equilibrium under risk neutrality and compatible with risk aversion the observed prices are consistent with collusion attempts our main findings are robust to variations in three experimental conditions automated vs human market sharing rule for ties individual vs collective decision making and even vs odd number of locations

the east end the west end and king s cross on clustering in the four player hotelling game nicolaas j vriend i introduction despite the popularity of simple location models in industrial economics and voting theory in the tradition following hotelling 1929 and despite the recent rise of the experimental method in economics there have been only few experimental tests of such models brown kruse et al 1993 and brown kruse and schenk 1999 study models with elastic demand while collins and sherstyuk 2000 focus on the simpler case which we address too where demand is inelastic collins and sherstyuk implement a model with three agents who choose locations on a line segment with a uniform density of consumers who due to the assumption of inelastic demand can also be seen as voters with one vote each it is well known that this game has no pure strategy equilibrium see eaton and lipsey 1975 normalizing the line segment to the unit interval the unique mixed strategy equilibrium prescribes uniform randomization over the middle two quarters for all firms see shaked 1982 as it is a well established fact that experimental subjects have difficulties in randomizing see for example rapoport and budescu 1997 it is not very surprising that collins and sherstyuk do not find strong support for the equilibrium hypothesis their empirical distribution of choices is m shaped and has a considerably larger support than the equilibrium distribution in this study we analyze the case of four agents with uniform consumer density and inelastic demand as the equilibrium of this case implies that two firms locate at the edge of the first and second quarters and the other two at the edge of the third and fourth quarters this setup seems ideal for the investigation of various matters first there is no other number of agents where the equilibrium prediction has a better chance to be valid 1 with three competitors the unique symmetric equilibrium is mixed with five the unique equilibrium configuration is asymmetric and implies unequal payoffs and with six and more agents the equilibrium configurations cease to be unique thus only the two and the four agent cases yield unique pure and symmetric equilibrium configurations that give identical payoffs to all agents second the equilibrium in the four agent case has a property that makes it interesting from a behavioral and empirical point of view not only the focal midpoint is empty but the whole middle segment of the linear city is empty as well that is notwithstanding the nice theoretical properties the equilibrium is not entirely intuitive and is also conflicting with casual empirical evidence there are no cities without shops in the center nor are there democracies without parties located in the political middle ground the picture we will discern in our experimental data can be summarized in the following experimental result in the four seller case the equilibrium prediction is of substantial but limited help about one third of all choices are clustered around the equilibrium locations but in no session do we observe convergence to equilibrium at the same time the focal midpoint exerts a considerable attraction with almost 10 of all choices clustered around it consumers profit from this considerably in the form of lower transportation costs the remainder of the article is organized as follows in section ii we give a theoretical account of the model we implement in section iii we present the experimental design in section iv we analyze the results and explain the data and section v concludes ii theory consider a linear city in which four firms produce a good at constant marginal cost the price of the good is fixed due to some unmodeled features of the market consequently costs can be normalized to zero and the price to one to sell the goods the firms simultaneously choose a location on the unit interval 0 1

package size decisions we describe a model examining how a firm might choose the package size and price for a product that deteriorates over time our model considers four factors 1 the usable life of the product 2 the rates at which consumers use the product 3 the relation between package size and the variable cost of the product and 4 the minimum quantities consumers seek to consume for each dollar they spend we call these reservation quantities we allow heterogeneity in the usage rates and reservation quantities for the consumers we show that when the cost increases as a linear or convex function of the package size the firm should make packages of the smallest possible size smaller packages reduce waste and allow consumers to more closely match their purchases with desired consumption this in turn allows the firm to charge a higher unit price and also sell more unit volume the results imply that in a market with multiple package sizes produced by the same or competing firms at least one of the packages must have the smallest possible size provided the fixed cost of making the product is sufficiently low for concave cost functions the firm may find it optimal to make larger than smallest size packages

strategic choice of quality when quality is costly the persistence of the high quality advantage in a two firm two stage model of vertical product differentiation i show that for every convex fixed cost function of quality the firm that chooses the higher quality at the first stage earns the higher profits the result holds for the pure strategy equilibrium in the simultaneous quality game and it holds as well if firms choose their qualities in sequential order

firm size effects and the association between excess returns and lifo tax savings biddle and lindahl 1982 henceforth b l used cross sectional regressions to analyze the market reaction for 311 nyse firms that adopted lifo in the period 1973 80 fifteen month excess returns were regressed on an unexpected earnings variable and a measure of the tax savings from lifo adoption the coefficient on the tax savings variable was positive and highly significant leading to the conclusion that the market reacted positively to the cash flow implications of lifo adoption this paper reexamines the b l analysis by enlarging the sample and addressing several methodological concerns the results which suggest b l s findings are attributable to the confounding effects of firm size are consistent with any of three views 1 the lack of a positive market reaction to lifo adoption 2 the inadequacy of adoption year tax savings as a proxy for the net benefit of lifo adoption or 3 the confounding of the market reaction to lifo adoption with the reaction to other events because returns are cumulated over such a long time period section 2 describes the data collection procedures section 3 presents the results and section 4 offers some conclusions

market segmentation self selection and product line design the purpose of this paper is to develop a theory of market segmentation based on consumer self selection the extant theory is based on the third degree price discrimination model of pigou central assumptions of which are that the firm can directly address individual segments and isolate them by using consumer self selection i am relaxing these assumptions in the context of a monopolist designing a product line i show that this relaxation has significant implications for how the products and prices are chosen and what they look like in particular segments may be aggregated even though there are no economies of scale furthermore consumer self selection enables us to model cannibalization and competition among firms

research note on the profitability of firms in a differentiated industry in a model of vertical differentiation the principal concern of this paper is to identify sufficient conditions for producing a higher or lower quality good to be more profitable in terms of profits and profit margin our basic model considers a short run scenario where the firms quality levels are fixed and they engage in price competition here our results are three first we develop the notion of relative cost efficiency and show that its increasing or decreasing monotonicity in product quality implies that of firm profitability in equilibrium a firm s relative cost efficiency refers to its quality adjusted cost dis advantage relative to its immediate competitors for a given distribution of consumer tastes second selling a higher quality good is more profitable when absolute cost efficiency defined as the ratio between a firm s quality and unit cost is increasing in quality third we also establish a set of lower and upper bounds on each firm s profitability the basic model is then extended in two directions we examine unit cost functions that demonstrate monotone profitability even when both quality and price are endogenous variables we also show that the spirit of relative cost efficiency and its associated sufficient condition hold valid for a logconcave consumer distribution

the existence of low end firms may help high end firms two models of competition between high end and low end products benefiting the high end firms are presented one is a quantity competition model and the other is a price competition model with product differentiation the key factor is the existence of two heterogeneous consumer groups those who demand only high end name brand products and those who care little whether products are high or low end we show that under certain conditions the profits of firms in the high end market are larger when there are firms producing low end products than when there are not the existence of price sensitive consumers who care little about product quality intensifies competition among the high end firms the existence of low end firms functions as a credible threat which induces the high end firms not to overproduce because price sensitive consumers buy products from the low end firms the result provides a new theoretical mechanism concerning the profitability and pricing of national brand firms after the entry of private labels it has an implication for pricing and marketing strategies established firms should not decrease their prices after the entry of nonestablished firms

limit qualities and entry deterrence in this article we investigate how the interplay of competition among incumbents and the magnitude of a potential entrant s setup cost determines the configuration of the array of products to be offered in a perfect nash equilibrium we show that incumbents can use limit qualities to deter entry we also demonstrate that rivalry among incumbents may lead to excessive entry deterrence our analysis generates predictions about the correlation between the degree of product differentiation and the size of the entrant s setup costs

the effect of owner versus management control on the choice of accounting methods abstract this paper examines the relationship between the ownership control status of firms and the accounting methods they adopt the arguments of watts and zimmerman s positive theory are integrated with those of managerial economists to generate the prediction that management controlled firms are more likely than owner controlled firms to adopt accounting methods which increase reported earnings this prediction is inconsistent with fama s hypothesis that the market for managerial talent will prevent management controlled firms from acting differently than owner controlled firms this paper compares the depreciation methods used by a sample of management and owner controlled firms for financial reporting purposes the comparison considers and controls for the factors of firm size leverage and the depreciation method used for tax reporting purposes the comparison reveals that there is a significant difference in the depreciation methods adopted by management controlled and owner controlled firms for financial reporting purposes

competition in corruptible markets firms seeking business opportunities often face corruptible agents in many markets this paper investigates the marketing strategy implications for firms competing for business and for the buyer in a corruptible market we consider a setting in which a buyer a firm or government seeks to purchase a good through a corruptible agent supplier firms that may or may not be a good fit compete to be selected by the agent only the agent observes whether a firm is a good fit corruption arises due to the agent s incentive to select a nondeserving firm in exchange for bribes intuitively and as expected a sufficiently large monitoring of the agent eradicates corruption interestingly however increasing the monitoring from an initial low level can backfire making the agent more likely to select a nondeserving firm this nonmonotonic agent behavior makes it difficult for the buyer to reduce corruption the implication is that the buyer should choose either to be ignorant or to take drastic measures to limit

choice of inventory accounting methods comparative analyses of alternative hypotheses in the past decade hundreds of firms switched to the lifo accounting method for their inventories in response to high rates of inflation nevertheless many others continue to use the fifo method biddle 1980 estimated that each of the 105 fifo firms in his study paid an average of nearly 26 million in additional federal income tax what makes these fifo firms so reluctant to switch accounting methods a review of the literature provides three possible explanations for inventory accounting choices political costs agency costs and divergent production and investment characteristics because the required economic variables to test these three alternative explanations are not observable the empirical tests are based on examination of proxy variables many of the proxy variables of the first and third explanations are the same so it is difficult to discriminate one from the other using univariate statistical methods for example there is consistent evidence of an association between size and inventory accounting choices but size can serve as a proxy for either political costs or divergent production and investment opportunities or both similarly there is also strong evidence that the type of industry is associated with inventory choice which could also be consistent with both explanations the major purpose of this paper is to test the three explanations cited above in a simultaneous manner using multivariate probit methods

dynamics of retail advertising evidence from a field experiment we use a controlled field experiment to investigate the dynamic effects of retail advertising the experimental design overcomes limitations hindering previous investigations of this issue our study uncovers dynamic advertising effects that have not been considered in previous literature we find that current advertising does affect future sales but surprisingly the effect is not always positive for the firm s best customers the long run outcome may be negative this finding reflects two competing effects brand switching and intertemporal substitution we also find evidence of cross channel substitution with the firm s best customers switching demand to the ordering channel that corresponds to the advertising jel l2 l81 m3 a firm s current advertising is generally associated with an increase in its sales but this effect is generally short lived

price promotions in emerging markets how should price promotion strategies be modified in an emerging market e g india china compared to those employed in developed markets e g usa canada specifically how should the presence of middle class consumers with limited ability to pay prevalent in an emerging market influence the depth and frequency of price promotions offered by competing firms lay intuition suggests that firms should promote more frequently and offer deeper discounts in emerging markets in order to effectively sell to limited income middle class consumers we construct a theoretical model that investigates the effect of the middle class segment on firms price promotion strategies contrary to lay intuition our analysis reveals precisely the opposite results first price promotions offered in an emerging market with middle class consumers are shallower than those offered in a developed market without middle class consumers second relatively deep price promotions occur less frequently in an emerging market compared to a developed market these theoretical findings are consistent with the empirical evidence we gathered from the supermarkets in india and in canada

competing for low end markets recent business research points to the fortune awaiting to be tapped in low end markets in this paper we investigate how the size of the low end market influences a firm s profits and the pioneering firm s quality choice as low valuation consumers increase in a market on average consumers willingness to pay decreases this may lead us to expect firms profits to decrease as the size of the low end market increases our analysis shows that if the size of the low end market is below a threshold an increase in the size of the low end market may actually dampen price competition and improve profits as firms can then strategically choose their quality levels such that their products are more differentiated conventional wisdom also suggests that the pioneering firm will offer a higher quality product and earn more profits compared with the later entrant in contrast to this notion of quality advantage our analysis identifies circumstances in which a pioneer can offer a lower quality product and yet earn more profits an experimental test lends support for some of our model s predictions we further extend the model to consider markets with multiple firms firms with multiple products and consumers with limited purchasing power

new evidence on lifo adoptions the effects of more precise event dates results of recent research support conclusions of an increase a decrease or no change in share values for firms switching to lifo biddle and lindahl 1982 ricks 1982 and brown 1980 this study supports the view that on average firms which adopt lifo experience an increase in share values tests are based on more nearly accurate dates when the change to lifo was announced the results suggest that a search for voluntary accounting change disclosure dates can be productive if some previously unexploited sources are examined a cross sectional regression similar to the approach taken by for example biddle and lindahl 1982 is used to explain cumulative residual stock returns at announcements of the change in accounting method variables representing quarterly unexpected earnings annual unexpected earnings systematic risk and firm size are used to control for extraneous effects the independent variable of interest is tax savings

designing sales contests does the prize structure matter abstract sales contests are short term incentives that managers use to raise sales effort the extant marketing theory predicts that the optimal prize structure should have two characteristics 1 the number of prizewinners should be greater than one and 2 prize values should be unique and rank ordered however this theory has not been empirically examined this article presents two empirical studies that examine whether the prize structure of a sales contest affects sales performance in each study the authors investigate the incremental effects of introducing multiple prizewinners and unique rank ordered prizes into a sales contest the first study consists of two laboratory experiments in which participants make decisions that closely reflect the decision trade offs in the theoretical model of sales contests the second study consists of two field economic experiments in which trained salespeople sell fundraising sponsorships to companies the results across the experiments are remarkably consist

taxes and firm size abstract firm size has been used as a proxy for the firm s political costs and hence managers proclivity to choose income reducing accounting procedures this study provides additional evidence on this topic by examining the association between firm size and effective corporate tax rates the latter are one component of a firm s political costs the roughly fifty largest u s exchange listed firms in particular oil and gas companies and manufacturing firms have significantly higher worldwide tax rates than other firms these higher tax rates are observed primarily after the implementation of the u s 1969 tax reform act and after the opec countries raised their tax rates on u s oil producers the findings which are insensitive to alternative sources of data alternative measures of firm size and alternative measures of effective tax rates are consistent with the use in previous studies of firm size as a proxy for the firm s political costs

competitive positioning in markets with nonuniform preferences we investigate the nature of competitive equilibrium for brands competing in a multi attribute product space when consumer preferences for product attributes follow nonuniform distributions we establish subgame perfect equilibria in a two stage game where firms choose positions in the first stage and prices in the second stage two types of entry scenarios are investigated in the first the number of brands is given exogenously and all of them choose positions simultaneously in the second scenario firms enter in sequence and the early entrants can choose strategies to deter the entry of later entrants we find the equilibria for two three and four brands for consumer preferences that follow a beta distribution nonuniform distributions result in equilibrium configurations that are substantially different from those obtained for uniform consumer distributions in the two brands case for sufficiently concentrated distributions we find asymmetric position equilibria with one firm at the corner of the market and one firm at an interior position in the case of three brands for sufficiently concentrated preferences we find symmetric equilibria that do not yield maximal differentiation we also establish an equilibrium for the case of four competing brands in addition we characterize entry deterring positioning strategies and examine how they vary with the distribution of consumer preferences

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