a principal agent problem with heterogeneous demand distributions for a carbon capture and storage system abstract mechanism design problems optimize contract offerings from a principal to different types of agents who have private information about their demands for a product or a service we study the implications of uncertainty in agents demands on the principal s contracts specifically we consider the setting where agents demands follow heterogeneous distributions and the principal offers a menu of contracts stipulating quantities and transfer payments for each demand distribution we present analytical solutions for the special case when there are two distributions each taking two discrete values as well as a method for deriving analytical solutions from numerical solutions we describe one application of the model in carbon capture and storage systems to demonstrate various types of optimal solutions and to obtain managerial insights

improving supply chain performance and managing risk under weather related demand uncertainty we consider a manufacturer retailer supply chain for a seasonal product whose demand is weather sensitive the retailer orders from the manufacturer supplier prior to the selling season and then sells to the market we examine how a manufacturer can structure a weather linked rebate to improve his expected profit the proposed class of rebate contracts offers several advantages over many other contract structures including no required verification of leftover inventory and or markdown amounts and no adverse effect on sales effort by the retailer we provide a thorough analysis of the manufacturer s and retailer s decisions in this context we show that the weather linked rebate can take many different forms and this flexibility allows the supplier to design contracts that are pareto improving and or limit his risk in offering the contract and the retailer s risk in accepting it for weather rebates with certain characteristics the manufacturer can fully hedge his risks of offering a weather rebate by paying a risk premium we show how this can be accomplished we also show that the basic structural results extend to settings in which the two parties would like to limit their risk

optimal shared savings contracts in supply chains linear contracts and double moral hazard in many supply chains consumption of indirect materials sold by a supplier to a customer for use in her production process can be reduced by efforts exerted by either party since traditional supply contracts provide no incentive for the supplier to exert such effort shared savings contracts have been proposed as a way to improve incentives in the channel leading to more efficient effort choices by the two parties such shared savings contracts typically combine a fixed service fee with a variable component based on consumption volume we formalize this situation using the double moral hazard framework in which both parties decide how much effort to exert by trading off the cost of their effort against the benefits that they will obtain from reduced consumption we also extend the double moral hazard framework to analyze a broader class of cost of effort functions than considered so far including the linear cost of effort functions commonly found in practice we show that the supplier can still always induce the optimal second best equilibrium with a linear shared savings contract under this broader class of functions however the behavior of the optimal contract as a function of the problem parameters becomes more complex we illustrate how small changes in the problem parameters can turn profits from being a well behaved to a poorly behaved function of the contract and provide some theoretical characterization of this phenomenon the practical significance of this is that simple linear contracts are sufficient in many double moral hazard contexts even for the broader class of functions we consider but care must be taken in selecting the optimal contract parameters

loss aversion and rationality in the newsvendor problem under recourse option abstract risk neutral assumption in the newsvendor problem under recourse option predicts the order quantity insensitive to the selling price and risk aversion modeled through common utility functions gives decreasing order quantity with increasing selling price in this paper we consider loss aversion to model the choice preference of the decision maker in the newsvendor problem under recourse option and prove that loss aversion predicts the rational ordering behavior of the newsvendor with respect to the changes in price and cost parameters further we find that loss aversion can significantly improve the performance of utility function based models in predicting the rational behavior we extend the analysis to a supply chain setting and establish coordinating contract between a loss averse retailer facing a newsvendor problem and a risk neutral supplier under recourse option we find that the contract parameter does not depend on the loss aversion hence the same contract can be implemented with retailers with different levels of loss aversion

myopia redistribution and pensions this paper reviews a number of recent contributions that study pension design with myopic individuals its objective is to explore how the presence of more or less myopic individuals affects pension design when individuals differ also in productivity this double heterogeneity gives rise to an interesting interplay between paternalistic and redistributive considerations which is at the heart of most of the results that are presented the main part of the paper is devoted to the issue of pension design when myopic individual do not save enough for their retirement because their myopic self with a high discount rate emerges when labor supply and savings decisions are made some extensions and variations are considered in the second part in particular we deal with situations where labor disutility or preferences for consumption are subject to habit formation and where sin goods have a detrimental effect on second period health myopic individuals tend to underestimate the effects of both habit formation and sinful consumption which complicates public policy

efficient adaptation in long term contracts take or pay provisions for natural gas to mitigate the inflexibility of long term contracting for natural gas parties will look for terms that minimize the need for costly adjudication while maintaining incentives for appropriate adaptation the authors examine the incident of take or pay provisions in contracts between natural gas producers and pipelines from this perspective they argue that take obligations can be viewed as a mechanism for effecting appropriate incentives for contractual performance and show that efficient breach considerations define an optimal take percentage as a function of characteristics of the transaction these incentives are distorted by regulated price ceilings which cause the adoption of take obligations in excess of optimal levels the findings refute the common perception that take or pay provisions are just an artifact of wellhead price regulation and serve no useful purpose in the absence of regulation 20 references 1 figure 1 table

solutions for flexible container leasing contracts with options under capacity and order constraints abstract the container shipping market becomes prosperous with the development of the global economy as shipping networks become more complex and heterogeneous container capacity planning becomes more difficult this paper tackles the container planning problem from the carrier s perspective in a two echelon container shipping service chain cssc which includes one carrier and one upstream rental company a flexible contract with options is introduced into the one period container planning mechanism with the flexible options contract the rental company requires the carrier to make a commitment or place an order in advance options give buyer the right to modify the initial orders to better match the supply with the demand based on the carrier s decision tendency i e aggressive or conservative we analyze the application strategies of the unilateral options and the bidirectional options in different practical scenarios in particular for the applicability of the decision models we further consider the shipping capacity and the minimum order constraints and formulate the carrier s option policies with constrained nonlinear programs numerical examples show that the proposed decision strategies with option contract cannot only effectively increase the container trading quantity between the rental company and the carrier but also significantly reduce the carrier s container capacity risk while increasing its profit

designing a firm s coordinated manufacturing and supply decisions with short product life cycles in this paper we consider a problem of joint coordination between a firm s manufacturing and supply departments the manufacturing department is responsible for meeting random demand of a product with a short life cycle the supply department s responsibility is to provide the sufficient amount of raw materials so that the required production level can be achieved when coordination prevails both departments decisions are jointly made otherwise decisions are made independently without an exchange of information if the random demand exceeds the amount produced a second production run can be expedited at a substantially higher cost our analysis yields insightful results to such a coordination problem between the two departments we provide conditions under which it is desirable to coordinate resulting in a significant increase in expected profit if coordination is optimal then the supply department would purchase additional reserved material for the second run under this scenario we analyze the effects of joint coordination on the expected profit we also find explicit conditions for which joint coordination is not beneficial i e the supply department should only order sufficient material to meet the first production run requirements we provide a detailed set of numerical examples and generate response surfaces indicating the desirability of coordination for different pairs of parameter combinations

managing supply uncertainty under supply chain cournot competition abstract we study the cournot competition between two supply chains that are subject to supply uncertainty each supply chain consists of a retailer and an exclusive supplier which has random yield we examine how the levels of supply uncertainty and competition intensity affect the equilibrium decisions of ordering quantity contract offering and centralization choice we show that a retailer should order more if its competing retailer s supply becomes less reliable or if its own supply becomes more reliable a supply chain with reliable supply can take great advantage of the high supply risk of its competing chain furthermore for decentralized chains we characterize the optimal wholesale price contracts with linear penalty under different supply risks and competition scenarios finally we show that supply chain centralization is a dominant strategy and it always makes the customers better off nevertheless if the supply risk is low and the chain competition is intensive centralization could actually decrease the supply chain profit compared with the case where both chains do not choose centralization this results in a prisoner s dilemma on the other hand if the supply risk is high and or the competition level is low centralization always increases the supply chain profit the desirability of supply chain centralization is enhanced by high supply uncertainty or low chain competition

channel coordination under price protection midlife returns and end of life returns in dynamic markets this paper examines three channel policies that are used in declining price environments price protection p is a mechanism under which the manufacturer pays the retailer a credit applying to the retailer s unsold inventory when thewholesale price drops during the life cycle midlife returns m allow the retailer to return units partway through the life cycle at some rebate and end of life returns e allow the retailer to return unsold units at the end of the life cycle under decliningretail prices if the wholesale prices and the return rebates are set properly then em i e midlife and end of life returns achieves channel coordination however such a policy may not be implementable because it may require the manufacturer to be worse off as a result of coordination if p is used in addition to em and the terms are set properly then pem guarantees both coordination and a win win outcome if theretail price is constant over time then em is sufficient to guarantee both coordination and a win win outcome

pretia ex machina prices and process in long term contracts aimong the primary motives for writing contracts identified in both the law and economics literatures is the desire to protect against the hazards inherent to exchange where one or both parties have invested in reliance or relationship specific assets in support of the transaction because such investments have a higher value in their intended than in their next best use parties have an incentive to engage in haggling or other forms of opportunism in hopes of influencing the distribution of the resulting quasi rents contracts promote efficiency by securing the distribution of those rents ex ante thereby avoiding costly repetitive bargaining over the terms of trade and reducing the risk for each party of relying on the performance of the other in reality this description of the role and functioning of contracting is oversimplified as a number of legal and economic scholars have emphasized contracts are not the precise mechanically enforced documents often encountered in economic theory 2 indeed contracts are extremely

studying optimal paternalism illustrated by a model of sin taxes the classical economic approach to policy analysis assumes that people always respond optimally to the costs and benefits of their available choices a great deal of evidence suggests however that in some contexts people make errors that lead them not to behave in their own best interests economic policy prescriptions might change once we recognize that humans are humanly rational rather than superhumanly rational and in particular it may be fruitful for economists to study the possible advantages of paternalistic policies that help people make better choices we propose an approach for studying optimal paternalism that follows naturally from standard assumptions and methods of economic theory write down assumptions about the distribution of rational and irrational types of agents about the available policy instruments and about the government s information about agents and then investigate which policies achieve the most efficient outcomes in other words economists ought to treat the analysis of optimal paternalism as a mechanism design problem when some agents might be boundedly rational this approach has many advantages first and foremost by explicitly addressing when and how people do and don t pursue their own best interests economists will be better able to contribute to policy debates to contribute to debates over regulating private financial decisions we must study whether financial decisions are based on fallacious statistical reasoning and whether self control problems lead people to borrow too heavily to contribute to debates over teenage smoking we must study whether teenagers become smokers against their long run best interest economists will and should be ignored if we continue to insist that it is axiomatic that constantly trading stocks or accumulating consumer debt or becoming a heroin addict must be optimal for the people doing these things merely because they have chosen to do it a second advantage of our approach is that it forces us to look for the best feasible policy our

microfinance and poverty in bolivia both in its institutional range and in its penetration of financial markets the microfinance sector in bolivia rivals any in the world and has played a major part in extracting the macro economy from meltdown since the mid 1980s we seek specifically to assess its impact on poverty and do this through small sample surveys on four microfinance institutions two urban and two rural using a range of poverty concepts income generated both through the borrower s enterprise and through the labour market asset holdings and diversity and various measures of vulnerability all the institutions studied had on balance positive impacts on income and asset levels with income impacts correlating negatively with income on account of poor households choosing to invest in low risk low return assets microfinance may however augment vulnerability average debt service ratios of microfinance clients are disturbingly high and if the coping mechanisms used by borrowers fail borrowers may be forced out of the

tax incidence when individuals are time inconsistent the case of cigarette excise taxes abstract one of the most cogent criticisms of excise taxes is their regressivity with lower income groups spending a much larger share of their income on goods such as cigarettes than do higher income groups we argue that traditional quantity based measures of incidence are only appropriate under a very restrictive time consistent model of consumption of sin goods a model that is much more consistent with existing evidence on smoking decisions is a time inconsistent formulation where excise taxes on cigarettes serve a self control function that is valued by smokers who would like to quit but cannot this self control function benefits lower income groups more since they have a significantly higher price sensitivity of smoking calibrations show that as a result cigarette taxes are much less regressive than previously assumed and are even progressive for a wide variety of parameter values

coordination of supply chains by option contracts a cooperative game theory approach manufacturer retailer supply chains commonly adopt a wholesale price mechanism this mechanism however has often led manufacturers and retailers to situations of conflicts of interest for example due to uncertain market demand retailers prefer to order flexibly from manufacturers so as to avoid incurring inventory costs and to be able to respond flexibly to market changes manufacturers on the other hand prefer retailers to place full orders as early as possible so that they can hedge against the risks of over and under production such conflicts between retailers and manufacturers can result in an inefficient supply chain motivated by this problem we take a cooperative game approach in this paper to consider the coordination issue in a manufacturer retailer supply chain using option contracts using the wholesale price mechanism as a benchmark we develop an option contract model our study demonstrates that compared with the benchmark based on the wholesale price mechanism option contracts can coordinate the supply chain and achieve pareto improvement we also discuss scenarios in which option contracts are selected according to individual supply chain members risk preferences and negotiating powers

taxing sin goods and subsidizing health care we consider a two period model in the first period individuals consume two goods one is sinful and the other is not the sin good brings pleasure but has a detrimental effect on second period health and individuals tend to underestimate this effect in the second period individuals can devote part of their saving to improve their health status and thus compensate for the damage caused by their sinful consumption we consider two alternative specifications concerning this second period health care decision either individuals acknowledge that they have made a mistake in the first period out of myopia or ignorance or they persist in ignoring the detrimental effect of their sinful consumption we study the optimal linear taxes on sin good consumption saving and health care expenditures for a paternalistic social planner we compare those taxes in the two specifications we show under which circumstances the first best outcome can be decentralized and we study the second best taxes when saving is unobservable

managing channel profits a channel of distribution consists of different channel members each having his own decision variables however each channel member s decisions do affect the other channel members profits and as a consequence actions a lack of coordination of these decisions can lead to undesirable consequences for example in the simple manufacturer retailer consumer channel uncoordinated and independent channel members decisions over margins result in a higher price paid by the consumer than if those decisions were coordinated in addition the ensuing suboptimal volume leads to lower profits for both the manufacturer and the retailer this paper explores the problems inherent in channel coordination we address the following questions what is the effect of channel coordination what causes a lack of coordination in the channel how difficult is it to achieve channel coordination what mechanisms exist which can achieve channel coordination what are the strengths and weaknesses of these mechanism what is the role of nonprice variables e g manufacturer advertising retailer shelf space in coordination does the lack of coordination affect normative implications from in store experimentation can quantity discounts be a coordination mechanism are some marketing practices actually disguised quantity discounts we review the literature and present a simple formulation illustrating the roots of the coordination problem we then derive the form of the quantity discount schedule that results in optimum channel profits this article was originally published in marketing science volume 2 issue 3 pages 239 272 in 1983

is addiction rational theory and evidence this paper makes two contributions to the modeling of addiction first we provide new and convincing evidence that smokers are forward looking in their smoking decisions using state excise tax increases that have been legislatively enacted but are not yet effective and monthly data on consumption second we recognize the strong evidence that preferences with respect to smoking are time inconsistent with individuals both not recognizing the true dife culty of quitting and searching for self control devices to help them quit we develop a new model of addictive behavior that takes as its starting point the standard rational addiction model but incorporates time inconsistent preferences this model also exhibits forward looking behavior but it has strikingly different normative implications in this case optimal government policy should depend not only on the externalities that smokers impose on others but also on the internalities imposed by smokers on themselves we estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational addiction case

quantity discounts under demand uncertainty to motivate buyers to increase their order quantity suppliers often rely on a well established and widely used approach they offer quantity discounts this practice is in large part driven to obtain improved economies in transportation through higher truckload utilization recently transportation rates which are increasing faster than other costs have become a larger portion of total net landed cost placing the traditional quantity discount practices under scrutiny many suppliers are left perplexed as to why their approach is not effective anymore and some are even concerned that their overall profits may have actually decreased due to their discount parameters in this paper we study a multiperiod model with a buyer facing stochastic end item demand and a supplier offering an all units quantity discount to him to understand better the dynamics of such systems we provide guidelines and insights on how to set effective discount parameters and when not to expect much from them we derive the opt

reducing the cost of demand uncertainty through accurate response to early sales traditionally fashion products have incurred high losses due to stockouts and inventory obsolence because long lead times coupled with a concentrated selling season force all or at least most production to be committed before demand information is available under a quick response system lead times are shortened sufficiently to allow a greater portion of production to be scheduled in response to initial demand we model and analyze the decisions required under quick response and give a method for estimating the demand probability distributions needed in our model we applied these procedures with a major fashion skiwear firm and found that cost relative to the current informal response system was reduced by enough to increase profits by 60 relative to the cost that would have been incurred if no response were used optimized response reduces cost by enough to roughly quadruple profits

a serial supply chain of newsvendor problem with safety stocks under complete and partial information sharing abstract we consider a supply chain where multiple members are serially connected the decision is to determine the ordering quantity of a member to the next upstream member in the supply chain the basic cost model is similar to the newsvendor problem with additional consideration to safety stock this paper presents optimal approaches for coordination of the supply chain under both complete and partial information sharing in order to maximize the total expected benefit for complete information sharing we develop an optimal coordination algorithm for partial information sharing we propose an optimal coordination algorithm based on the alternating direction method and the diagonal quadratic approximation method a numerical example is discussed to show the optimal convergence of ordering quantities and discuss the properties of the proposed algorithms

optimal sin taxes in the presence of income taxes and health care abstract we present a unified approach to analyze sin taxes by allowing for a non paternalistic view stemming from crowding out externalities in addition to the paternalistic view analytical results show the additive property between the pigouvian and the efficiency elements in optimal sin taxes the pigouvian element can be decomposed into externality components additively although the pigouvian elements are lower in the second best the second best optimal sin taxes are not necessarily lower due to the presence of the efficiency element calibration results show that the implementation of sin taxes has double dividends which improve not only health but also economic performance and welfare

ordering policy and coordination of a supply chain with two period demand uncertainty abstract we develop a two period game model of a one manufacturer and one retailer supply chain to investigate the optimal decisions of the players where stock out and holding costs are incorporated into the model the demand at each period is stochastic and price sharply drops in mid life we assume the retailer has a single order opportunity and decides how much inventory to keep in the middle of selling season we show that both the price protection mid life and end of life returns pme scheme and the only mid life and end of life returns me scheme may achieve channel coordination and access a win win situation under some conditions the larger the lowest expected profit of the retailer the lower the possibility of win win situation will be combined with the analysis of feasible regions for coordination policies we find that pme scheme is not always better than me scheme from the perspective of implementable mechanism finally we find that adopting the dispose down to ddt policy can bring a larger improvement of the expected channel profit in the centralized setting and it is interesting that by using ddt policy double marginalization occurs only at period 1 and however does not plague the retailer in period 2

efficient supply contracts for fashion goods with forecast updating and two production modes we examine the problem of developing supply contracts that encourage proper coordination of forecast information and production decisions between a manufacturer and distributor of high fashion seasonal products operating in a two mode production environment the first production mode is relatively cheap but requires a long lead time while the second is expensive but offers quick turnaround we focus on contracts of the form w1 w2 b wherewi is the wholesale price offered for production modei andb is a return price offered for items left over at the end of the season we find that such a contract can coordinate the manufacturer and distributor to act in the best interest of the channel the pricing conditions needed to ensure an efficient solution vary depending on the degree of demand forecast improvement between periods and the manufacturer s access to forecast information we also examine whether these conditions ensure a pareto optimal solution with respect to two traditional production settings

an infinite horizon inventory model with periodic order commitment abstract this paper studies an infinite horizon inventory model of a buyer with a periodic order commitment the commitment requires the buyer to purchase at least a certain fixed amount on a periodic basis there is no extra adjustment cost should the buyer decide to order more than the basic amount we consider general discrete demand distributions we formulate a markov chain to represent the behavior of the inventory system stimulated by the solution approach to the classical gi m 1 queue we derive the steady state results and obtain the exact closed form cost function numerical examples are provided

diversification under supply uncertainty supply chain management is becoming an increasingly important issue especially when in most industries the cost of materials purchased comprises 40 60 of the total sales revenue despite the benefits cited for single sourcing in the popular literature there is enough evidence of industries having two three sources for most parts in this paper we address the operational issue of quantity allocation between two uncertain suppliers and its effects on the inventory policies of the buyer based on the type of delivery contract a buyer has with the suppliers we suggest three models for the supply process model i is a one delivery contract with all of the order quantity delivered either in the current period with probability or in the next period with probability 1 model ii is also a one delivery contract with a random fraction of the order quantity delivered in the current period the portion of the order quantity not delivered is cancelled model iii is similar to model ii with the remaining quantity delivered in the next period we derive the optimal ordering policies that minimize the total ordering holding and penalty costs with backlogging we show that the optimal ordering policy in period n for each of these models is as follows for x a n order nothing for vi n x a n use only one supplier and for x vi n order from both suppliers for the limiting case in the single period version of model i we derive conditions under which one would continue ordering from one or the other or both suppliers for model ii we give sufficient conditions for not using the second more expensive supplier when the demand and yield distributions have some special form for the single period version of models ii and iii with equal marginal ordering costs we show that the optimal order quantities follow a ratio rule when demand is exponential and yields are either normal or gamma distributed

adjustment strategies for a fixed delivery contract we consider a long term contractual agreement between buyer and seller in whichq units are delivered to the buyer at regular time intervals it must be true that the delivery quantity q is less than the mean demand per period in order to manage the inventory the buyer has the option of adjusting the delivery quantity upwards just prior to a delivery but must pay a premium to do so demand is assumed random and we model the system in a continuous review setting we show that the equations one must solve to find optimal adjustment strategies are intractable a diffusion approximation is developed which when coupled with the solution to an even simpler deterministic version of the problem yields very simple but effective approximations extensive computations are included to compare the performance of the optimal and approximate policies we also empirically derive a formula for computingq whose accuracy is established computationally we prove that the fixed delivery contract results in lower variance of orders to the seller we also include a computational study to find the unit cost discount that equalizes the expected costs for the fixed delivery contract and the base stock contract for a large parameter set

a simple model for merit good arguments abstract in this paper we examine a way of representing merit goods by allowing governments to apply a specific form of correction to consumers preferences the model builds upon an approach to the analysis of taste and quality change due to fisher and shell we look at the first best allocation of resources where this is done we also consider second best policies in which the government must charge the same price to all consumers of the merit good and when optimal lump sum transfers are not available

the right to return this article studies the allocation of responsibility for unsold inventory provision for which is made in practically every distribution contract the two extreme cases are the consignment contract which allocates all the burden to the manufacturer and the no return contract in which retailers purchase the merchandise outright and assume responsibility for unsold inventory contract choices are shown to vary across countries industries products and types of transactions the article identifies six main factors affecting this choice optimal inventory policy in a stochastic retail demand environment relative advantage in disposing of the unsold inventory optimal risk allocation incentives to invest in promotions and provide services to increase consumer demand information asymmetry and costs associated with the consignment contract per se several testable implications are presented and the choice of contracts in the publishing industry is shown to be consistent with the predictions of the model

supply contract with bidirectional options the buyer s perspective abstract this paper develops a single period two stage supply contract with bidirectional options by which the buyer can adjust the initial order both upward and downward at the beginning of the planning horizon the buyer places an initial order and purchases options after updating the demand forecast the buyer exercises options to adjust the initial order we analyze the contract from the buyer s perspective and formulate the buyer s optimal policies in particular we obtain closed form formulae to describe the buyer s optimal behavior when the demand is uniformly distributed we also analyze how the parameters affect the buyer s behavior and prove numerically that using bidirectional options can improve the buyer s profit

information distortion in a supply chain the bullwhip effect this article originally appeared in management science april 1997 volume 43 number 4 pp 546 558 published by the institute of management sciences consider a series of companies in a supply chain each of whom orders from its immediate upstream member in this setting inbound orders from a downstream member serve as a valuable informational input to upstream production and inventory decisions this paper claims that the information transferred in the form of orders tends to be distorted and can misguide upstream members in their inventory and production decisions in particular the variance of orders may be larger than that of sales and distortion tends to increase as one moves upstream a phenomenon termed bullwhip effect this paper analyzes four sources of the bullwhip effect demand signal processing rationing game order batching and price variations actions that can be taken to mitigate the detrimental impact of this distortion are also discussed

myopic optimal policy for a multi period two delivery lead times stochastic inventory problem with minimum cumulative commitment and capacity abstract this paper studies a single product multi period stochastic inventory problem that imposes the lower and upper bounds on the cumulative order quantity during a planning horizon and allows two delivery lead times this model includes three features the first one is that a buyer purchases a fixed capacity from a supplier at the beginning of a planning horizon and the buyer s total cumulative order quantity during the planning horizon is constrained with the capacity the second one is that the buyer agrees to purchase the product at least a certain percentage of the purchased capacity during the planning horizon the third one is that the supplier allows the buyer to order the product with two delivery lead times we identify conditions under which a myopic ordering policy is optimal we also develop an algorithm to calculate the optimal capacity when the minimum cumulative order quantity commitment is a certain percentage of the capacity we then use the algorithm to evaluate the effect of the various parameters on the buyer s minimum expected total cost during the planning horizon our computation shows that the buyer would benefit from the commitments and two delivery lead times

the political economy of sin taxes we analyse the determination of taxes on harmful goods when consumers have self control problems we show that under reasonable assumptions the socially optimal corrective tax exceeds the average distortion caused by self control problems further we analyse how individuals with self control problems would vote on taxes on the consumption of harmful goods and show that the equilibrium tax is typically below the socially optimal level when the redistributive effects of sin taxes are taken into account the difference between the social optimum and equilibrium is small at low levels of harm but becomes more pronounced when consumption is more harmful

endogenous default risk in supply chain and non linear pricing abstract based on incomplete contract theories we studied the strategic behaviors of up stream and down stream manufacturers by option game model and obtain some conclusions first the down stream s pay off function is a concave function of its investment in fixed assets so there is an optimal investment which ensures the down stream s maximal pay off and prevents it from being holdup second in presence of endogenous default risks the up stream can improve its pay off level through non linear pricing last increasing business risks of the down stream may lead to an increased price fluctuation of the up stream while the down stream s technological advancement can make such fluctuation less

optimal sin taxes abstract we investigate sin taxes on unhealthy items such as fatty foods that people may by their own reckoning consume too much of we employ a standard optimal taxation framework but replace the standard assumption that all consumers have 100 self control with an assumption that some consumers may have some degree of self control problems we show that imposing taxes on unhealthy items and returning the proceeds to consumers can generally improve total social surplus because such taxes counteract over consumption by consumers with self control problems while at the same time they naturally redistribute income to consumers with no self control problems who consume less such taxes can even create pareto improvements finally we demonstrate with some simple numerical examples that even if the population exhibits relatively few self control problems optimal taxes can still be large

procurement planning to maintain both short term adaptiveness and long term perspective we study the fuel procurement problem for electrical utilities under uncertain demand and market price long term contractual supply commitments are made at a set price with fuel suppliers at the beginning of each year each month the procurement planner can use fuel from these contracts or purchase fuel at the current market price motivated by practical insights from this market we propose a two phase dynamic procedure to determine a procurement plan in the first phase the minimum contract purchases for each month are determined at the beginning of the year in the second phase given the minimum contract purchases the more detailed procurement decisions are determined at the beginning of each month with the most up to date information we perform intensive computational experiments that show that this procedure produces high quality solutions comparable to a rolling horizon stochastic programming heuristic is easier to maintain and generalize is computationally faster and is robust to random fluctuations in demand requirements spot market prices and other sources of uncertainty

governmental interventions and household behavior in a developing country anticipating the unanticipated consequences of social programs abstract estimates of the joint effects of governmental health education and family planning programs as well as sources of water on fertility child mortality and schooling are obtained from combined district level and household level data from rural india the estimates are used both to test the implications of a model of household decision making and to assess the effectiveness of the joint public provision of such services in shifting resources from increasing family size to augmenting human capital per person the results appear consistent with household optimizing behavior and suggest that reductions in the costs of medical services contraceptives and schooling and the improvement of water sources are mutually reinforcing alternatives for implementing the joint policy goals of reduced population growth and increased human capital formation

optimal policies for inventory systems with priority demand classes we consider a periodic review inventory system with two priority demand classes one deterministic and the other stochastic the deterministic demand must be met immediately in each period however the units of stochastic demand that are not satisfied during the period when demand occurs are treated as lost sales at each decision epoch one has to decide not only whether an order should be placed and how much to order but also how much demand to fill from the stochastic source the firm has the option to ration inventory to the stochastic source i e not satisfy all customer demand even though there is inventory in the system we first characterize the structure of the optimal policy we show that in general the optimal order quantity and rationing policy are state dependent and do not have a simple structure we then propose a simple policy called s k s policy wheres ands ordering policy determine when and how much to order whilek rationing policy specifies how much of the stochastic demand to satisfy we report the results of a numerical study which shows that this simple policy works extremely well and is very easy to compute

optimal policy for a dynamic non stationary stochastic inventory problem with capacity commitment abstract this paper studies a single product dynamic non stationary stochastic inventory problem with capacity commitment in which a buyer purchases a fixed capacity from a supplier at the beginning of a planning horizon and the buyer s total cumulative order quantity over the planning horizon is constrained with the capacity the objective of the buyer is to choose the capacity at the beginning of the planning horizon and the order quantity in each period to minimize the expected total cost over the planning horizon we characterize the structure of the minimum sum of the expected ordering storage and shortage costs in a period and thereafter and the optimal ordering policy for a given capacity based on the structure we identify conditions under which a myopic ordering policy is optimal and derive an equation for the optimal capacity commitment we then use the optimal capacity and the myopic ordering policy to evaluate the effect of the various parameters on the minimum expected total cost over the planning horizon

real options and demographic decisions abstract the theory of real options is used to incorporate the influence of uncertainty on demographic decision making the decision to have children is formulated as an investment using portfolio theory the timing of the decision to have a child is modelled as a real options decision with uncertainty affecting a woman s ability to exercise the option to wait in order to delay or space births an increase and reduction in uncertainty on this option is explored compared to the widely used net present value npv framework the real options approach roa better explains the process of demographic decision making in poor countries

income and employment effects of micro credit programmes village level evidence from bangladesh micro credit programmes having made their mark in providing credit and other development services to the poor in a non traditional way are able to make significant changes in a rural economy this article attempts to quantify the village level impacts of the three most important micro credit programmes of bangladesh namely grameen bank bangladesh rural advancement committee brac and bangladesh rural development board s brdb rd 12 project descriptive and econometric analyses show that these programmes have positive impacts on income production and employment particularly in the rural non farm sector also growth in self employment has been achieved at the expense of wage employment which implies an increase in rural wages the article emphasises that an upward shift in the labour demand curve is required for both improved productivity and wage gains on a sustainable basis which can only be supported through a structural transformation of the rural economy

earmarking and the political support of fat taxes a fat and a healthy good provide immediate gratification and cause health costs or benefits in the long run which are misperceived additionally the fat good healthy good increases decreases health care costs by increasing decreasing the probability of suffering from a chronic disease in the future individuals differ in income and in their degree of misperceptions concerning the health effects of the consumption of fat and of healthy goods the level of the fat tax is determined through majority voting individuals vote according to their misperceived utility function consequently excessive fat consumption is not due to a self control problem but due to information deficiencies or cognitive inability to process information a fraction of the fat tax proceeds is earmarked to reduce health insurance premiums while the remaining fraction finances a subsidy on the healthy good this earmarking rule is determined at a constitutional stage to maximize utilitarian or rawlsian welfare anticipating the induced political equilibrium we show that the fat tax in the political equilibrium is always lower than the utilitarian fat tax this is no longer necessarily true with a rawlsian objective the determination of the optimal earmarking rule is quite complex even in the utilitarian case it is not just used to boost political support for the fat tax instead it may involve a tradeoff between the fat tax and the healthy good subsidy

information sharing in a long term supply chain relationship the role of customer review strategy in this paper we study the practice of forecast sharing and supply chain coordination with a game theoretical model we find that in a one shot version of the game forecasts are not shared truthf

non linearities in returns to participation in grameen bank programs abstract this paper studies the benefits of participation in micro finance programs where benefits are measured in terms of the ability to smooth the effect of seasonal shocks that cause consumption fluctuations it is shown that although membership in these programs is an effective instrument in combating inter seasonal consumption differences there is a threshold level of length of participation beyond which benefits begin to diminish returns from membership are modelled using an euler equation approach fixed effects non linear least squares estimation of parameters using data from 24 villages of the grameen bank suggests that returns to participation as measured by the ability to smooth seasonal shocks begin to decline after approximately two years of membership this implies that membership alone no longer has a mitigating marginal effect on seasonal shocks to per capita consumption after four years of participation such patterns suggest that the ability to smooth consumption as a function of l

access to water women s work and child outcomes abstractpoor rural women in the developing world spend considerable time collecting water do women living in places where more time is needed for water collection tend to participate less in income earning market based activities do the education outcomes of their children tend to be worse we use micro data for nine developing countries to help address these questions our primary aim is to describe the patterns in the data rather than to infer causality although we do treat the household level access to water as endogenous assuming that community level access is exogenous conditional on a wide range of geographic factors better access to water is not found to be associated with greater off farm paid work but is associated with less unpaid work for women in countries where substantial gender gaps in schooling exist both boys and girls enrollments also tend to be better

the impact of customer returns and bidirectional option contract on refund price and order decisions abstract this study investigates the impacts of customer returns and a bidirectional option contract on a newsvendor firm s refund price and order decisions the stochastic demand is refund price sensitive we show that the optimal refund price increases with the option price and decreases with both the wholesale and exercise prices while the optimal order quantity increases with the exercise price but decreases with both the wholesale and option prices furthermore we illustrate that in the presence of customer returns the optimal refund price and order quantity decrease the firm should cut the refund price and order more products if a bidirectional option contract is available we identify the conditions under which a firm should offer a full partial or no refund policy we also show that a bidirectional option contract can reduce the negative impact of customer returns and enhance the firm s profit especially under high demand uncertainty

how a dominant retailer might design a purchase contract for a newsvendor type product with price sensitive demand abstract a dominant retailer will purchase a newsvendor type product from a manufacturer who incurs a unit manufacturing cost k the expected retail demand is a function of the unit retail price p how should the retailer design her purchase contract for this increasingly prevalent but inadequately studied scenario we propose plausible adaptations of several contract formats that have been widely studied in the dominant manufacturer context for both symmetric k and a symmetric k knowledge situations we present performance results of these contracts our results then reveal that the performance of these contract formats under our scenario differs considerably from what one would surmise from the well known results published for closely related scenarios for example the widely studied buyback and revenue sharing formats turn out to be largely ineffective when implemented by a dominant retailer in contrast the two part tariff format performs well relative to the theoretically optimal menu of contracts our results highlight the need to study purchase contract formats designed specifically for dominant retailer newsvendor product channels

a value based approach to option pricing the case of supply chain options chapter 6 explores the pricing issue for supply chain options in classical research this issue is generally considered in the stackelberg game framework such a pricing scheme however is usually unacceptable to the follower since the leader always captures all the surplus derived from the options being different from the existing literature this chapter develops a value based pricing scheme for supply chain options with two modeling scenarios including a single retailer and multiple retailers the intuition behind such a pricing scheme is to price the option based on the value inherent in the option right as shown in the research such a pricing scheme can assure that each of the contracting partners captures a share of the surplus derived from the options as a result the pricing schemes developed in this chapter are more objective and fair and consequently are more likely to be accepted by the contracting partners as compared with those that follow the stackelberg game approach

comments on information distortion in a supply chain the bullwhip effect in this commentary we trace back how we pursued research on the bullwhip effect which resulted in the article published in management science we reflect on the evolution of this concept the impact that our work has had on industry the way our work has been used in the teaching of supply chain management and the key directions of research that have taken place since then

comment managing channel profits comment in a recent paper in this journal jeuland and shugan jeuland a s shugan 1983 managing channel profits marketing sci 2 summer 239 272 proposed a quantity discount schedule as a way of coordinating a channel as they put it on p 253 of their paper a quantity discount schedule which would fix the retailer s and hence the manufacturer s profits to some fixed linear function of total channel profits would lead the channel to maximize profits the purpose of this note is to show that a quantity discount schedule is not necessary for channel coordination

forced saving redistribution and nonlinear social security schemes this paper studies the design of nonlinear social security schemes when individuals differ in productivity and in their degree of myopia myopic individuals may not save enough for their retirement the welfare function is paternalistic the rate of time preference of the farsighted is used for both types we show that the solution does not necessarily imply forced savings for the myopics paternalistic considerations are mitigated by incentive effects numerical results suggest that as the proportion of myopic individuals increases there is less redistribution and more forced saving and the desirability of social security increases

commodity options purchasing and credit financing under capital constraint abstract this paper investigates a purchasing contract with options under capital constraint and credit support from a financial institution the buyer who has limited capital can buy commodity options and a fixed order and choose to exercise all or part of the options at a later time we characterize the buyer s optimal ordering strategy with limited capital there is one critical value for the capital that is the buyer will only purchase a fixed order when the capital is less than the value with more capital the buyer will reduce the fixed order quantity and increase the option orders until the capital is used up or the global optimization is reached this result implies that the option is a risk hedging tool only for easy finance companies furthermore we find that when the buyer obtains funding from a financial institution such as a bank the buyer s profit will be increased with bank financing and the buyer s optimal purchasing decision will follow the similar policy and order less options and more fixed orders compared with the case when there is sufficient capital numerical examples are provided to demonstrate the theoretical results

the implications of pooled returns policies abstract when selling products with highly uncertain demands and short life cycles it is common for a manufacturer to offer some form of returns policy to entice the distributors to increase their order quantities in this paper we consider a multi item returns policy called pooled or joint returns policy under which the distributor can return any combination of the products up to r percent of the total purchases across all products we analyze the distributor s optimal profit and order quantity under the pooled returns policy and compare these operating characteristics to the case when a single item non pooled returns policy is instituted under the non pooled returns policy the distributor can only return on individual items using item specific return limits we show an intuitive result that the distributor will always achieve a higher profit under the pooled policy however the manufacturer could actually obtain a lower profit under the pooled policy due to a counter intuitive result the distributor may order less under the pooled policy even though the pooled policy offers more flexibility this counter intuitive result motivates us to determine the conditions under which the distributor would order less under the pooled policy finally we develop a heuristic for determining the distributor s optimal order quantities associated with the n product case under the pooled policy

an economic theory of vertical restraints vertical restraints imposed by manufacturers on the prices locations and sales of retail firms represent a puzzling departure from the simple price mediated exchange of conventional markets in this article we analyze the theoretical basis for these restraints in a setting where retailers inform consumers and are imperfectly competitive and where a manufacturer has some monopoly power we identify three potential externalities affecting retailers decisions these externalities lead to the failure of simple uniform price contracts to coordinate the incentives of retailers with the objective of maximizing combined manufacturer and retailer profits we identify the packages of vertical restraints that are minimally sufficient under various conditions to neutralize the externalities and to achieve the joint profit maximum

contingent claims contracting for purchasing decisions in inventory management option pricing is a common and important practice in the financial community and has become a fundamental theoretical construct in financial economics the theory is quite rich and has potential uses in many other problem domains this paper develops a variant of the theory as applied to inventory planning in particular we consider a risk management approach that uses negotiated option contracts for hedging against price and quantity uncertainty in inventory procurement we derive conditions for the inclusion of options in inventory control as a function both of managerial attitudes toward risk and of the correlation between price and demand

on returns policies with exogenous price we contribute to current research on single period returns policies by making a clear distinction between models in which transfer price is exogenous and models in which one dominant party unilaterally declares a price we compare the equilibrium contracts that result from these two approaches and derive conditions for the equilibrium returns policy to be pareto efficient when transfer price is exogenous our main result is distribution free but we make some interesting observations on channel performance when demand is uniformly distributed

price markdown scheme in a multi echelon supply chain in a high tech industry this paper studies the price markdown scheme in a supply chain that consists of a supplier a contract manufacturer cm and a buyer retailer the buyer subcontracts the production of the final product to the cm the cm buys the components from the supplier and charges the buyer a service fee for the final product produced the price markdown is made possible by the supplier with the development of new manufacturing technologies that reduce the production cost for the sourced component consequently the buyer adjusts the retail price in order to possibly stimulate stronger demand that may benefit both the supplier and the buyer under this scenario we identify the optimal discount pricing strategies capacity reservation and the stocking policies for the supplier and the buyer we also investigate the optimal inventory decision for the cm to cope with the price discount by considering both demand and delivery uncertainties our results suggest that higher production cost accelerates the effects of higher price sensitivity on lowering the optimal capacity and stocking policies in the supply chain the effect of mean demand error on the optimal prices is relatively marginal compared with that from price sensitivity we also found that increasing the standard deviation of the random demand does not necessarily increase the stocking level as one would predict the results show that delivery uncertainty plays an important role in the inventory carried beyond the price break we discuss potential extensions for future research

note the role of returns policies in pricing and inventory decisions for catalogue goods manufacturers often use returns policies to encourage retailers to stock and price items more aggressively we focus on the effect that such policies have on both a retailer s and a manufacturer s profits when the retailer must commit prior to the selling season to both a stocking quantity and a price at which to sell an item such a commitment is often necessary for retailers who sell primarily through catalogues

a continuous review model for an inventory system with two supply modes in this paper we develop an approximate model of an inventory control system in which there exist two options for resupply with one having a shorter lead time because the optimal policy appears to be extremely complex we consider a reasonable extension of the standard q r policy to allow for two different lot sizes q1 and q2 and two different reorder levels r1 and r2 expressions for the expected on hand inventory and the expected backorders are developed and a procedure for determining the policy parameters is given the model is validated by simulation and calculations are included which compare the average annual cost with and without emergency ordering

sole versus dual sourcing in stochastic lead time s q inventory models when supply lead times are uncertain the simultaneous procurement from two sources offers savings in inventory holding and shortage costs economies are achieved if these savings outweigh the increase in ordering costs in this paper we analyze dual sourcing in the context of the reorder point order quantity inventory model with constant demand and stochastic lead times and compare it with single sourcing two cases are studied using the uniform and the exponential distributions which may be thought of as two extreme ways of representing stochastic lead times in our two vendor model the order quantity is split equally between the two vendors and the split orders are placed simultaneously when the inventory position reaches the reorder level a comparison of the total expected costs suggests that when the uncertainty in the lead times is high and the ordering costs are low dual sourcing could be cost effective

tax incidence with strategic firms in the soft drink market abstract because soft drink sd consumption is considered to be a contributor to the epidemic of obesity there is a growing interest in evaluating the impact on sd consumption of alternative tax policies in this paper we propose a methodology to evaluate the impact of taxation of a food market taking into account the strategic price response of both manufacturers and retailers we apply this methodology to the french sd market and simulate the impacts of ad valorem and excise taxes we find that firms behave differently when facing an ad valorem tax or an excise tax an excise tax is overshifted to consumer prices while an ad valorem tax is undershifted to consumer prices we find that an excise tax based on the sugar content of sd is the most effective at reducing sd consumption our results also indicate that ignoring strategic pricing by firms leads to misestimations of the impact of taxation by between 15 and 40 depending on the products and the tax implemented in the short term that is ignoring positive long term health effects a 9 cents l excise tax has a small negative welfare effect about 1 person year

analysis of supply chains with quantity based fixed incentives abstract this paper examines the use of quantity based fixed incentives to coordinate inventory decisions in a decentralized supply chain we consider a two stage supply chain of autonomous supplier and distributor and prove that the optimal ordering policy for the newsvendor distributor under fixed incentives is an s s type policy we further show that external and internal quantity based incentives can restore channel coordination in single period and channel members can benefit through arbitrary splitting of the resulting additional chain profit the single period results are extended to multiple periods and the impact of fixed incentives on the distributor s optimal stocking policy and channel efficiency are examined under three different multi period supplier strategies numerical examples are used to compare the multi period strategies and to provide additional managerial insights the results show that contrary to common belief incentive plans developed and maintained based only on current inventory data perform poorly in long term and that such incentive plans must be periodically updated to enhance their efficiency furthermore we show that high level of incentives designed to push too much inventory downstream of the supply chain can actually reduce the chain s efficiency

a note on optimal paternalism and health capital subsidies this paper concerns the policy implications of a potential self control problem underlying the consumption of unhealthy food our results show that subsidies on wealth and healthcapital can be used

optimal paternalistic health and human capital subsidy abstract we characterize the first best earnings subsidy when agents are heterogeneous with respect to present biased preferences and cognitive skills when agents health and human capital biased allocations affect not only welfare but also their labor earnings a single subsidy corrects for agents mistaken decisions we highlight two novel features of paternalistic interventions the effects of agents decisions on the economy s supply side through future productivity and the role of cognitive skills on individual s optimal trade off between human capital accumulation and leisure we compare this optimal subsidy to an alternative policy package

optimal tax rules and addictive consumption abstract this paper studies implementation of the social optimum in a model of addictive consumption we consider corrective taxes that address inefficiencies due to negative externalities imperfect competition and self control problems our setup allows us to evaluate how such taxes are affected by i market power and ii a requirement for implementation to be time consistent together these features can imply significantly lower taxes we provide a general characterization of the optimal tax rule and illustrate it with two examples

optimal ordering decisions with uncertain cost and demand forecast updating we determine the optimal ordering policy for a retailer who has two instants to order a seasonal product from a manufacturer prior to a single selling season while the demand is uncertain the retailer can improve the forecast by utilizing the market signals observed between the first and second instants however because of the nature of the manufacturing environment the unit cost at the second instant is uncertain and could be higher or lower than the unit cost at the first instant to determine the profit maximizing ordering strategies at both instants the retailer has to evaluate the trade off between a more accurate forecast and a potentially higher unit cost at the second instant we present a nested newsvendor model for determining the optimal order quantity at each instant and characterize the conditions under which it is optimal for the retailer to delay its order until the second instant

supply chain coordination perspectives empirical studies and research directions supply chains sc are generally complex and are characterized by numerous activities spread over multiple functions and organizations which pose interesting challenges for effective sc coordination to meet these challenges sc members must work towards a unified system and coordinate with each other a systematic literature review is presented in this paper to throw light on the importance of sc coordination the objectives of this paper are to report and review various perspectives on sc coordination issues understand and appreciate various mechanisms available for coordination and identify the gaps existing in the literature a framework is suggested indicating scope for further research

the quantity flexibility contract and supplier customer incentives consider a supply chain consisting of two independent agents a supplier e g a manufacturer and its customer e g a retailer the latter in turn serving an uncertain market demand to reconcile manufacturing procurement time lags with a need for timely response to the market such supply chains often must commit resources to production quantities based on forecasted rather than realized demand the customer typically provides a planning forecast of its intended purchase which does not entail commitment benefiting from overproduction while not bearing the immediate costs the customer has incentive to initially overforecast before eventually purchasing a lesser quantity the supplier must in turn anticipate such behavior in its production quantity decision this individually rational behavior results in an inefficient supply chain this paper models the incentives of the two parties identifying causes of inefficiency and suggesting remedies particular attention is given to the quantity flexibility qf contract which couples the customer s commitment to purchase no less than a certain percentage below the forecast with the supplier s guarantee to deliver up to a certain percentage above under certain conditions this method can allocate the costs of market demand uncertainty so as to lead the individually motivated supplier and customer to the systemwide optimal outcome we characterize the implications of qf contracts for the behavior and performance of both parties and the supply chain as a whole

longevity genes and efforts an optimal taxation approach to prevention this paper applies the analytical tools of optimal taxation theory to the design of the optimal subsidy on preventive behaviours in an economy where longevity varies across agents and depends on preventive expenditures and on longevity genes public intervention can be here justified on three grounds corrections for misperceptions of the survival process and for externalities related to individual preventive behaviour and redistribution across both earnings and genetic dimensions the optimal subsidy on preventive expenditures is shown to depend on the combined impacts of misperception externalities and self selection it is generally optimal to subsidize preventive efforts to an extent depending on the degree of individual myopia on how productivity and genes are correlated and on the complementarity of genes and preventive efforts in the survival function

optimal redistributive taxation when government s and agents preferences differ abstract paternalism merit goods and specific egalitarianism are concepts we sometimes meet in the literature the thing in common is that the policy maker does not fully respect the consumer sovereignty principle and designs policies according to some other criterion than individuals preferences using the self selection approach to tax problems developed by stiglitz stiglitz j e 1982 self selection and pareto efficient taxation journal of public economics 17 213 240 and stern stern n h 1982 optimum taxation with errors in administration journal of public economics 17 181 211 the paper provides a characterization of the properties of an optimal redistributive mixed tax scheme in the general case when the government evaluates individuals well being using a different utility function than the one maximized by private agents

voting over type and generosity of a pension system when some individuals are myopic this paper studies the determination through majority voting of a pension scheme when society consists of far sighted and myopic individuals all individuals have the same basic preferences but myopics tend to adopt a short term view instant gratification when dealing with retirement saving and labor supply consequently they will find themselves with low consumption after retirement and regret their insufficient savings decisions henceforth when voting they tend to commit themselves into forced saving we consider a pension scheme that is characterized by two parameters the payroll tax rate that determines the size or generosity of the system and the bismarckian factor that determines its redistributiveness individuals vote sequentially we examine how the introduction of myopic agents affects the generosity and the redistributiveness of the pension system our main result is that a flat pension system is always chosen when all individuals are of one kind all far sighted or all myopic while a less redistributive system may be chosen if society is composed of both myopic and far sighted agents furthermore while myopic individuals tend to prefer larger payroll taxes than their far sighted counterparts the generosity of the system does not always increase with the proportion of myopics

quality standards versus nutritional taxes health and welfare impacts with strategic firms the goal of this paper is to better understand firms strategic reactions to nutritional policies targeting food quality improvements and to derive optimal policies we propose a model of product differentiation taking into account the taste and health characteristics of products we study how two firms react to alternative policies an mqs policy linear taxation of the two goods on the market and taxation of the low quality good the mqs and the taxation of the low quality product are the preferred options by a social planner if taste is moderately important the mqs policy is chosen by a populist and a paternalist social planner if taste is a major component of choice the populist planner chooses to tax the low quality product whereas the paternalist planner prefers the mqs policy finally for a paternalist social planner an mqs based policy always allows for higher levels of welfare than an information policy alone