two stage equilibrium and product choice with elastic demand abstract this paper examines a two stage model of product choice with elastic demand duopolists choose locations and then prices consumers demand is linear in price transportation cost is quadratic and is a lump sum for each pair of locations there is a price equilibrium in the second stage the first stage equilibrium locations are unique symmetric and depend upon the ratio of the reservation price and the transportation cost parameter when this ratio exceeds a certain critical value the locations are at the extreme end points of the market as the ratio decreases the locations gradually move towards the center

impact of deposit rate ceiling changes on bank stock returns this paper reexamines the impact of four major changes in deposit rate ceilings that occurred during the 1970 80 decade on bank systematic and unsystematic risk the reexamination clarifies why it is dangerous to conduct event studies naively stephen m goldfeld and richard e quandt s switching regressions method is proposed as a procedure that forces the researcher to take a more disciplined approach to determining event dates contrary to previous studies switch dates identified by goldfeld and quandt s switching regressions method cannot be associated with ceiling change announcements because of other information flows so that inferences cannot be drawn about the specific effects of the regulatory adjustments copyright 1989 by ohio state university press

journal pricing and mergers a portfolio approach despite their influence on the careers of economists the production and pricing of scholarly journals have received scant attention from the profession by contrast the issue of journal quality and scholarly research productivity have been studied in far greater detail a search in the econlit database using the term journal generates several dozen papers on this topic although there may be a number of reasons for this imbalance it is likely that the tenure process combined with the low if not zero effective cost of journals on campuses have influenced our research agenda in other words while professors worry about their job security publish well or perish others their librarians are charged with maintaining free access to all relevant journals of course this pattern is observed not just in economics but across academic disciplines in recent years however easy access to journals has been threatened beset by persistent journal price inflation especially in the socalled stm fields or science technology and medicine and stagnant budgets many university libraries have been forced to reallocate dollars from monographs to journals to postpone the purchase of new journal titles and in some cases to cancel titles as a consequence libraries often relied on interlibrary loans to satisfy faculty demands this situation and its possible causes has been studied at great length in the library science literature with few exceptions a consensus has evolved there which focuses on the growing importance of commercial publishers in the market for scholarly journals over the past decade or more commercial firms have aggressively raised prices at a rate disproportionate to any increase in costs or quality this appears to be especially true for the largest commercial firms although the analysis underlying these conclusions is generally not of the multivariate sort it is suggestive enough to warrant further investigation school of economics georgia institute of technology 781 marietta street nw atlanta ga 30318 e mail mark mccabe econ gatech edu i would like to thank many of my former colleagues at the department of justice including craig conrath renata hesse aaron hoag russ pittman david reitman dan rubinfeld and greg werden as well as jonathan baker cory capps george deltas luke froeb jeffrey mackie mason roger noll dan o brien richard quandt lars hendrik roller steve salop and margaret slade seminar participants at the federal trade commission georgia tech north carolina state university suny stony brook and wissenschaft zentrum berlin and participants at the meetings of the american economic association the european association of research in industrial economics the southern economics association and western economics association the association of research libraries and its members the national library of medicine the georgia tech library and the georgia tech foundation have provided invaluable assistance expert data support was provided by a large group of individuals including deena bernstein claude briggs pat finn doug heslep and steve stiglitz finally i would like to thank the dozens of librarians and publishers who have provided me with important insights 1 the exceptions are janusz a ordover and robert d willig 1978 lisa lieberman et al 1992 george a chressanthis and june d chressanthis 1994 mccabe 2000 and theodore c bergstrom 2001 ordover and willig model the pricing of a single title to institutional and individual subscribers bergstrom s paper discusses the differences between commercial and nonprofit economics journals the other three papers are discussed below 2 increasingly journals are available in both print and digital versions and for some new titles only a digital format is available see carol tenopir and donald king 2000 ch 15 starting in 1998 commercial publishers began placing their content online although major research libraries have generally responded by adding digital access this shift is still in its early stages especially in cases where library collections are more specialized e g the typical biomedical library for this reason as well as the fact that more than two thirds of the sample period occurred in a print only environment the emphasis of this paper is on the behavior of publishers and libraries in a print environment the economic implications of digital access are considered briefly at the conclusion of the paper and are a subject of ongoing research 3 see martha kyrillidou 1999 4 see tenopir and king 2000 ch 13 for a review of this literature an alternative explanation for journal price inflation has been offered by lieberman et al 1992 they argue that entry by new titles over time has lowered circulation for existing journals forcing the latter to raise prices to cover fixed costs

the principle of minimum differentiation holds under sufficient heterogeneity the so called principle of minimum differentiation stated by hotelling has been challenged by many authors this paper restores the principle by showing that n firms locate at the center of the market and charge prices higher than the marginal cost of production when heterogeneity in consumers tastes is large enough

quantity competition in a spatial model the authors analyze a duopoly model where firms first choose locations on a line segment and then choose quantities in the second stage pure strategy quantity equilibria fail to exist for locations close together for low transport costs near agglomeration occurs and the firms choose locations where pure strategy quantity equilibria exist as transport costs rise firms become less direct competitors as they move away from the center of the market coauthors are james f klein eytan sheshinski and steven m slutsky we analyse a duopoly model where firms first choose locations on a line segment and then choose quantities in the second stage pure strategy quantity equilibria fail to exist for locations close together for low transport costs near agglomeration occurs and the firms choose locations where pure strategy quantity equilibria exist as transport costs rise firms become less direct competitors as they move away from the centre of the market coauthors are james f klein eytan sheshinski and stephen m slutsky

sequential location games we study location games where market entry is costly and occurs sequentially and where consumers are nonuniformly distributed over the unit interval we show that for certain classes of densities including monotone and under some additional restrictions hump shaped and u shaped ones equilibrium locations can be determined independently of when they are occupied our analysis reveals a number of peculiarities of the uniform distribution extensions of the model allow for price competition and advertisement in media markets winner take all competition trade offs between profits in the short and the long run and firms operating multiple outlets

can ecolabeling schemes preserve the environment a three stage game of production technology signal and price competition is developed to study the impact of eco labeling in a duopoly model of vertical product differentiation the production technology and the subsequent pollution level are non observable by consumers the only way to inform consumers about the environmental quality of the product is to stick an ecolabel on it however a polluting firm may also usurp the ecolabel by incurring a certain cost by assuming that consumers are altruistic and willing to pay for environmental quality we show that ecolabels can reduce the pollution level finally and importantly under restrictive conditions on labeling cost ecolabeling can constitute to some extent an environmentally effective and economically efficient policy however ecolabeling cannot alone internalize the whole negative externality until the optimum point

a location model with preference for variety we propose a new location model where consumers are allowed to make multiple purchases i e one unit from each firm this model may fit many markets e g newspapers credit cards better than existing models a common feature of these markets is that some consumers are loyal to one brand while others consume more than one product our model yields predictions consistent with this observation if firms are allowed to choose their locations on the interval then spatial differentiation may not be maximal and in some cases it may even be minimal thus under certain conditions we restore hotelling s principle of minimum differentiation

asymmetric equilibria in spatial competition abstract the main purpose of this paper is to study the impact of consumer concentration around the market center on the equilibrium locations of location price games in the case of symmetric triangular density it is shown that no symmetric equilibrium exists however we demonstrate the existence of asymmetric equilibria in pure strategies these equilibria are also characterized our secondary purpose is to study the sequential entry of two firms when the location space is not restricted to the market space this leads us to uncover a substantial first mover advantage which has been neglected in the literature

hotelling s spatial competition as a model of sales abstract hotelling s spatial competition model is used to explain the existence of sales it is shown that 1 an equilibrium in randomized strategies exists when a pure strategy equilibrium fails to exist 2 with more dissimilarity among brands prices are chosen from a wider interval

a note on the stock market effects of the adoption of risk based capital requirements on international banks in different countries abstract the present note provides empirical evidence on the relative competitive effects of the adoption of risk based capital requirements on large international banks in the u s canada u k and japan a two index regression model is used to calculate prediction errors in periods with numerous announcements concerning the new capital rules including the basle conference we find significant declines in equity returns for u s canadian and u k banks in response to news announcements with u s bank stocks exhibiting the largest negative reaction for japanese banks the equity return results are mixed which may be due to uncertainty among investors regarding the handling of their sizeable hidden reserves under the new risk adjusted capital rules

positioning and pricing in a variety seeking market we study competitive positioning and pricing strategies in markets where consumers seek variety variety seeking behavior is modeled as a decrease in the willingness to pay for the product purchased on the previous purchase occasion using a three stage hotelling type model we show that the presence of variety seeking consumers reduces product differentiation offered in equilibrium thereby explaining some otherwise counterintuitive findings in empirical research we find that firms charge higher prices in period 1 and lower prices in period 2 the lower price in period 2 represents the price incentive that firms need to offer to prevent the variety seeking consumers from switching furthermore we find that the observed switching in a market may not fully capture the true magnitude of the underlying variety seeking tendencies among consumers finally we show that the presence of variety seeking consumers leads to lower firm profits and a higher consumer surplus surplus increases for variety seeking consumers as well as regular consumers therefore the presence of variety seeking consumers benefits everyone in the market

imperfect product testing and market size we consider an imperfect test of product quality and ask how it interacts with adverse selection to affect market size although one might expect adverse selection to be mitigated there are scenarios where it is exacerbated also two counter intuitive comparative static results emerge first a small increase in the test cost can increase the equilibrium expected profits earned by sellers of higher quality units and so expand the market second the equilibrium expected profits earned by sellers with lower quality units can be increased by a small improvement in the accuracy of an imperfect test

imperfect certification in a bertrand duopoly abstract a label that imperfectly signals product quality is analyzed in a bertrand duopoly with differentiated products considering strategic firms when certification is imperfect has some important implications a separating equilibrium can be sustained with a free test due to price strategic complementarity when the certifier s objective is welfare and the test cost is sufficiently small the most appropriate test is that which is subject to a low rate of false negatives

cournot competition yields spatial agglomeration most theoretical models of spatial competition show a strong tendency toward spatial dispersion of firms yet common observations suggest that firms tend to agglomerate in this paper the authors show that competition between cournot type oligopolists that discriminate over space leads to spatial agglomeration one implication is that firms do not necessarily earn supernormal profits at the free entry equilibrium copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

estimating multiple discrete choice models an application to computerization returns buyers in many markets face multiple discrete choices they can purchase multiple units as well as multiple brands at the same time this paper presents a multiple discrete choice model for the analysis of differentiated products demand users maximize profits by choosing the number of units of each brand they purchase i estimate the model using micro level data on the demand for personal computers i use the estimated demand structure to assess the welfare gains from computerization and technological innovation in peripherals the estimated return on investment in personal computers is 92 moreover a 10 increase in the performance to price ratio of microprocessors leads to a 2 2 gain in the estimated user surplus the personal computer pc market is of interest to industrial organization economists because of its size the continual technological change and above all because of the farreaching implications of pcs on the economy as a whole several distinct features make pc demand difficult to model pcs are a differentiated durable good in constant technological evolution moreover buyers make multiple discrete choices firms according to our data spread their purchases of pcs over different brands at the same time they buy pcs in blocks several units of each brand that they have chosen the aim of the paper is to present a model that captures these features and to use this model to estimate the welfare gains from computerization classical discrete choice models allow one choice among mutually exclusive alternatives in contrast the proposed framework allows users to demand multiple units and multiple brands the model can be applied to other cases of multiple discrete choices e g the composition of airline fleets car holdings per household the fields of the faculty in economics departments household cereals consumption or any other good consumed in more than one variety during a relevant time period although pervasive multiple discrete choice problems have received little attention because of their complexity a central issue regarding the pc market is the current controversy in the economics literature about the computerization puzzle this puzzle stems from the empirical finding that computerization has had no effect on firm productivity griliches and siegel 1991 and morrison and berndt 1990 contrary to those results hendel 1994 and lichtenberg 1995 using more disaggregate data than most previous studies report excess returns to computerization this indicates that data aggregation may have created the computerization puzzle in this paper i present a model consistent with the basic

the brady plan the 1989 mexican debt reduction agreement and bank stock returns in the united states and japan the authors investigate the impact of the menu approach to debt rescheduling on the market value of two major creditors u s and japanese banks they try to understand how major creditor banks are affected by debt reschedulings and the menu choices they make so that debt deals can be structured in a way that appeals to both creditors and debtor countries they measure the stock market s reaction to the announcement of the brady plan and the mexican debt reduction agreement the brady plan was implemented through the menu approach which acknowledges creditor heterogeneity and provides financing packages that meet the country s financing requirements while still allowing the banks to reduce their exposure the mexican agreement provides an opportunity to test the impact of the brady plan s implementation by examining individual bank s menu choices exposure levels and the market s reaction they explore whether banks were able to make optimal portfolio choices when confronted with the obligation to participate they show that stock prices for different groups of banks reacted quite differently to focal events among all banks u s multinationals showed the strongest positive reaction to the brady announcement and the mexican agreement u s non multinationals do not appear to have been significantly affected by these international debt related events the reaction experienced by all japanese banks was much weaker than that of u s multinationals and was negative for the brady announcement and the initial mexico announcement the authors contend that the lack of a strong reaction was because of the japanese banks relatively low exposure to developing country risk they see the negative market reaction as a reflection of the expectation that a u s initiated debt reduction strategy would not be favorable for japanese banks indeed after the menu choices were announced the market recognized that the japanese banks were treated fairly and corrected itself they do not find that banks that made different choices were treated differently by the market so banks were able to negotiate menu choices in their best interest and to make portfolio choices consistent with their business objectives the results here confirm that the menu approach to debt restructuring may benefit both the creditor banks and the debtor countries

minimal and maximal product differentiation in hotelling s duopoly abstract hotelling s 1929 model of duopolistic competition is re examined a family of utility functions is used which has as a special case hotelling s original utility function in a two stage location price game it is shown that an equilibrium exists when the curvature of the utility functions in the space of characteristics is sufficiently high the subgame perfect equilibrium never exhibits minimum product differentiation on the other hand not all equilibria are at maximal product differentiation

eco labeling and market equilibria with noisy certification tests an intriguing alternative to traditional methods for regulating externalities is the provision of information about firms environmental attributes an increasingly important example of this approach is eco labeling where a third party certifies firms products such schemes are currently used in a variety of countries this paper investigates the equilibria that may occur with eco labeling and the attendant welfare effects i model certification as a noisy test subject to both type i and type ii errors but where green firms more likely to pass than brown firms while it commonly leads to an increase in the fraction of green units in the market the introduction of an eco label can either increase or decrease welfare

spatial price competition a semiparametric approach we investigate the nature of price competition among firms that produce differentiated products and compete in markets that are limited in extent we propose an instrumental variables series estimator for the matrix of cross price response coefficients demonstrate that our estimator is consistent and derive its asymptotic distribution our semiparametric approach allows us to discriminate among models of global competition in which all products compete with all others and local competition in which products compete only with their neighbors we apply our semiparametric estimator to data from u s wholesale gasoline markets and find that in this market competition is highly localized

aggregation and imperfect competition on the existence of equilibrium we present a new approach to the theory of imperfect competition and apply it to study price competition among differentiated products the central result provides general conditions under which there exists a pure strategy price equilibrium for any number of firms producing any set of products this includes products with multi dimen sional attributes in addition to the proof of existence we provide conditions for uniqueness our analysis covers location models the characteristics approach and probabilistic choice together in a unified framework to prove existence we employ aggregation theorems due to prekopa 1971 and borell 1975 our companion paper caplin and nalebuff 1991 introduces these theorems and develops the application to super majority voting rules we present a new approach to the theory of imperfect competition and apply it to study price competition among differentiated products the central result is that there exists a pure strategy price equilibrium for any number of firms producing any set of products in addition to the proof of existence we provide conditions for uniqueness our model both unites diverse strands of the earlier literature and opens up uncharted areas for future analysis in particular we expand the traditional one dimensional framework to allow for multi dimen sional product differentiation our approach involves twin restrictions on consumer preferences one on individuals preferences the other on the distribution of preferences across society these are generalizations of the restrictions supporting 64 majority rule presented in caplin and nalebuff 1988 to prove existence we apply a new technique of aggregation this technique is valuable in a variety of other problems in the companion paper we use the aggregation result to generalize our earlier work on 64 majority rule and to characterize the relationship between the distribution of human capital and the distribution of income caplin and nalebuff 1991 there are additional applications in statistics and in search theory we begin with a brief review of the early literature on imperfect competition describing in more detail the existence problem and previous solutions section 3 presents our twin assumptions and shows that they cover many standard cases in section 4 we introduce the aggregation theorem and use it in the analysis of demand functions the proof of existence of equilibrium is in section

deposit insurance and wealth effects the value of being too big to fail this paper investigates the effect on bank equity values of the comptroller of the currency s announcement that some banks were too big to fail and that for those banks total deposit insurance would be provided using an event study methodology we find positive wealth effects accruing to tbtf banks with corresponding negative effects accruing to non included banks we demonstrate that the magnitude of these effects differed with bank solvency and size we also show that the policy to which the market reacted was that suggested by the wall street journal and not that actually intended by the comptroller the role of deposit insurance has become a topic of increasing debate advocates argue that by removing the incentive to run deposit insurance protects individual financial institutions from instability in the intermediation process thereby providing stability to the financial system as a whole 1 the recent rise in bank failures and the concomitant crises in the s l industry however demonstrate that this stability is not guaranteed moreover critics note that deposit insurance may introduce incentive problems and wealth effects into the financial system both of which can impede the effective functioning of any deposit insurance system these problems have prompted concern about the structure of the current deposit insurance system and have led to numerous proposals regarding its restructuring 2 this paper investigates one aspect of this debate by analyzing the effect on bank equity values of the policy decision to insure completely some banks but not others specifically in september 1984 the comptroller of the currency testified before congress that some banks were simply too big to fail tbtf and that for those banks total deposit insurance would be provided while not explicitly naming the banks the comptroller admitted that this policy would apply to the eleven largest banks using an event study methodology we analyze