buyer initiated vs seller initiated information revelation sales presentations are the core of the selling process where salespeople provide information to prospects one challenge is that the amount of information available to be potentially communicated may exceed salespeople s ability to communicate or customers ability to process there is limited bandwidth between the firm and customers one important decision then is which information should customers see what the firm chooses to tell customers may be informative in itself when constrained to a seller initiated information revelation format where the firm chooses which feature to show the firm never finds it optimal to offer more features than it is able to inform customers about consequently customers never find credible a claim that the product has all features the important implication is that price alone cannot serve as a signal of quality in this setting in contrast a buyer initiated information revelation format where customers decide which information to receive increases the probability of a sale and also results in the production of higher quality products in a competitive setting by adopting buyer initiated information revelation firms are able to attain positive profits this is due to the fact that customers infer the product s quality from the price along with the information revelation format customers know that at some prices firms find it profitable to produce high quality products and at other lower prices this is not the case thus customer empowerment leads to higher profits

signaling quality with a money back guarantee the role of transaction costs direct marketing is witnessing explosive growth as consumers increasingly purchase products from their homes their ability to judge the quality of products they buy is significantly reduced in this paper we study how money back guarantees can signal product quality in such environments we interpret product quality broadly to mean both the level of attributes promised as well as the firm s consistency in delivering on those promises key aspects of our formulation are the explicit consideration of transaction costs and alternative signals of product quality transaction costs are the costs the seller or buyer faces when redeeming a money back guarantee we show that money back guarantees signal quality by exploiting the higher probability of returns for a lower quality product and the attendant higher transaction costs however if the seller s transaction costs are very large then there are less costly ways to signal namely charging a high price we compare the signaling performance of 1 price 2 price with uninformative advertising and 3 price with a money back guarantee whereas uninformative advertising does not work at all in our model under certain conditions a money back guarantee is necessary to signal and under other conditions a money back guarantee is a useful supplement to price

the strategic interaction between firms and formulary committees effects on the prices of new drugs we study the strategic interaction between the pricing decisions of a pharmaceutical firm and the reimbursement decisions of a government agency which grants reimbursement rights to patients for whom new drugs are most cost effective if the reimbursement decision precedes pricing the agency only reimburses some patients if the drug s private and public health benefits diverge this is there are consumption externalities and the variable cost of the drug exceeds the alternative s contrarily if the firm can commit to a price before reimbursement a strategic effect implies that by setting a sufficiently high price the firm can make the agency more willing to reimburse than without commitment

strategic pricing signalling and costly information acquisition abstract consider a market where an informed monopolist sets the price for a good or asset with a value unknown to potential buyers upon observing the price buyers may pay some cost for information about the value before deciding on purchases under a belief restriction which generalizes the idea of the cho kreps intuitive criterion we establish a version of the grossman stiglitz paradox there is no separating equilibrium with fully revealing prices yet we also resolve the paradox there is a unique equilibrium and as the cost of information becomes small the equilibrium approaches the full information outcome and prices become perfectly revealing

high and declining prices signal product quality high and declining prices signal a high quality product high prices are the efficient means of signaling because the consequent loss of sales volume is most damaging for lower cost lower quality products as time passes and the number of informed consumers increases the signaling distortion lessens resulting in a declining price profile the prediction of high and declining prices is robust across a variety of dynamic models and is consistent with recent empirical findings copyright 1991 by american economic association

barter and monetary exchange under private information the authors develop a model of production and exchange with uncertainty concerning the quality of commodities and study the role of fiat money in ameliorating frictions caused by private information the model is specified so that without private information only high quality commodities are produced and there is no welfare gain from using money with private information there can be equilibria and sometimes multiple equilibria where low quality commodities are produced and money can increase welfare money works by promoting useful production and exchange in efficient monetary equilibria agents adopt strategies that increase the probability of acquiring high quality output copyright 1994 by american economic association

two part pricing for experience goods in the presence of adverse selection abstract because customers learn something when they purchase an experience good for the first time a firm selling experience goods may face different demand curves from new and repeat customers the firm can exploit these differences by using a two part pricing strategy to price discriminate between new and repeat customers the firm may also use a two part pricing strategy to mitigate the information problems of adverse selection when its quality is uncertain the analysis is particularly applicable to service markets where customers and firms seek long term relationships and firms maintain customer records which facilitate price discrimination

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

credible signals of the release of new versions i introduction many products are marketed some time after they have been developed for instance a new smartphone may be developed and tested well before it is available for purchase a new car might be prototyped and driven months before it comes to the market indeed a firm will often have several products concurrently in a development pipeline consumers may know a product is in that pipeline without knowing its progress towards the market because the outcome of such development and testing is not visible to outsiders the firm knows whether it can market a product before consumers do consumers are uninformed about when and if the new product will be marketed to them economists have long recognized that the present demand for durable goods depends on future prospects such as the future price or the introduction of an improved version 1 the existence of such an improved version is often the seller s private information if consumers anticipate a new version some will defer purchases until the new version is available and the seller will face low demand for the present version disclosing the new version is not in a monopoly seller s interest a seller whose good does not have a new version would also like to communicate that fact to consumers while a firm with a successful product innovation can credibly disclose the new version with relative ease a firm that has failed to develop a new product could have great difficulty convincing consumers that the product has no new version in such situations it is important to examine whether prices can inform consumers whether a new version will be marketed in the near future in a recent paper choi et al 2010 developed a model with a risky product development process in which reputation effects allow cheap talk announcements to signal successful product development to consumers an announcement induces consumers to delay or divert purchases to the announcer s coming product which increases the announcer s profit and can improve welfare 2 in their model the announcer and her non innovative rivals supply the original good competitively because of this an announcement does not reduce profit on the current version this paper will focus on markets where the seller has substantial market power before innovating so announcing a successful product development has a cost in terms of current revenue further because we attend to prices as signals this model may also apply to markets where a long run relationship between consumers and firms may not be sustainable another objective of this paper is to examine the welfare effects of mandatory disclosure a government policy mandating disclosure of any new version is an alternative means of informing consumers 3 as long as firms are not willing to lie to the government such a policy would credibly communicate whether a new version of a durable is coming mandatory disclosure would bring about full information as consumers are informed about any improved future version before observing the price of the current version in this paper we explore a two period model of a durable good monopoly in which consumers are initially uninformed about whether there will be a new version of the current good the monopoly seller is privately informed if he will be able to market an improved version in the second period in the first period consumers must decide whether to purchase the good now or wait for an upgraded version they may be able to infer from the price of the current version whether the seller will bring a new version to the market it is important to see first whether prices can serve as signals and second how welfare compares between any signaling outcome and a full information benchmark corresponding to mandatory disclosure we will show that there is a unique equilibrium supported by intuitive beliefs in this equilibrium the seller s private information about an improved version is completely revealed to consumers

the menu setting problem and subsidized prices drug formulary illustration the menu setting problem msp determines the goods and services an institution offers and the prices charged it appears widely in health care from choosing the services an insurance arrangement offers to selecting the health plans an employer proffers the challenge arises because purchases are subsidized and consumers or their physician agents may make cost ineffective choices the intuitively comprehensible msp model readily solved by computer using actual data helps structure thinking and support decision making about such problems the analysis uses drug formularies lists of approved drugs in a plan or institution to illustrate the framework

long term market overreaction the effect of low priced stocks conrad and kaul 1993 report that most of de bondt and thaler s 1985 long term overreaction findings can be attributed to a combination of bid ask effects when monthly cumulative average returns cars are used and price rather than prior returns in direct tests we find little difference in test period returns whether cars or buy and hold returns are used and that price has little predictive ability in cross sectional regressions the difference in findings between this study and conrad and kaul s is primarily due to their statistical methodology they confound cross sectional patterns and aggregate time series mean reversion and introduce a survivor bias their procedures increase the influence of price at the expense of prior returns

strategic pricing of new pharmaceuticals this paper provides empirical evidence on the leading factors affecting the prices of new pharmaceuticals both at introduction and after 4 6 and 8 years most important is the extent of therapeutic advance embodied in a new product for drugs which represent important therapeutic gains launch prices can be two or three times those of existing drugs used for the same purposes while drugs that largely duplicate the actions of currently available products are typically priced at comparable levels in addition the number of branded substitutes has a substantial negative effect on launch prices which reflects the importance of competitive pressures duplicate products thereby play an important economic role in pharmaceutical markets

price quality and reputation evidence from an online field experiment we examine the link between price quality seller claims and seller reputation in internet auctions after purchasing actual baseball cards and having them professionally graded we find that some buyers in the online graded market are misled by incredible claims of quality they pay higher prices but do not receive better quality and in fact are defrauded more often online seller reputation is effective for identifying good faith sellers but conditional on completed auctions reputable sellers do not provide better quality evidence also suggests that high claim sellers target less experienced buyers we attribute these patterns to two loopholes in the ebay rating system we benefited from the comments of austan goolsbee raphael thomadsen john shea dan vincent david reiley larry ausubel peter cramton v joseph hotz jeff smith jimmy chan vincent crawford mark duggan and attendees at numerous seminars and conferences we are particularly grateful to seth sanders and john list for their constructive advice at the early stage of the research to timothy bresnahan rachel kranton and thomas hubbard for their detailed suggestions in reshaping earlier versions and to editor ariel pakes and two anonymous referees for their careful readings special thanks to eight friends who acted as our agents in purchasing baseball cards in retail markets and to numerous sports card store owners who shared their insights on the sportscard industry excellent research assistance from randy alexander moore and krzysztof fizyta is gratefully acknowledged any remaining errors are ours

when cheaper is better fee determination in the market for equity mutual funds abstract in this paper we develop a model of the market for equity mutual funds that captures three key characteristics of this market first there is competition among funds second fund managers ability is not observed by investors before making their investment decisions third some investors do not make optimal use of all available information the main results of the paper are that 1 price competition is compatible with positive mark ups in equilibrium and 2 worse performing funds set fees that are greater or equal to those set by better performing funds these predictions are supported by available empirical evidence

multidimensional separating equilibria and moral hazard an empirical study of national football league contract negotiations this paper empirically tests for a multidimensional separating equilibrium in contract negotiations and tests for evidence of the moral hazard inherent in many contracts using contract and performance data on players drafted into the national football league from 1986 through 1991 we find evidence that players use delay to agreement and incentive clauses to reveal their private information during contract negotiations in addition our empirical tests of the moral hazard issue indicate that a player s effort level is influenced by the structure of his contract

a price discrimination analysis of monetary policy monetary policy is analysed within a model that appeals to legal restrictions on private intermediation to explain the coexistence of currency and interest bearing default free bonds the interaction between such legal restrictions and monetary policy is illustrated in a version of the overlapping generations model the model shows that legal restrictions and the use of both currency and bonds permit the government to levy a nonlinear inflation tax and that such a tax may be better in terms of the pareto criterion than a linear inflation tax

how ethical are managers goodwill impairment decisions in spanish listed firms this article provides an analysis of the ethical behavior of managers making goodwill impairment decisions following the adoption of the international financial reporting standard ifrs 3 on business combinations replacing the systematic amortization of goodwill with the impairment only approach has been a highly controversial step although the aim of ifrs 3 was to provide users with more value relevant information regarding the underlying economics of the business it has been criticized for the potential earnings management inherent in impairment testing this study is based on a sample of spanish listed companies between 2005 and 2011 a period that embraces the economic crisis after controlling for the underlying economic factors of the firms the results suggest that managers are exercising discretion in the reporting of goodwill impairment losses and big bath and smoothing strategies are influencing the decisions whether or not to impair goodwill and about the magnitude of the impairment firm size is an attribute that appears significant in the analysis suggesting that the cost and complexity of running the impairment test affect managers decisions additional analyses suggest that the macroeconomic environment influences opportunistic and unethical behaviors

price endings when prices signal quality this paper provides a theoretical explanation for why firms behave as though they use round prices to signal quality by replacing the linear demand curve in bagwell and riordan s 1991 price as a signal of quality model with a kinked demand curve and analyzing what price endings firms are most likely to use the following observations can be made 1 firms that are using high prices to signal quality are more likely to set those prices at round numbers and 2 price endings themselves are not necessarily signals of quality a simulation was conducted to demonstrate that these findings generally hold true even in the presence of demand spikes at 9 ending prices e g schindler and kibarian 1996 finally empirical evidence is provided to demonstrate that firms tend to use more round prices for higherquality products and that this relationship is even stronger for product categories where consumers are less able to detect the true level of quality prior to purchase

addiction as a market failure using rational addiction results to justify tobacco regulation abstract tobacco regulation efforts have been criticized by some academic economists for failing to provide adequate welfare analytic justification this paper attempts to address these criticisms unlike previous research that has discussed second hand smoke and health care financing externalities this paper develops the logic for identifying the much larger market failures attributable to the failure of smokers to fully internalize the costs of their addictive behavior the focus is on teen addiction as a form of intrapersonal externality and observed adult consumption behavior consistent with partial myopia the importance of peer effects in the consideration of welfare impacts is also emphasized

barter in the us economy a macroeconomic analysis in this paper a statistical model is developed to examine the determinants of the growing level of barter transactions in the us although a barter system is believed to be pareto inferior to a money system recent statistics of the estimated level of barter transactions in the us show a rapidly growing interest by large corporations as well as individuals in this type of trade the primary obstacle in empirical research in this area is the difficulty of measuring the size of barter transactions here data from barter exchange organizations are used to test the significance of several variables the ordinary least squares and cointegration and error correction models are employed as two alternative empirical techniques to analyse the data the results support the counter cyclical arguments as well as the inflation factor however the notion of tax evasion as a motive in organized barter receives only a partial support

monetization financial liberalization and economic development barter sector in 1954 55 the monetized sector contributed 69 to the net national product of india the share of the monetized sector increased to 78 6 of the net national product by 1974 75 during this period the explicit objective of monetary policy in india was to help accelerate the pace of economic development in an environment of reasonable price stability there are several versions of the financial liberalization hypothesis but the one put forward by ronald mckinnon is chosen here because of its succinctness and easy amenability to empirical verification 2 mckinnon s theory in essence deals with the effect of financial liberalization on the accumulation of capital through a policy of high real interest rates this formulation has been made operational by estimating the response of real demand for money balances and private investment to alternative rates of return under the implicit assumption that these are the only two alternative forms of assets held by the private sector 3 all this is predicated on the assumption that the effective limitation on the rate of real capital formation is the supply of real savings and not the inadequate willingness to invest most underdeveloped countries have a significant barter sector a reduction in the share of the barter sector can help to further accelerate the accumulation of capital in a barter system a good share of the factors of production is tied up in distribution away from production to achieve the double coincidence required in such a system with the

dynamic epidemiology and the market for vaccinations abstract the intent of this paper is to raise the question of how and when externalities can arise in the market for vaccinations static and dynamic models of such markets are developed and compared a special case in a continuous time dynamic framework is examined and is found to be efficient i e there is no externality this is in contrast to the results from the static formulation raising doubts about the suitability of a static approach these results indicate that the question of whether there are externalities in individual immunization decisions is more involved than is generally supposed

strategic it investments the impact of switching cost and declining it cost the declining cost of information technology it over time provides the later entrant in information intensive industries a cost advantage on the other hand the earlier entrant has the potential to build and retain its market share if consumers incur a cost in switching to the later entrant we investigate the impact of a decline in the it cost and the switching cost on it investment strategies of firms we find that a declining it cost always hurts the early entrant s profit the early entrant may assume an aggressive investment strategy or a defensive investment strategy in response to a decline in the it cost depending on whether the switching cost relative to the extent of decline in the it cost is high or low respectively a decline in it cost also hurts the later entrant s profit if the switching cost is high a surprising result is that when the decline in the it cost is higher than a critical value a higher switching cost increases consumer surplus when firms control the switching cost the early entrant increases its investment in quality and switching cost and maintains its quality and its market share leadership irrespective of the extent of decline in the it cost

the distortionary effects of government procurement evidence from medicaid prescription drug purchasing in 2003 the federal state medicaid program provided prescription drug coverage to more than 50 million people to determine the price that it will pay for each drug medicaid uses the average private sector price when medicaid is a large part of the demand for a drug this creates an incentive for its maker to increase prices for other health care consumers using drug utilization and expenditure data for the top 200 drugs in 1997 and in 2002 we investigate the relationship between the medicaid market share mms and the average price of a prescription our estimates imply that a 10 percentage point increase in the mms is associated with a 7 to 10 percent increase in the average price of a prescription in addition the medicaid rules increase a firm s incentive to introduce new versions of a drug in order to raise price we find empirical evidence that firms producing newer drugs with larger sales to medicaid are more likely to introduce new versions taken together our findings suggest that government procurement rules can alter equilibrium price and product proliferation in the private sector

the effect of barter on the demand for money an empirical analysis abstract the impact of barter on the m2 money demand for the u s is explored the results show that in addition to the traditional explanatory variables the level of barter must be included in the estimates of the demand for money

an empirical analysis of the economic implications of fair value accounting for investment securities abstract this paper analyzes security returns of bank holding companies and insurance companies during periods surrounding the adoption of sfas 115 we find bank share prices were negatively affected by the examined events but find little share price reaction for insurance companies our evidence suggests banks were adversely affected by the standard because of problems with the standard s market value accounting approach cross sectional analysis of event period returns shows that banks that more frequently traded their investments with longer maturing investments and that are more fully hedged against interest rate changes were the most negatively impacted by the standard

the transition from barter to fiat money how did it become possible to exchange apparently valueless pieces of paper for goods this paper provides an equilibrium account of the transition between barter and fiat money regimes the explanation relies on the intervention of a self interested government that must be able to promise credibly to limit the issue of money to achieve credibility the government must offset the benefits of seigniorage by internalizing some of the macroeconomic externalities generated by the issue of fiat money the government s patience and the extent of its involvement in the economy are key determinants of whether the transition can be accomplished copyright 1995 by american economic association

how to haggle and to stay firm barter as hidden price discrimination barter transactions conducted openly by established corporations play an increasingly significant role in the u s economy the model developed here helps explain why firms use barter and yields predictions concerning the circumstances under which barter is likely to occur it is shown that when two firms barter goods used as inputs price discrimination occurs this price discrimination is hidden from the firms other customers because the real values of the transacted goods to the barterers are different from the accounting prices used in the transaction since price discrimination that is observed by potential customers might have an adverse effect on the selling firm s future bargaining power barter will have value as a means of hiding price discrimination

investor underreaction to goodwill write offs current accounting rules end regular amortization of goodwill and mandate annual tests for goodwill impairment and loss recognition when appropriate these rules make consideration of goodwill write offs important and timely in the study reported here we found that the effects of goodwill write off announcements were typically negative and material on the order of 2 94 percent to 3 52 percent of the company s stock price what makes goodwill write off announcements especially noteworthy for investors is that additional effects of roughly 11 02 percent were realized by the end of a one year post announcement period these results suggest that investors initially underreact to goodwill write off announcements and that they need to be aware of the potential for further losses in the post announcement period

money barter and the optimality of legal restrictions we examine a decentralized monetary economy in which households can use a means of exchange barter or gold other than fiat money the alternative means of exchange may drive out money even if monetary exchange pareto dominates legal restrictions prohibiting other means of exchange may therefore be necessary with stochastic preferences households may use barter to supplement monetary purchases when they have an unexpectedly high demand however this may drive down the value of money in all states so low that households are again better off with fiat money alone the paper provides both stochastic and nonstochastic examples in which eliminating markets for goods or assets that compete with fiat money improves welfare