optimizing multinomial logit profit functions the multinomial logit model is a standard approach for determining the probability of purchase in product line problems when the purchase probabilities are multiplied by product contribution margins the resulting profit function is generally nonconcave because of this standard nonlinear search procedures may terminate at a local optimum which is far from the global optimum we present a simple procedure designed to alleviate this problem the key idea of this procedure is to find a path of prices from the global optimum of a related but concave logit profit function to the global optimum of the true but nonconcave logit profit function

clustering and competition in asset markets economists financial commentators regulatory agencies and the legal community have recently criticized the nasdaq stock market inc because there is greater clustering of stock quotations on even eighths on nasdaq than on the new york stock exchange or the american stock exchange a phenomenon which critics attribute to collusion or some other defect in nasdaq market structure however as this article demonstrates clustering occurs in varying degrees in many other incontestably competitive financial markets including the nyse the amex the london stock exchange the london gold market and the international foreign exchange market this article provides a competitive theory of clustering that emphasizes the effect of uncertainty the size of transactions volatility and the informational and transactional roles of quotations on the degree of clustering in addition the article examines how market structure can affect the degree of clustering and considers the relation between clustering spread

market performance with multiproduct firms we revisit the fundamental issue of market provision of variety associated with chamberlin spence and dixit stiglitz when firms sell multiple products both products and firms are horizontally differentiated we propose a general nested demand framework where consumers first decide upon a firm then which variant to buy and how much the nested ces is a special case we use it to determine the market s biases when firms compete in product ranges and prices the market system attracts too many firms with too few products per firm firms restrain product ranges to relax price competition but this exacerbates over entry

general linear formulations of stochastic dominance criteria abstract we develop and implement linear formulations of general n th order stochastic dominance criteria for discrete probability distributions our approach is based on a piece wise polynomial representation of utility and its derivatives and can be implemented by solving a relatively small system of linear inequalities this approach allows for comparing a given prospect with a discrete set of alternative prospects as well as for comparison with a polyhedral set of linear combinations of prospects we also derive a linear dual formulation in terms of lower partial moments and co lower partial moments an empirical application to historical stock market data suggests that the passive stock market portfolio is highly inefficient relative to actively managed portfolios for all investment horizons and for nearly all investors the results also illustrate that the mean variance rule and second order stochastic dominance rule may not detect market portfolio inefficiency because of non trivial violations of non satiation and prudence

one security many markets determining the contributions to price discovery when homogeneous or closely linked securities trade in multiple markets it is often of interest to determine where price discovery the incorporation of new information occurs this article suggests an econometric approach based on an implicit unobservable efficient price common to all markets the information share associated with a particular market is defined as the proportional contribution of that market s innovations to the innovation in the common efficient price applied to quotes for the thirty dow stocks the technique suggests that the preponderance of the price discovery takes place at the new york stock exchange nyse a median 92 7 percent information share although most of the classic paradigms in market microstructure concern a security that trades in a single centralized market such situations are becoming increasingly rare in practice fragmentation the dispersal of trading in a security to multiple sites has emerged as a dominant institutional trend this process is of concern to financial economists and regulators because price information and price discovery the impounding of new information into the security price arguably the most important products of a security market have many attributes of public goods as the process of fragmentation accelerates it may be important to determine where the price information and price discovery are being produced 1 this paper suggests a practical econometric approach to this problem the technique is illustrated with an application to u s equity markets many stocks listed on the new york stock exchange nyse trade concurrently on the regional exchanges and the national association of securities dealers national market system nasd nms since a share of ibm stock is the same security whether purchased on the midwest or pacific exchange this is a particularly clear instance of multiple markets nevertheless the expres

constrained assortment optimization for the nested logit model we study assortment optimization problems where customer choices are governed by the nested logit model and there are constraints on the set of products offered in each nest under the nested logit model the products are organized in nests each product in each nest has a fixed revenue associated with it the goal is to find a feasible set of products i e a feasible assortment to maximize the expected revenue per customer we consider cardinality and space constraints on the offered assortment which limit the number of products and the total space consumption of the products offered in each nest respectively we show that the optimal assortment under cardinality constraints can be obtained efficiently by solving a linear program the assortment optimization problem under space constraints is np hard we show how to obtain an assortment with a performance guarantee of 2 under space constraints this assortment also provides a performance guarantee of 1 1 when the space requirement of each produc

portfolio analysis using stochastic dominance relative entropy and empirical likelihood this study formulates portfolio analysis in terms of stochastic dominance relative entropy and empirical likelihood we define a portfolio inefficiency measure based on the divergence between given probabilities and the nearest probabilities that rationalize a given portfolio for some admissible utility function when applied to a sample of time series observations in a blockwise fashion the inefficiency measure becomes a likelihood ratio statistic for testing inequality moment conditions the limiting distribution of the test statistic is bounded by a chi squared distribution under general sampling schemes allowing for conservative large sample testing we develop a tight numerical approximation for the test statistic based on a two stage optimization procedure and piecewise linearization techniques a monte carlo simulation study of the empirical likelihood ratio test shows superior small sample properties compared with various generalized method of moments tests an application analyzes the efficie

gains from diversification on convex combinations a majorization and stochastic dominance approach by incorporating both majorization theory and stochastic dominance theory this paper presents a general theory and a unifying framework for determining the diversification preferences of risk averse investors and conditions under which they would unanimously judge a particular asset to be superior in particular we develop a theory for comparing the preferences of different convex combinations of assets that characterize a portfolio to give higher expected utility by second order stochastic dominance our findings also provide an additional methodology for determining the second order stochastic dominance efficient set

an asset allocation puzzle comment the purpose of this note is to look at the rationale behind popular advice on portfolio allocation among cash bonds and stocks we argue that the typical investment advice is not inconsistent with the behavior of risk averse expected utility maximizers we propose an additional solution to the asset allocation puzzle posed by niko canner et al 1997 who argue that popular advice contradicts financial theory because it is inconsistent with the capital asset pricing model capm mutual fund separation theorem the capm asserts that investors should hold the same selection of risky assets while popular advice is that investors should hold a proportion of bonds to stocks that increases with risk aversion using mean variance mv analysis and the capm canner et al show that recommended portfolios are far from optimal and that losses from the apparent failure of optimization are not substantial however they failed to explain the popular advice within an economic model we offer a rational model based on stochastic dominance to demonstrate that all popular financial advice portfolios belong to the efficient set for all risk averse investors using the historical annual real returns on bonds and stocks in canner et al we cannot ascertain that investment advisors indeed offer bad advice rather we maintain that acting as agents for numerous clients advisors recommend portfolios that are not inefficient for all risk averse investors i overview

a nonparametric approach to modeling choice with limited data choice models today are ubiquitous across a range of applications in operations and marketing real world implementations of many of these models face the formidable stumbling block of simply identifying the right model of choice to use because models of choice are inherently high dimensional objects the typical approach to dealing with this problem is positing a priori a parametric model that one believes adequately captures choice behavior this approach can be substantially suboptimal in scenarios where one cares about using the choice model learned to make fine grained predictions one must contend with the risks of mis specification and overfitting underfitting thus motivated we visit the following problem for a generic model of consumer choice namely distributions over preference lists and a limited amount of data on how consumers actually make decisions such as marginal information about these distributions how may one predict revenues from offering a particular assortment of choices an outcome of our investigation is a nonparametric approach in which the data automatically select the right choice model for revenue predictions the approach is practical using a data set consisting of automobile sales transaction data from a major u s automaker our method demonstrates a 20 improvement in prediction accuracy over state of the art benchmark models this improvement can translate into a 10 increase in revenues from optimizing the offer set we also address a number of theoretical issues among them a qualitative examination of the choice models implicitly learned by the approach we believe that this paper takes a step toward automating the crucial task of choice model selection this paper was accepted by yossi aviv operations management

quantifying the effects from horizontal mergers in european competition policy this paper starts from a recent case to study how merger analysis in europe may be potentially improved starting from the geographic market definition in the merger decision we formulate and estimate an oligopoly model with differentiated products based on the estimates we compare several alternative market power tests a hypothetical market power test an actual market power test and a comparative market power test our comparison of these alternative tests illustrates that the recently introduced empirical techniques need not be in conflict with traditional policy practices in europe but should be seen as a natural extension of commonly accepted principles furthermore we emphasize the importance of our dynamic comparative market power test in the european context according to this test the relevant point of comparison when assessing a merger is not the status quo but rather a relevant alternative merger scenario that is likely to happen in the event the merger is rejected in a european context the choice is often to accept a sequence of regionally based mergers or rather a sequence of pan european mergers finally we also emphasize the importance of constructing confidence intervals when computing the predicted merger effects especially if one is interested in testing the hypothesis that a merger has no effects

the exponomial choice model a new alternative for assortment and price optimization we investigate the use of a canonical version of a discrete choice model due to daganzo 1979 daganzo c 1979 multinomial probit the theory and its application to demand forecasting academic press new york in optimal pricing and assortment planning in contrast to multinomial and nested logit the prevailing choice models used for optimizing prices and assortments this model assumes a negatively skewed distribution of consumer utilities an assumption we motivate by conceptual arguments as well as published work the choice probabilities in this model can be derived in closed form as an exponomial a linear function of exponential terms the pricing and assortment planning insights we obtain from the exponomial choice ec model differ from the literature in two important ways first the ec model allows variable markups in optimal prices that increase with expected utilities second when prices are exogenous the optimal assortment may exhibit leapfrogging in prices i e a product can be s

does it pay to be ethical evidence from the ftse4good abstract the empirical mean variance evidence comparing the performance of socially responsible investments sri and conventional investments suggests that there is no significant difference between the two this paper re examines the problem in the context of marginal conditional stochastic dominance mcsd which can accommodate any return distribution or concave utility function our results provide strong evidence that there is a financial price to be paid for socially responsible investing indices composed of socially responsible firms are mcsd dominated by trademarked indices composed of conventional firms as well as by indices carefully matched by size and industry with the firms in the sri indices zero cost portfolios created by shorting the sri index and using the proceeds to invest in the conventional index generate higher average returns lower variance and higher skewness than either of the two indices standing alone they also mcsd dominate the sri and conventional indices standing alone

joint inventory and pricing decisions for an assortment we seek optimal inventory levels and prices of multiple products in a given assortment in a newsvendor model single period stochastic demand under price based substitution but not stockout based substitution we address a demand model involving multiplicative uncertainty motivated by market share models often used in marketing the pricing problem that arises is known not to be well behaved in the sense that in its deterministic version the objective function is not jointly quasi concave in prices however we find that the objective function is still reasonably well behaved in the sense that there is a unique solution to the first order conditions and this solution is optimal for our problem

almost stochastic dominance and stocks for the long run abstract the geometric mean argument and the recently developed almost stochastic dominance criterion have been employed to make the case for stocks for the long run we show that almost stochastic dominance and the geometric mean argument do not necessarily support long run investment in equities in fact for standard preferences bonds may be preferred to stocks for the long run while stocks are preferred for shorter horizons

linear tests for decreasing absolute risk aversion stochastic dominance we develop and implement linear formulations of convex stochastic dominance relations based on decreasing absolute risk aversion dara for discrete and polyhedral choice sets our approach is based on a piecewise exponential representation of utility and a local linear approximation to the exponentiation of log marginal utility an empirical application to historical stock market data suggests that a passive stock market portfolio is dara stochastic dominance inefficient relative to concentrated portfolios of small cap stocks the mean variance rule and nth order stochastic dominance rules substantially underestimate the degree of market portfolio inefficiency because they do not penalize the unfavorable skewness of diversified portfolios in violation of dara this paper was accepted by james smith decision analysis

do competing specialists and preferencing dealers affect market quality we empirically demonstrate that the opportunities the boston stock exchange and the cincinnati stock exchange offer members to take the other side of their customers orders through affiliated market makers to internalize orders have little short run effect on posted or effective bid ask spreads this is true despite substantial movement of order flow away from the new york stock exchange when trading under one of these regional stock exchange programs begins these results contrast with the adverse effects of market fragmentation and internalization predicted by some theoretical market microstructure analyses and the popular financial press article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a static approximation for dynamic demand substitution with applications in a competitive market we propose a static approximation of dynamic demand substitution behavior based on a fluid network model and a service inventory mapping this approximation greatly enhances our ability to analyze the interdependent inventory service price and product assortment decisions in noncompetitive and competitive scenarios with demand substitution we demonstrate that the approximation is well behaved and then apply it to two previously intractable applications first we study a price and service competition between single product retailers after establishing a unique pure strategy nash equilibrium we find that competition results in lower price higher demand and a higher level of inventory we also observe that the aggregate profit and inventory level increase to positive constants as the number of retailers goes to infinity second we study a duopolistic competition on price service and product assortment we establish a pure strategy nash equilibrium for the product assortment competition and identify a condition for uniqueness we find that competition on both price and product assortment results in lower price and less variety for each competitor but the total number of products and the aggregate inventory level in a duopoly market are both likely to be higher than in a monopolistic market

testing for marginal changes in income distributions with lorenz and concentration curves asymptotically distribution free statistical tests for comparing absolute and relative lorenz and concentration curves are provided the procedures do not require independent samples and can be used to test for marginal changes in income distributions the tests are illustrated using a large sample of tax returns that have been randomly selected for audit by the internal revenue service the tests reveal the marginal effects of systematic underreporting of income and tax liabilities on the u s income distribution copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

almost marginal conditional stochastic dominance marginal conditional stochastic dominance mcsd developed by shalit and yitzhaki 1994 gives the conditions under which all risk averse individuals prefer to increase the share of one risky asset over another in a given portfolio in this paper we extend this concept to provide conditions under which most and not all risk averse investors behave in this way instead of stochastic dominance rules almost stochastic dominance is used to assess the superiority of one asset over another in a given portfolio switching from mcsd to almost mcsd amcsd helps to reconcile common practices in asset allocation and the decision rules supporting stochastic dominance relations a financial application is further provided to demonstrate that using amcsd can indeed improve investment efficiency

ranking income distributions a large variety of policy questions involve choices between social states and a consequent ordering of the feasible alternatives when these social states are related to the levels of welfare experienced by individuals or households two central issues stand out in determining the relative desirability of different social outcomes one of these is the essentially positive exercise of achieving comparability between households with different characteristics such as composition or preferences operating in different environments for example facing different price structures the other concerns the normative judgments implicit in the evaluation of alternative allocations of resourcesthe emphasis placed on inequality between households and the extent to which greater inequality can be compensated by higher average living standards this paper focuses on the second of these issues and in doing so we abstract from the problem of household comparability by considering a population of n households identical in all respects except for their incomes the question of ordering social states then becomes one of ranking income distributions over a group of anonymous households or individuals borrowing the usual assumptions imposed on consumer preferences we may suppose that a social ordering of income distributions can be represented by a welfare function 2

mean gini analysis in r d portfolio selection abstract to date no single model has been published which fully satisfies the needs for a practical r d project selection technique some earlier models cannot handle risk well while others do not provide efficient portfolios this paper will present a model adapted from the literature of financial portfolio optimization which provides a practical means of developing preferred portfolios of risky r d projects the method is simple and highly intuitive requiring estimation of only two parameters the expected return and the gini coefficient the gini coefficient essentially replaces the variance in the two parameter mean variance model and results in a superior screening ability the model that we present requires estimates of only these two parameters and in turn allows for relatively simple determination of stochastic dominance sd among candidate r d portfolios we apply our model to a simple artificial five project set and then to a set of 30 actual candidate projects from an anonymous operating company we demonstrate that we can determine the stochastically non dominated portfolios for this real world set of projects our technique appropriate for all risk averse decision makers permits r d managers to screen large numbers of candidate portfolios to discover those which they would prefer under the criteria of sd

mergers coordinated effects and efficiency in the portuguese non life insurance industry we evaluate the impact on market power and efficiency of a series of mergers on three portuguese non life insurance markets we specify and estimate with a panel of firm level data a structural model which includes preferences technology and a market equilibrium condition firms demand curves are not very elastic firms technologies exhibit scale and scope economies and high cost efficiency scores we find that for the period following the mergers there is no evidence of i an increase in market power through coordinated behavior or ii changes in cost efficiency levels in addition social welfare increased

conservation payments under risk a stochastic dominance approach conservation payments can be used to preserve forest and agroforest systems to explain landowners land use decisions and determine appropriate conservation payments it is necessary to focus on revenue risk marginal conditional stochastic dominance rules are used to derive conditions for determining the conservation payments required to guarantee that the environmentally preferred land use dominates an empirical application to shaded coffee protection in the biologically important choco region of west ecuador shows that conservation payments required for preserving shaded coffee areas are much higher than those calculated under risk neutral assumptions further the extant distribution of land has strong impacts on the required payments

anticipatory effects of voluntary export restraints a study of home video cassette recorders market 1978 86 abstract this paper investigates the impact of voluntary export restraints vers at the pre implementation stage when exporters have a good prospect for the vers distinctive features of the vcr market in 1978 86 provide a testable hypothesis to analyze the effect of the ec japan vers which were implemented in the fiscal years of 1983 85 the paper finds consistent evidence that the vers affected firms pricing behavior in the u s market prior to the ver period as a result of japanese exporters anticipation of the vers

optimal and competitive assortments with endogenous pricing under hierarchical consumer choice models this paper studies assortment planning and pricing for a product category with heterogeneous product types from two brands we model consumer choice using the nested multinomial logit framework with two different hierarchical structures a brand primary model in which consumers choose a brand first then a product type in the chosen brand and a type primary model in which consumers choose a product type first then a brand within that product type we consider a centralized regime that finds the optimal solution for the whole category and a decentralized regime that finds a competitive equilibrium between two brands we find that optimal and competitive assortments and prices have quite distinctive properties across different models specifically with the brand primary model both the optimal and the competitive assortments for each brand consist of the most popular product types from the brand with the type primary choice model the optimal and the competitive assortments for each brand may not always consist of the most popular product types of the brand instead the overall assortment in the category consists of a set of most popular product types the price of a product under the centralized regime can be characterized by a sum of a markup that is constant across all products and brands its procurement cost and its marginal operational cost implying a lower price for more popular products the markup may be different for each brand and product type under the decentralized regime implying a higher price for brands with a larger market share these properties of the assortments and prices can be used as effective guidelines for managers to identify and price the best assortments and to rule out nonoptimal assortments our results suggest that to offer the right set of products and prices category and or brand managers should create an assortment planning process that is aligned with the hierarchical choice process consumers commonly follow to make purchasing decisions this paper was accepted by pradeep chintagunta and preyas desai special issue editors this paper was accepted by pradeep chintagunta and preyas desai special issue editors

competition and collusion in dealer markets this article develops a game theoretic model to analyze market makers intertemporal pricing strategies we show that dealers who adopt noncooperative pricing strategies may set bid ask spreads above competitive levels this form of implicit collusion differs from explicit collusion where dealers cooperate to fix prices price discreteness or asymmetric information are not required for collusion to occur rather institutional arrangements that restrict access to the order flow are important determinants of the ability to collude because they reduce dealers incentives to compete on price public policy efforts to increase interdealer competition should focus on such restrictions

assortment optimization under variants of the nested logit model we study a class of assortment optimization problems where customers choose among the offered products according to the nested logit model there is a fixed revenue associated with each product the objective is to find an assortment of products to offer so as to maximize the expected revenue per customer we show that the problem is polynomially solvable when the nest dissimilarity parameters of the choice model are less than one and the customers always make a purchase within the selected nest relaxing either of these assumptions renders the problem np hard to deal with the np hard cases we develop parsimonious collections of candidate assortments with worst case performance guarantees we also formulate a convex program whose optimal objective value is an upper bound on the optimal expected revenue thus we can compare the expected revenue provided by an assortment with the upper bound on the optimal expected revenue to get a feel for the optimality gap of the assortment by using this approach our computational experiments test the performance of the parsimonious collections of candidate assortments that we develop

does order preferencing matter 1we would like to thank david easley eugene kandel the referee g william schwert the editor participants at the dealer markets conference at ohio state university and an anonymous referee for helpful comments we gratefully acknowledge financial support from the johnson graduate school of management and the national science foundation 1 abstract this study examines how order preferencing affects the competitiveness and efficiency of laboratory financial markets we operationalize preferencing by allowing some dealers to execute a portion of the order flow by matching the most favorable quotes available increasing the proportion of order flow that is preferenced can increase bid ask spreads reduce the informational efficiency of prices and benefit dealers at the expense of liquidity traders preferencing has none of these effects however when two or more dealers are not receiving preferencing orders preferencing may significantly degrade market performance if preferencing arrangements affect all or virtually all dealers

inference tests for gini based tax progressivity indexes distribution free statistical inference procedures for changes in lorenz and gini based indexes of tax progressivity are developed and applied related but distinct tests for the reynolds smolensky index of residual progression and the kakwani index of liability progression are provided the inference procedures are illustrated by applying them to luxembourg income study microdata for sweden the united kingdom and the united states before and after periods of tax reform in each country a finding of significant change depends on the choice among progressivity indexes no single index exhibits a consistent pattern of significant change in all countries across time

turf wars product line strategies in competitive markets in this paper we study product line scope and pricing decisions in a horizontally differentiated duopoly past research has shown that a firm may offer a broader product line to attract higher demand or charge a higher price or both and benefit at the expense of its competitor we show that such outcomes may be reversed especially when consumers have relatively high valuation and low heterogeneity in their preferences for the line extension we find that an equilibrium exists such that only one firm prefers to expand scope but profits may be higher for both firms even in the absence of market size expansion this is because a broader scope permits that firm to effectively price discriminate by raising prices for its core customers the competitor optimally responds by lowering prices to gain share and earn a higher profit thus higher prices for the firm expanding its product line translate into higher demand for the competing firm thus increasing profit for both we show that our results hold when firms deploy generic offensive or defensive strategies during product line expansion

competition for attention we present a model of market competition in which consumers attention is drawn to the products most salient attributes firms compete for consumer attention via their choices of quality and price strategic positioning of a product affects how all other products are perceived with this attention externality depending on the cost of producing quality some markets exhibit commoditized price salient equilibria while others exhibit de commoditized quality salient equilibria when the costs of quality change innovation can lead to radical shifts in markets as in the case of decommoditization of the coffee market by starbucks in the context of financial innovation the model generates the phenomenon of reaching for yield

empirical tests for stochastic dominance efficiency we derive empirical tests for the stochastic dominance efficiency of a given portfolio with respect to all possible portfolios constructed from a set of assets the tests can be computed using straightforward linear programming bootstrapping techniques and asymptotic distribution theory can approximate the sampling properties of the test results and allow for statistical inference our results could provide a stimulus to the further proliferation of stochastic dominance for the problem of portfolio selection and evaluation using our tests the fama and french market portfolio is significantly inefficient relative to benchmark portfolios formed on market capitalization and book to market equity ratio

third market broker dealers cost competitors or cream skimmers this article compares the bid ask spread for new york stock exchange nyse listed securities before and after a major third market broker dealer bernard l madoff investment securities madoff begins to selectively purchase and execute orders in those securities tests reveal the quoted bid ask spread tightens when madoff enters the market furthermore trading costs as measured by the difference between the transaction price and the midpoint of the contemporaneous bid ask spread do not increase together these results suggest that the adverse selection problem associated with allowing agents to selectively execute orders in exchange listed securities may be economically insignificant

mean gini portfolio theory and the pricing of risky assets this paper presents the mean gini mg approach to analyze risky prospects and construct optimum portfolios the proposed method has the simplicity of a mean variance model and the main features of stochastic dominance efficiency since mean gini is consistent with investor behavior under uncertainty for a wide class of probability distributions gini s mean difference is shown to be more adequate than the variance for evaluating the variability of a prospect the mg approach is then applied to capital markets and the security valuation theorem is derived as a general relationship between average return and risk this is further extended to include a degree of risk aversion that can be estimated from capital market data the analysis is concluded with the concentration ratio to allow for the classification of different securities with respect to their relative riskiness

revenue management under a general discrete choice model of consumer behavior customer choice behavior such as buy up and buy down is an important phenomenon in a wide range of revenue management contexts yet most revenue management methodologies ignore this phenomenon or at best approximate it in a heuristic way in this paper we provide an exact and quite general analysis of this problem specifically we analyze a single leg reserve management problem in which the buyers choice behavior is modeled explicitly the choice model is very general simply specifying the probability of purchase for each fare product as a function of the set of fare products offered the control problem is to decide which subset of fare products to offer at each point in time we show that the optimal policy for this problem has a quite simple form namely it consists of identifying an ordered family of efficient subsets s 1 s m and at each point in time opening one of these sets s k where the optimal index k is increasing in the remaining capacity x and decreasing in the remaining time that is the more capacity or less time available the further the optimal set is along this sequence we also show that the optimal policy is a nested allocation policy if and only if the sequence of efficient sets is nested that is s 1 s 2 s m moreover we give a characterization of when nesting by fare order is optimal we also develop an estimation procedure for this setting based on the expectation maximization em method that jointly estimates arrival rates and choice model parameters when no purchase outcomes are unobservable numerical results are given to illustrate both the model and estimation procedure

does the limit order routing decision matter we examine the impact deciding to route limit orders away from the new york stock exchange nyse has on three dimensions of execution quality with methodologies controlling for market conditions and order submission strategies overall differences in limit order execution quality between regional stock exchanges and the nyse are small suggesting that the order routing decision may not affect retail limit order traders substantively conditioning on the distance between the limit order s price and prevailing quotes however reveals systematic differences in execution quality this implies that brokers can strategically route limit orders to improve retail limit order execution quality copyright 2002 oxford university press

stochastic dominance and expected utility survey and analysis while stochastic dominance has been employed in various forms as early as 1932 it has only been since 1969 1970 that the notion has been developed and extensively employed in the area of economics finance agriculture statistics marketing and operations research in this survey the first second and third order stochastic dominance rules are discussed with an emphasis on the development in the area since the 1980s

preferencing internalization of order flow and tacit collusion evidence from experiments this paper examines preferencing arrangements and tacit collusion in laboratory asset markets in the experiments dealers may internalize by matching the best quote or by passing orders to the dealer posting the best quote although some markets were highly competitive several markets reached a collusive equilibrium with wide spreads and near complete intemalization of order flow the paper further examines the role of market transparency and passed order flow on quote setting behavior and suggests that these affect the mechanism leading to tacitly collusive equilibria

portfolio choice based on third degree stochastic dominance we develop an optimization method for constructing investment portfolios that dominate a given benchmark portfolio in terms of third degree stochastic dominance our approach relies on the properties of the semivariance function a refinement of an existing superconvex dominance condition and quadratic constrained programming we apply our method to historical stock market data using an industry momentum strategy our enhanced portfolio generates important performance improvements compared with alternatives based on mean variance dominance and second degree stochastic dominance relative to the center for research in security prices all share index our portfolio increases average out of sample return by almost seven percentage points per annum without incurring more downside risk using quarterly rebalancing and without short selling this paper was accepted by lauren cohen finance

why nasdaq market makers avoid odd eighth quotes recent studies argue that implicit collusion explains the tendency of nasdaq market makers to avoid odd eighth price quotes this paper focuses on the role that preference trading plays in determining quoted spreads under the postulated effects of preference trading an analysis of the relation between spreads and price fractions explains the paucity of odd eighth quotes on nasdaq empirical results from a comprehensive data set show that exogenous economic characteristics explain the distribution of price fractions across securities and illustrate the stability of that distribution over time these results contradict empirical results offered as support for the collusion hypothesis

exclusive dealing as a barrier to entry evidence from automobiles exclusive dealing contracts between manufacturers and retailers force new entrants to set up their own costly dealer networks to enter the market we ask whether such contracts may act as an entry barrier and provide an empirical analysis of the european car market we first estimate a demand model with product and spatial differentiation and quantify consumers valuations for dealer proximity and dealer exclusivity we then perform policy counterfactuals to assess the profit incentives and possible entry deterring effects of exclusive dealing we find that there are no unilateral incentives to maintain exclusive dealing but there is a collective incentive for the industry as a whole furthermore a ban on exclusive dealing would raise the smaller entrants market share but more importantly consumers would gain not so much because of increased price competition but rather because of the increased spatial availability which compensates for the demand inefficiency from a loss of dealer exclusivity

portfolio theory for independent assets this paper presents several new concepts for portfolio problems with independently distributed asset prices a criterion is developed for including or excluding assets in an optimal portfolio for an investor maximizing the expected value of a von neumann morgenstern utility function the central concept of the generalized harmonic mean is introduced it is shown to be the analogue of the riskless rate of return for problems without a riskless asset a new ordering theorem is proven showing that an optimal portfolio always consists of positive amounts of the assets with the largest mean values next the concept of independence from irrelevant alternatives is introduced for portfolio problems this is a property of utility functions and is proven to be true for most of the commonly used utility functions altogether the results provide new insights and tools for portfolio problems with independent assets and extend earlier results by samuelson and fishburn and porter

making inefficient market indices efficient this paper uses the concept of marginal conditional stochastic dominance and a generalization of the 50 portfolio rule to develop a tractable and parsimonious methodology for constructing a second degree stochastic dominance ssd efficient portfolio from a given inefficient index because the ssd approach considers the entire probability distributions of asset returns the resulting portfolios are efficient with respect to all risk averse utility maximizing investors regardless of the form of their utility functions or the distributions of asset returns

effects of market reform on the trading costs and depths of nasdaq stocks the relative merits of dealer versus auction markets have been a subject of significant and sometimes contentious debate on january 20 1997 the securities and exchange commission began implementing reforms that would permit the public to compete directly with nasdaq dealers by submitting binding limit orders additionally superior quotes placed by nasdaq dealers in private trading venues began to be displayed in the nasdaq market we measure the impact of these new rules on various measures of performance including trading costs and depths our results indicate that quoted and effective spreads fell dramatically without adversely affecting market quality

risk aversion and the choice between risky prospects the preservation of comparative statics results most results in what can be termed the comparative statics of risk aversion are obtained when there is only one source of uncertainty the primary example which originally motivated the definition of risk aversion is that more risk averse people are willing to pay a higher premium for insuring against risk it is known that the results do not generally carry over when there is another source of uncertainty the paper develops conditions under which comparative statics results are robust against the introduction of additional sources of uncertainty

stochastic dominance via quantile regression with applications to investigate arbitrage opportunity and market efficiency abstract tests for stochastic dominance constructed by translating the inference problem of stochastic dominance into parameter restrictions in quantile regressions are proposed they are variants of the one sided kolmogorov smirnoff statistic with a limiting distribution of the standard brownian bridge the procedure to obtain the critical values of our proposed test statistics are provided simulation results show their superior size and power they are applied to the nasdaq 100 and s p 500 indices to investigate dominance relationship before and after major turning points results show no arbitrage opportunity between the bear and bull markets our results infer that markets are inefficient and risk averters are better off investing in the bull rather than the bear market

payments for order flow on nasdaq we present a model of nasdaq that includes the two ways in which marketmakers compete for order f low quotes and direct payments brokers in our model can execute small trades through a computerized system preferencing arrangements with marketmakers or vertical integration into market making the comparative statics in our model differ from those of the traditional model of dealer markets which does not capture important institutional features of nasdaq we also show that the empirical evidence is inconsistent with the traditional model which suggests that preferencing and vertical integration are important components in understanding nasdaq

stochastic dominance and the investment horizon with riskless assets this paper analyses the relationship between the efficient sets of investment portfolios and the investment holding period investors are allowed to hold risky assets as well as the riskless asset the main result is that dominance in each period implies dominance in the multiperiod case this finding holds with respect to first second and third degree stochastic dominance the riskless interest rate may vary from one period to another without changing the results of this paper

rivalry in price and variety among supermarket retailers recent theoretical models of retail competition suggest that product heterogeneity is critical to retail price and variety strategies this article provides empirical evidence on supermarket retailers price and variety strategies using a nested constant elasticity of substitution nces modeling framework the model is estimated using chain level scanner data for four major grocery chains in a large urban west coast market the results show that retailers compete for market share using both price and variety while they all tend to follow moderately cooperative pricing strategies the extent to which they follow cooperative strategies in variety is less homogeneous

liberalizing a distribution system the european car market we quantify the competitive effects of liberalizing the selective and exclusive distribution system in the european car market based on a model of oligopoly pricing with differentiated products we consider two possible competitive effects from liberalization i the creation of international intrabrand competition cross border trade which will result in a reduction of international price discrimination and ii a possible cumulative effect arising from a strengthening of national intrabrand competition which would result in reduced double marginalization we find that the reduction in international price discrimination mainly redistributes consumer gains across countries it has a positive but modest effect on total welfare if liberalization also has the cumulative effect of reducing double marginalization the welfare effects are much higher finally we find that the effects of liberalization on the manufacturers profits are either small or positive this finding implies that international price discrimination and softening competition through a double marginalization mechanism should not be interpreted as main profit motives for the previous distribution system but only as unintended side effects hence the industry rationale for maintaining the previous distribution system should be sought in other areas jel f15 l42

theories of risk testing investor behaviour on the taiwan stock and stock index futures markets investor behavior towards risk lies at the heart of economic decision making in general and modern investment theory and practice in particular this paper uses both the mean variance mv criterion and stochastic dominance sd procedures to analyze the preferences for four of the most widely studied investor types in the taiwan stock and stock index futures market we find that risk averters concave utility function prefer spot to futures whereas risk seekers convex utility function prefer futures to spot our findings also show that investors with s shaped utility functions prefer spot futures to futures spot when markets move upward downward finally our results imply that investors with reverse s shaped utility functions prefer futures spot to spot futures when markets move upward downward these results are robust with respect to sub periods spot returns including dividends and diversification although we do not check whether risk averters risk seekers and investors with s shaped and reverse sshaped utility functions actually exist in the market we do show that their existence is plausible the implications of our findings on market efficiency and the existence of arbitrage opportunities are also discussed in this study

regulation of pharmaceutical prices evidence from a reference price reform in denmark reference price systems for prescription drugs constitute widely adopted cost containment tools under these regimes patients co pay a fraction of the difference between a drug s pharmacy retail price and a reference price that is set by the government reference prices are either externally based on drug prices in other countries or internally based on domestic drug prices determined we study the effects of a change from external to internal reference pricing in denmark in 2005 we find that the reform led to substantial reductions in retail prices reference prices and patient co payments as well as to sizable decreases in overall producer revenues and health care expenditures the reform induced consumers to substitute away from branded drugs for which we estimate strong preferences the increase in consumer welfare due to the reform therefore depends on whether or not we take perceived quality differences into account in its calculation

marginal conditional stochastic dominance this paper introduces the concept of marginal conditional stochastic dominance mcsd which states the conditions under which all risk averse individuals when presented with a given portfolio prefer to increase the share of one risky asset over that of another mcsd rules also answer the question of whether all risk averse individuals include a new asset in their portfolio when assets returns are correlated mcsd criteria are expressed in terms of the probability distributions of the assets and of the underlying portfolio an empirical application of mcsd is provided using stocks traded on the new york stock exchange mcsd rules are used to show that in the long run one cannot assert that the market portfolio is inefficient

multiple product firms a nested logit approach this paper proves the existence of a symmetric equilibrium with multiproduct firms using a nested logit model of demand the demand model is parameterized by two variables that characterize different dimensions of preference for variety these reflect intragroup heterogeneity and intergroup heterogeneity a group or nest being the set of products produced by a firm there are then two dimensions to market performance the total number of firms and the range of products produced per firm it is shown that the market equilibrium involves an excessive number of firms but each firm provides too few products copyright 1992 by blackwell publishing ltd

the d level nested logit model assortment and price optimization problems we consider assortment and price optimization problems under the d level nested logit model in the assortment optimization problem the goal is to find the revenue maximizing assortment of products to offer when the prices of the products are fixed using a novel formulation of the d level nested logit model as a tree of depth d we provide an efficient algorithm to find the optimal assortment for a d level nested logit model with n products the algorithm runs in o d n log n time in the price optimization problem the goal is to find the revenue maximizing prices for the products when the assortment of offered products is fixed although the expected revenue is not concave in the product prices we develop an iterative algorithm that generates a sequence of prices converging to a stationary point numerical experiments show that our method converges faster than gradient based methods by many orders of magnitude in addition to providing solutions for the assortment and price optimization problems

a comparison of mad and cvar models with real features abstract in this paper we consider two different mixed integer linear programming models for solving the single period portfolio selection problem when integer stock units transaction costs and a cardinality constraint are taken into account the first model has been formulated by using the maximization of the worst conditional expectation as objective function the second model is based on the maximization of the safety measure corresponding to the mean absolute deviation extensive computational results are provided to compare the financial characteristics of the optimal portfolios selected by the two models on real data from european stock exchange markets some simple heuristics are also introduced that provide efficient and effective solutions when an optimal integer solution cannot be found in a reasonable amount of time