the role of reference prices in experimental auctions abstract we examine the role of reference prices field prices in willingness to pay studies involving experimental auctions using a 2nd price vickrey auction we find that provision of reference prices increases bid values

bidding behavior in first price sealed bid auctions use of computerized nash competitors abstract results are reported from a series of first price sealed bid auctions where bidders face computerized nash equilibrium competitors the results provide strong support for employing this newly developed methodology as a testing procedure for nash equilibrium bidding models

asymmetric promotion effects and brand positioning several studies have shown that promotions of national brands yield more effect than those of store brands e g allenby and rossi 1991 blattberg and wisniewski 1989 however the evolution of price quality data available from consumer reports over the last 15 years seems to reveal a reduction of the quality gap between store brands and national brands while price differences remain substantial simultaneously the share of private label brands has increased progressive grocer 1994 in this context we study whether we can maintain a view of the world where national brands may easily attract consumers from store brands through promotions whereas store brands are relatively ineffective in attracting consumers from national brands by such means we analyze consumer reactions to price discounts in a parsimonious preference model featuring loss aversion and reference dependence along dimensions of price and quality hardie johnson and fader 1993 tversky and kahneman 1991 the key result of our analysis is that given any two brands there is an asymmetric promotion effect in favor of the higher quality higher price brands if and only if the quality gap between the brands is sufficiently large in comparison with the price gap thus the direction of promotion asymmetry is not unconditional it depends uniquely on the value of the ratio of quality and price differences compared to a category specific criterion which we call if the ratio of quality and price differences is larger than this criterion the usual asymmetry prevails if such is not the case the lower quality lower price brands promote more effectively more precisely our model predicts that cross promotion effects depend on two components of brand positioning in the price quality quadrant first we define a variable termed positioning advantage that indicates whether relative to the standards achieved by another brand a given brand is underpriced positive advantage or overpriced negative advantage promotion effectiveness is increasing in this variable second cross promotion effects between two brands depend on their distance in the price quality quadrant this variable impacts promotion effectiveness negatively and symmetrically for any pair of brands positioning advantage and brand distance are orthogonal components of brand positioning irrespective of the degree of correlation between available price and quality levels in the market empirically we investigate the role of brand positioning in explaining cross promotion effects using panel data from the chilled orange juice and peanut butter categories we compute the independent positioning variables positioning advantage and brand distance from readily available data on price and quality positioning after obtaining our estimates of we next measure promotion effectiveness by estimating choice share changes in response to a price discount using a choice model that does not contain any information about quality price ratios finally we test the relation between the two positioning variables and the promotion effectiveness measures the data reveal that in the orange juice category lower quality lower price brands generally promote more effectively than higher quality higher price brands in the peanut butter data the opposite asymmetry holds in both cases inter brand promotion patterns are well explained by the positioning variables an attractive feature of our model is that in addition to the direction of promotion asymmetries it also explains the extent of those asymmetries a further interesting aspect of this approach is that we go beyond a categorization of brands into price tiers for instance lower tier brands in our data may promote more effectively than one national brand but less effectively than another consistent with our theoretical predictions the data presented here seem to confirm that such cases occur because the lower tier brand offers a favorable trade off of price and quality differences compared with one national brand and a less favorable trade off compared with the other the content of this paper is potentially relevant for brand managers or retailers concerned with predicting the impact of their promotions the paper is of particular interest to marketing scientists who study the performance of store brands versus national brands and may also appeal to those who wish to explore the marketing implications of behavioral decision theory finally our investigation does not reject blattberg and wisniewski s 1989 finding shared by allenby and rossi 1991 and hardie johnson and fader 1993 that national brands have a principle advantage in promotion effectiveness rather it formalizes when this principle advantage is overruled by positioning disadvantages of such brands

a model of how discounting high priced brands affects the sales of low priced brands drawing on a consumer preference distribution structure postulated in analytical modeling research the author develops a separate effects model that separates the total discount effect of a compet

how trading institutions affect financial market performance some laboratory evidence i introduction trading institutions vary considerably across contemporary financial markets 1 but most can be classified into one of two basic types the continuous double auction da allows traders to submit public offers to buy or to sell and to accept other traders offers at any moment in time the double auction institution offers immediacy but non uniform transaction prices the other basic trading institution the clearinghouse ch gathers offers and clears them at a unified price at a pre specified time it sacrifices immediacy for uniform transaction prices 2 the two types of institutions have co existed and evolved for centuries but now are emerging in new electronic versions market participants and policy makers would like to know which institution or variant or combination is most efficient but theoretical and empirical work to date provides little guidance this paper reports on a series of laboratory asset markets experiments designed to compare variants of the double auction and clearinghouse trading institutions the markets are small usually with eight or nine traders but the traders are profit motivated and experienced with the trading institutions the traded asset has uncertain market value and traders receive useful but inconclusive private information they can only learn the asset s true value during the course of trade laboratory markets offer several advantages for empirical study of financial market institutions first private information is observable even controllable in the laboratory and therefore the investigator can directly measure market efficiency 3 second the complexity of the environment can be varied systematically in the laboratory and its effects on market performance can be separated from the effects of the market institution and other forces finally the market institution itself is controllable in the laboratory so it is possible to make valid causal inferences on how the market institution shapes market performance i begin with a survey of relevant literature and other preliminaries in the rest of this section section ii outlines the laboratory procedures the creation of trading environments of varying complexity the electronic implementation of the clearinghouse and double auction trading institutions the computation of theoretical benchmark prices and allocations and the measurement of market performance section iii collects the results following an illustrative account of a double auction trading period and a clearinghouse trading period i use descriptive statistics to summarize market performance in each of the thirty nine experiments the main conclusions are based on statistical comparisons of market performance across alternative market institutions the clearinghouse institution does surprisingly well it delivers greater market depth than the double auction discovers prices at least as efficiently and produces final allocations almost as efficient as the double auction the main institutional variants examined in this paper concern the amount of information made public regarding order placement orderflow the data suggest that public display of the orderflow enhances double auction efficiency but may impair clearinghouse efficiency a study of trading volume shows higher volume in the double auction in both institutions volume increases when important private news arrives and when the trading period is about to end the paper concludes with a brief summary and discussion of the results a companion paper friedman 1991 considers the effects of awarding various privileges to some but not all traders copeland and friedman 1987 1991 provide useful background information on laboratory procedures and computerized double auction markets instructions for the current experiments are available on request the need for empirical work a skeptic might argue that empirical work is unnecessary the mere fact that the double auction and clearinghouse institutions both persist in major financial markets implies that both are highly efficient because a more efficient institution would displace less efficient institutions

do regulations work a comprehensive analysis of price limits and trading restrictions in experimental asset markets with deterministic and stochastic fundamental values abstract we examine how traders react to two prominent stock market regulations under a constant fundamental value fv process price limits and trading restrictions significantly reduce the price level and mispricing size when traders are inexperienced under a markov process fv there is no evidence for these regulations to reduce mispricing the novel markov process also serves as a testbed for several financial hypotheses related to the regulations we find that price limits do not improve reactions to market news and the binding of price limits magnifies the momentum in the price movements these findings suggest that the scope of these regulations is limited and that they can backfire in some market environments

bubbles crashes and endogenous expectations in experimental spot asset markets1 spot asset trading is studied in an environment in which all investors receive the same dividend from a known probability distribution at the end of each of t 15 or 30 trading periods fourteen of twenty two experiments exhibit price bubbles followed by crashes relative to intrinsic dividend value when traders are experienced this reduces but does not eliminate the probability of a bubble the regression of changes in mean price on lagged excess bids number of bids minus the number of offers in the previous period p pt a f b 1 o l supports the hypothesis that a e d the one period expected value of the dividend and that f 0 where excess bids is a surrogate measure of excess demand arising from homegrown capital gains losses expectations thus when bt 1 o goes to zero we have convergence to rational expectations in the sense of fama 1970 that arbitrage becomes unprofitable the observed bubble phenomenon can also be interpreted as a form of temporary myopia tirole 1982 from which agents learn that capital gains expectations are only temporarily sustainable ultimately inducing common expectations or priors tirole 1982 four of twenty six experiments all using experienced subjects yield outcomes that appear to the chart s eye to converge early to rational expectations although even in these cases we get 0 and small price fluctuations of a few cents that invite scalping

a test of the equality of closed ended and open ended contingent valuations a test is developed to find whether open ended and closed ended contingent valuation mechanisms lead to significantly different results the test is based on joint estimation of willingness to pay responses to open and closed ended questions asked of the same sample of individuals in a public good example individuals do respond differently depending on question format possible explanations include different incentives for strategic behavior and respondents lack of familiarity with the open ended question type no differences in willingness to pay were found in a private good example

the bubble game an experimental study of speculation we propose a bubble game that involves sequential trading of an asset commonly known to be valueless because no trader is ever sure to be last in the market sequence the game allows for a bubble at the nash equilibrium when there is no cap on the maximum price we run experiments both with and without a price cap structural estimation of behavioral game theory models suggests that quantal responses and analogy based expectations are important drivers of speculation

classroom games speculation and bubbles in an asset market this paper describes a classroom exercise in which students trade assets of uncertain value in a sequence of market periods assets pay one dollar dividends at the end of each period but once the dividend is paid there is fixed probability that the asset will be destroyed dividends and probabilities are chosen so that the fundamental value is constant over time speculative bubbles can be caused by divergent expectations about other traders valuations of the asset this exercise provides an interactive framework that facilitates discussions of discounting rational expectations and backward induction

asymmetric and neighborhood cross price effects some empirical generalizations this paper provides some empirical generalizations regarding how the relative prices of competing brands affect the cross price effects among them particular focus is on the asymmetric price effect and the neighborhood price effect the asymmetric price effect states that a price promotion by a higher priced brand affects the market share of a lower priced brand more so than the reverse the neighborhood price effect states that brands that are closer to each other in price have larger cross price effects than brands that are priced farther apart the main objective of this paper is to test if these two effects are generalizable across product categories and to assess which of these two effects is stronger while the neighborhood price effect has not been rigorously tested in past research the asymmetric price effect has been validated by several researchers however these tests of asymmetric price effect have predominantly used elasticity as the measure of cross price effect the cross price elasticity measures the percentage change in market share or sales of a brand for 1 change in price of a competing brand we show that asymmetries in cross price elasticities tend to favor the higher priced brand simply because of scaling effects due to considering percentage changes furthermore several researchers have used logit models to infer asymmetric patterns we also show that inferring asymmetries from conventional logit models is incorrect to account for potential scaling effects we consider the absolute cross price effect defined as the change in market share percentage points of a target brand when a competing brand s price changes by one percent of the product category price the advantage of this measure is that it is dimensionless hence comparable across categories and it avoids scaling effects we show that in the logit model with arbitrary heterogeneity in brand preferences and price sensitivities the absolute cross price effect is symmetric we develop an econometric model for simultaneously estimating the asymmetric and neighborhood price effects and assess their relative strengths we also estimate two alternate models that address the following questions i if i were managing the ith highest priced brand which brand do i impact the most by discounting and which brand hurts me the most through price discounts ii who hurts whom in national brand vs store brand competition based on a meta analysis of 1 060 cross price effects on 280 brands from 19 different grocery product categories we provide the following empirical generalizations 1 the asymmetric price effect holds with cross price elasticities but tends to disappear with absolute cross price effects 2 the neighborhood price effect holds with both cross price elasticities and absolute cross price effects and is significantly stronger than the asymmetric price effect on both measures of cross price effects 3 a brand is affected the most by discounts of its immediately higher priced brand followed closely by discounts of its immediately lower priced brand 4 national brands impact store brands more so than the reverse when the cross effect is measured in elasticities but the asymmetric effect does not hold with absolute effects store brands hurt and are in turn hurt the most by the lower priced national brands that are adjacent in price to the store brands 5 cross price effects are greater when there are fewer competing brands in the product category and among brands in nonfood household products than among brands in food products the implications of these findings are discussed

comparing the robustness of trading systems to higher order uncertainty this paper compares the performance of a decentralized market with that of a dealership market when traders have differential information trade occurs as a result of equilibrium actions in a bayesian game where uncertainty is captured by a finite state space and information is represented by partitions on this space in the benchmark case of trade with common knowledge of endowments the two mechanisms deliver virtually identical outcomes however with differential information the dealership market has strictly higher trading volume and yields an efficient posttrade allocation in most states in contrast the decentralized market suffers from suboptimal trading volume the reason for this poor performance is the vulnerability of the decentralized market to higher order uncertainty concerning the fundamentals of the market traders may know that mutually beneficial trade is feasible and perhaps know that they know and yet a failure of common knowledge that this is so precludes efficient trade the dealership market is robust to this type of uncertainty

the chinese warrants bubble in 2005 2008 over a dozen put warrants traded in china went so deep out of the money that they were almost certain to expire worthless nonetheless each warrant was traded more than three times each day at substantially inflated prices this bubble is unique in that the underlying stock prices make warrant fundamentals publicly observable and that warrants have predetermined finite maturities this sample allows us to examine a set of bubble theories in particular our analysis highlights the joint effects of short sales constraints and heterogeneous beliefs in driving bubbles and confirms several key findings of the experimental bubble literature jel g12 g13 o16 p34

price information and bidding behavior in repeated second price auctions examining panel data on bidding behavior in over forty second price auction markets with repeated trials we observe that i posted prices influence the behavior of the median naive bidder ii posted prices do not affect the behavior of the median experienced bidder or the bidder for familiar goods and iii anticipated strategic behavior wanes after two trials the results suggest that while affiliation might exist in auctions for new goods the repeated trial design with nonprice information removes the correlation of values and provides the experience that bidders need to understand the market mechanism

optimal pricing strategies for a cluster of goods own and cross price effects with correlated tastes contingent valuation methods are used to identify observed and unobserved preferences of goods and services we apply these methods in the context of multivariate probit analysis to compute willi

constructive consumer choice processes consumer decision making has been a focal interest in consumer research and consideration of current marketplace trends e g technological change an information explosion indicates that this topic will continue to be critically important we argue that consumer choice is inherently constructive due to limited processing capacity consumers often do not have well defined existing preferences but construct them using a variety of strategies contingent on task demands after describing constructive choice consumer decision tasks and decision strategies we provide an integrative framework for understanding constructive choice review evidence for constructive consumer choice in light of that framework and identify knowledge gaps that suggest opportunities for additional research

dividing online and offline a case study every new method of trade offers an opportunity for economic agents to compare its costs and benefits relative to the status quo such comparison motivates sorting across market segments and reshapes the whole marketplace the internet provides an excellent example it introduces substantial search cost savings over brick and mortar retail stores but imposes new obstacles for sellers to convey quality using sports card trading as a case study we provide empirical evidence on 1 the sorting of product quality between the online and offline segments 2 the changes for retail outlets after the internet came into place and 3 how supporting industries such as professional grading and card manufacturing adapted to take advantage of the new market copyright 2007 wiley blackwell

the reeded edge and the phillips curve money neutrality common knowledge and subjective beliefs abstract i present a simple two person auction model in which a seller and a buyer make bids in terms of money however the value of a unit of money is uncertain i show 1 a monetary revaluation has purely nominal effects if and only if it is common knowledge 2 if seller and buyer have identical beliefs making the value of money common knowledge maximizes total gains from trade 3 if seller and buyer are equally well informed and have identical beliefs then monetary revaluations have no net effect 4 when the seller knows the value of money but the buyer does not the expected utilities of both seller and buyer are proportional to 1 1 2 where is the standard deviation of the value of money expressed as a fraction of the mean and 5 when beliefs are subjective monetary policy can improve total gains from trade as in friedman s explanation of the phillips curve and an optimal level of inflation can be determined journal of economic literature classification numbers c78 e52

posted prices and bid affiliation evidence from experimental auctions in most experimental auctions researchers ask participants to bid on the same item in multiple po tentially binding rounds posting the price submitted by the top bidder or bidders after each of those rounds if bids submitted in later rounds are affiliated with posted prices from earlier rounds this practice could result in biased value estimates in this article we discuss the results of an experiment designed explicitly to test whether posted prices affect bidding behavior we find that for familiar items high posted prices lead to increased bids in subsequent rounds our results have implications for researchers conducting experimental auctions article advances the literature in several im portant ways first we report the design and results of the only study designed specifically to control for the effects of posted prices on bids in subsequent rounds we do this with the aid of confederate bidders who were instructed to bid within a certain narrow range thus we have multiple treatments that vary only by the presence or absence of confederate bidders al lowing for what we believe to be the cleanest possible test of the effect of posted prices on bidding behavior in later rounds while list and shogren 1999 model bids in round t as a function of the posted price in round t 1 through our use of confederate bidders to con trol posted prices we are able to test whether exposure to high posted prices has an effect that accumulates over the course of multiple rounds leading to a gradual increase in mean bids second our methods of analysis are more complete than previous work examining bid af filiation we not only compare summary statis tics from early and late rounds but we also use panel data analysis to understand how in dividual participants bids are affected by the presence of confederate bidders focusing on individuals rather than summary statistics al lows us to understand how individual specific characteristics influence affiliation and it also allows us to better understand the role of out liers

the bubble game a classroom experiment we propose a simple classroom experiment on speculative bubbles the bubble game this game is useful to discuss about market efficiency and trading strategies in a financial economics course and about behavioral aspects in a game theory course at all levels the bubble game can be played with any number of students as long as this number is strictly greater than one students sequentially trade an asset which is publicly known to have a fundamental value of zero if there is no cap on asset prices speculative bubbles can arise at the nash equilibrium because no trader is ever sure to be last in the market sequence otherwise the nash equilibrium involves no trade bubbles usually occur with or without a cap on prices traders who are less likely to be last and have less steps of reasoning to perform to reach equilibrium are in general more likely to speculate

omitted cross price variable biases in the linear travel cost model correcting common misperceptions the essence of the travel cost method is that the combination of the number of visits to a site and the round trip travel costs for each recreationist traces out a demand relationship since the geographic location of the recreationist s residence exerts a kind of experimental control which forces the more distant consumer to bear higher travel and related costs these travel costs are used as proxies for prices in estimating demand for the site s services clawson 1959 has presented the two step method for valuing a single site s services however it has been pointed out in the literature that single and isolated recreation sites very rarely exist and the failure to include prices for alternative sites in the demand equation leads to biased estimates for the value of the resource under consideration the literature contains some misconceptions about the direction of the bias consider quotations from two frequently cited studies

the formation of price forecasts in experimental markets this study utilizes laboratory experimental methods to evaluate the empirical validity of 1 muthian rational expectations assumptions 2 an adaptive expectations model and 3 an extrapolative expectations model over 5 00 price forecasts from 146 participants in twelve experimental double auction m arkets with a cash reward structure are analyzed the forecasting objective is t hemean price over a sequence of trading periods governed by stationary market parameters the price forecasts are found to be inconsistent with strict muthian rational expectations and the extrapolative modelis not supported by the data however the forecasts generally support the adaptive expectations model copyright 1987 by ohio state university press

empirical generalizations from reference price research considerable theoretical justification for consumers use of psychological reference points exists from the research literature from a managerial perspective one of the most important applications of this concept is reference price an internal standard against which observed prices are compared in this paper we propose three empirical generalizations that are well supported in the marketing literature first there is ample evidence that consumers use reference prices in making brand choices second the empirical results on reference pricing also support the generalization that consumers rely on past prices as part of the reference price formation process third consistent with other research on loss aversion consumers have been found to be more sensitive to losses i e observed prices higher than reference prices than gains we also propose topics for further research on reference prices

universal health insurance in the clinton plan coverage as a tax financed public good the financing arrangements embodied in the clinton health reform plan involve some important differences in the way in which public goods are usually financed the subsidies to small low wage firms mandated to provide benefits distort markets in both labor and products and offer incentives for the creation of small firms in addition the financing scheme implicitly envisions a head tax on families at modest income levels but offers a possible rationale for it nevertheless the main reason for many of the financing features appears to be an attempt to hold down the apparent budgetary cost of universal coverage

hierarchic demand and the engel curve for variety ahstract the usual treatment of consumer demand theory assumes a solution to the demand equations with positive quantities of all commodities this paper characterises a class called hierarchic demand systems for which only a subset of commodities are in the purchased set the hierarchic linear expenditure svstem is used to illustrate interesting properties of such systems the empirical section shows how the number of commodities purchased expands with total expenditure both in aggregate and for commodity groups the data clearly establish the empirical importance of corner solutions and of the purchase decision in demand studies

price induced patterns of competition this research focuses on how price changes influence the observed pattern of brand competition the paper begins with a basic utility model formulation and examines the implications of three major classes of preference distributions on the expected patterns of competition a price tier model is proposed to operationalize the theory and to allow predictive testing the price tier model is estimated on 28 brands across four product categories the results show a specific asymmetric pattern of price competition higher price higher quality brands steal share from other brands in the same price quality tier as well as from brands in the tier below however lower price lower quality brands take sales from their own tier and the tier below brands but do not steal significant share from the tiers above the results are consistent with a bimodal preference distribution with the regular price indifference point being located toward the lower quality end of the preference distribution for the categories analyzed

the generic existence of rational expectations equilibrium in the higher dimensional case abstract the study of the generic existence of rational expectations equilibrium has concentrated on three cases according to whether the space of states of private information has dimension less than equal to or greater than the price space previous results have shown that in the first case fully revealing equilibria exist generically and in the second case there are open sets of environments with no equilibrium this paper shows that in the third case there is a residual set of environments which permits equilibria which are arbitrarily close to fully revealing

an empirical analysis of latitude of price acceptance in consumer package goods scanner panel data analyses for sweetened and unsweetened drink categories with four brands in each support the presence of a region of price insensitivity around a reference price the analyses also suggest that consumers with higher average reference price have a wider latitude of price acceptance consumers with a higher frequency of purchase i e shorter average interpurchase time interval are found to have a narrower latitude of price acceptance because they are more aware of the range of price distributions finally consumers with a higher average brand loyalty have a wider latitude of price acceptance demonstrating greater tolerance of price fluctuations

equity considerations in utility based measures of health outcomes in economic appraisals an adjustment algorithm in this paper we consider whether methods currently used to measure utility of health outcomes are consistent with the equity criteria adopted by researchers we show that unless the chosen equity criterion is incorporated in the design of the measurement instrument the derived health state utilities are inconsistent with the equity criterion except under special circumstances adjustment algorithms are derived based on the axioms of von neumann morgenstern utility theory which take account of difference equity criteria currently adopted in the literature the proposed approach is based on simple lottery questions of the type already used widely in empirical studies

the impact of deal proneness on wtp estimates in incentive aligned value elicitation methods even after controlling for hypothetical biases some incentive aligned value elicitation methods still produce different willingness to pay wtp estimates in this study we compare wtp estimates from three incentive aligned value elicitation methods real choice experiment rce real double bounded dichotomous contingent valuation rcvm and becker degroot marschak auction bdm we find that participants aggressiveness in obtaining low prices i e deal proneness influences wtp estimates in the bdm auction but not those elicited from the rce and rcvm the participants with higher levels of deal proneness tend to submit lower bids in the bdm auction the discrepancies in wtp estimates between different incentive aligned procedures are narrower for participants with lower levels of deal proneness our results indicate that the bids in bdm auctions may be understated and the auction mechanism may induce the gambling behavior of people who are deal prone that is whether the bdm auction is truly incentive aligned is again called into question we also discuss the practical implications for food retailers

how to grow a bubble a model of myopic adapting agents abstract we present a simple agent based model to study the development of a bubble and the consequential crash and investigate how their proximate triggering factor might relate to their fundamental mechanism and vice versa our agents invest according to their opinion on future price movements which is based on three sources of information i public information i e news ii information from their friendship network and iii private information our bounded rational agents continuously adapt their trading strategy to the current market regime by weighting each of these sources of information in their trading decision according to its recent predicting performance we find that bubbles originate from a random lucky streak of positive news which due to a feedback mechanism of these news on the agents strategies develop into a transient collective herding regime after this self amplified exuberance the price has reached an unsustainable high value being corrected by a crash which brings the price even below its fundamental value these ingredients provide a simple mechanism for the excess volatility documented in financial markets paradoxically it is the attempt for investors to adapt to the current market regime which leads to a dramatic amplification of the price volatility a positive feedback loop is created by the two dominating mechanisms adaptation and imitation which by reinforcing each other result in bubbles and crashes the model offers a simple reconciliation of the two opposite herding versus fundamental proposals for the origin of crashes within a single framework and justifies the existence of two populations in the distribution of returns exemplifying the concept that crashes are qualitatively different from the rest of the price moves

elicitation formats and the wta wtp gap a study of climate neutral foods we conduct a field valuation experiment where we vary the valuation method contingent valuation vs inferred valuation as well as the payment format dichotomous choice vs payment card willingness to accept and willingness to pay valuations are elicited in a within subjects design for foods with climate neutral labels we find a similar gap for valuations elicited with the contingent or the inferred valuation method however we also find that the gap can be muted by using a payment card elicitation format

a comparative analysis of reference price models the effect of reference price on brand choice decisions has been well documented in the literature researchers however have differed in their conceptualizations and therefore in their modeling of reference price in this article we evaluate five alternative models of reference price of which two are stimulus based i e based on information available at the point of purchase and three that are memory based i e based on price history and or other contextual factors we calibrate the models using scanner panel data for peanut butter liquid detergent ground coffee and tissue to account for heterogeneity in model parameters we employ a latent class approach and select the best segmentation scheme for each model the best model of reference price is then selected on the basis of fit and prediction as well as on the basis of parsimony in cases where the fits of the models are not very different in all four categories we find that the best reference price model is a memory based model namely one that is based on the brand s own price history in the liquid detergent category however we find that one of the stimulus based models namely the current price of a previously chosen brand also performs fairly well we discuss the implications of these findings

on the ingredients for bubble formation informed traders and communication bubbles in asset markets have been documented in numerous experiments most experiments in which bubbles occur feature a declining fundamental value this feature has been criticized for being atypical of real financial markets here we experimentally study other ingredients for bubble formation that are common in such markets namely the existence of inside information and communication among traders we find that bubbles and mirages can occur if these additional ingredients are present in particular the mere possibility that some traders are better informed than others can create bubbles surprisingly communication turns out to be counterproductive for bubble formation

the informational efficiency of experimental asset markets a fundamental difficulty in devising any test of general efficient market hypotheses is the specification of the relevant public and private information sets of traders without a consensus as to reasonable empirical specifications tests of the hypotheses remain minimal or controversial in this study we examine the efficiency of experimental asset markets in which one may unambiguously identify the public and private information sets of traders we focus on how market efficiency is affected by the presence of futures markets in settings that incorporate different types of uncertainty and inside information our experimental results support four conclusions 1 market outcomes tend to evolve toward strong form informationally efficient equilibria whether or not futures markets and or event uncertainty are present 2 the presence of futures markets clearly stabilizes spot prices 3 the presence of futures markets tends to speed the evolution of asset markets to more efficient equilibria where there

context dependent preferences the standard theory of choice based on value maximization associates with each option a real value such that given an offered set the decision maker chooses the option with the highest value despite its simplicity and intuitive appeal there is a growing body of data that is inconsistent with this theory in particular the relative attractiveness of x compared to y often depends on the presence or absence of a third option z and the market share of an option can actually be increased by enlarging the offered set we review recent empirical findings that are inconsistent with value maximization and present a context dependent model that expresses the value of each option as an additive combination of two components a contingent weighting process that captures the effect of the background context and a binary comparison process that describes the effect of the local context the model accounts for observed violations of the standard theory and provides a framework for analyzing context dependent p

generic existence of completely revealing equilibria for economies with uncertainty when prices convey information conditions which imply the existence of strict rational expectations equilibria for most static pure exchange economies where prices convey information about the state of the world are analyzed information is aggregated and transmitted by prices because agents have different initial information and maximize the conditional expectation of state dependent utility functions major results state that if with probability one agents characteristics do not vary too much as the state of the world varies then generically there exist equilibrium price functions which reveal all initial information more precisely if the support of the image measure is contained in a compact c1 manifold satisfying some technical conditions which is of sufficiently low dimension relative to the number of commodities then existence of completely revealing equilibria is generic any economy satisfying these assumptions can be approximated by a sequence of economies which also obey these assumptions and have completely revealing equilibrium price functions slight perturbations do not destroy the existence property

the asymmetric share effect an empirical generalization on cross price effects abstract prior empirical literature states that asymmetry in cross price effect favors the high share brand that is when high share brands discount they have a greater impact on low share brands than the reverse this conclusion is based on consideration of cross price elasticities the authors point out that focusing on cross price elasticities for assessing asymmetry is inappropriate for determining the incremental profitability from price promotions instead asymmetries should be investigated in absolute cross price effects that is change in market share of a competing brand for a unit price change of the focal brand the authors theoretically and empirically demonstrate that asymmetry reverses when absolute cross price effect is considered that is the absolute cross price effect of a price reduction of a low share brand on the market share or sales of a high share brand is greater than the reverse the authors discuss the implications of the findings and future research directions

effects of cheap talk on consumer willingness to pay for golden rice a large body of literature suggests willingness to pay is overstated in hypothetical valuation questions as compared to when actual payment is required recently cheap talk has been proposed to eliminate the potential bias in hypothetical valuation questions cheap talk refers to process of explaining hypothetical bias to individuals prior to asking a valuation question this study explores the effect of cheap talk in a mass mail survey using a conventional value elicitation technique results indicate that cheap talk was effective at reducing willingness to pay for most survey participants however consistent with previous research cheap talk did not reduce willingness to pay for knowledgeable consumers

the electronic mail game strategic behavior under almost common knowledge the paper addresses a paradoxical game theoretic example which is closely related to the coordinated attack problem two players have to play one of two possible coordination games only one of them receives information about the coordination game to be played it is shown that the situation with almost common knowledge is very different from when the coordination game played is common knowledge

cotton farmers willingness to pay for pest management services in northern benin this study was carried out to assess cotton farmers willingness to pay wtp for pest management services in northern benin targeted staggered control tsc has been introduced to reduce pesticide use in cotton cropping and generate an estimated benefit of fcfa48 800 74 40 per cotton hectare accruing from increased productivity and reduced pesticide cost however tsc application requires extra time for pest identification and scouting and its adoption remains low due to the lack of funding to boost farmers awareness and cover training costs an interval regression model was used to analyze responses to a double bounded contingent valuation survey with data collected from 300 cotton farmers the results showed that 87 3 of cotton farmers were willing to pay for tsc services annual wtp per cotton hectare was estimated at fcfa16 962 25 80 revealing an existing demand for tsc adoption respondents wtp was driven by farm and socio economic characteristics financial mechanisms managed by farmers could thus potentially foster technology adoption and in turn generate economic and environmental benefits

efficiency of experimental security markets with insider information an application of rational expectations models the study reports on the ability of competing models of market information integration and dissemination to explain the behavior of simple laboratory markets for a one priced security returns to the security depended upon a randomly drawn state of nature some agents insiders whose identity was unknown to other agents knew the state before the markets opened with replication of market conditions the predictions of a fully revealing rational expectations model are relatively accurate prices adjusted immediately to near rational expectations prices profits of insiders were virtually indistinguishable from non insiders and efficiency levels converged to near 100 percent

adaptive behavior and economic theory the relationship between psychological and economic views of behavior once a subject of heavy dispute is now understood in a very similar way by practitioners of both these disciplines and of our sister social sciences in general terms we view or model an individual as a collection of decision rules rules that dictate the action to be taken in given situations and a set of preferences used to evaluate the outcomes arising from particular situation action combinations these decision rules are continuously under review and revision new decision rules are tried and tested against experience and rules that produce desirable outcomes supplant those that do not i use the term adaptive to refer to this trial anderror process through which our modes of behavior are determined if one is interested in modeling particular decisions in any very explicit way it is obviously necessary to think about rather narrow aspects of an individual s entire set of decision rules his or her personality experimental psychology has traditionally focused on the adaptive process by which decision rules are replaced by others in this tradition the influence of the subject s or as an economist says the agent s preferences this essay uses a series of examples to illustrate the use of rationality and adaptation in economic theory it is argued that these hypotheses are complementary and that stability theories based on adaptive behavior may help to narrow the class of empirically interesting equilibria in certain economic models an experiment is proposed to test this idea

on the theory of reference dependent preferences a theory is proposed in which preferences are conditional on reference points it is related to tversky and kahneman s reference dependent preference theory but is simpler and deviates less from conventional consumer theory preferences conditional on any given reference point satisfy conventional assumptions apart from a continuity condition the only additional restriction is to rule out cycles of pairwise choice the theory is consistent with observations of status quo bias and related effects reference points are treated as subject to change during the course of trade the implications of endogeneity of reference points for behaviour in markets are investigated

how tournament incentives affect asset markets a comparison between winner take all tournaments and elimination contests abstract we investigate the impact of investment managers tournament incentives on investment strategies and market efficiency distinguishing between winner take all tournaments wta where a minority wins and elimination contests ec where a majority wins theoretically we show that investment managers play heterogeneous strategies in wta and homogeneous strategies in ec and markets are more prone to mispricing in wta than in ec experimentally we find that investment managers play more heterogeneous strategies in wta than in ec but this does not trigger significant differences in prices moreover prices in wta and ec do not differ significantly from markets composed of linearly incentivized subjects

quality perceptions and asymmetric switching between brands rotating indifference curves are used to induce an income effect that favors superior brands at the expense of inferior brands in a discrete choice model when calibrated on scanner panel data the model yields an objective measure of brand quality which is related to the rate of rotation the model also leads to asymmetric responses to price promotions where switching up to high quality brands is more likely than switching down the model is capable of nesting the standard logit model and is similar to a nested logit model when there exists clusters of brands of like quality the model is used to explore a product line pricing decision where profits are maximized subject to the constraint that consumer utility is maintained

a simultaneous approach to the whether what and how much to buy questions consumer s purchase decisions of whether to buy what to buy and how much to buy are examined simultaneously based on a consumer utility maximization problem an unobservable threshold price about which a consumer pivots from nonpurchase to purchase can be deduced with any model specification the interrelationships between purchase decisions can be explicitly derived the model is applied to coffee purchasing data in addition by suppressing the nonpurchase options the model is compared with an alternative approach appearing in the marketing literature

price bubbles gender and expectations in experimental asset markets abstract this paper reports results of laboratory markets for a risky asset with a flat fundamental value that equates expected dividends to the return on a safe asset subjects were sorted by gender in an unobtrusive manner and bubbles in this setting are pervasive and of comparable magnitude for both genders in contrast a robustness check done with a declining fundamental value did generate larger bubbles for groups of males elicited price forecasts tend to trail share prices as they rise and exceed prices as they fall a pattern that is tracked by a double adaptive forecasting model

approximate equilibria in microeconomic rational expectations models abstract for general equilibrium models in which prices transmit information among asymmetrically informed traders strict rational expectations approximate equilibria are defined a state dependent price function is an e equilibrium if when agents use their own information and that conveyed by prices aggregate excess demand in each state of the world does not exceed e for any positive e existence requires only very mild assumptions continuity and compact support moreover there are revealing e equilibria for all smooth economies satisfying a dimensionality condition in an open neighborhood of this case existence of maximally revealing e equilibria holds

effects of seller supplied prices on buyers product evaluations reference prices in an internet auction context a field experiment investigated the impact of two external reference points under the seller s control on the final price of an auction when an item s seller specified a high external reference price a reserve price the final bid was greater than when the seller specified a low external reference price a minimum bid when the seller provided both high and low reference prices the reserve influenced the final bid more the low reference price led to a lower outcome compared to when the seller did not communicate any reference price the number of bidders influenced outcomes in the absence of seller supplied reference prices

communication and coordination in social networks i model people in a coordination game who use a communication network to tell each other their willingness to participate the minimal sufficient networks for coordination can be interpreted as placing people into a hierarchy of social roles or stages initial adopters then followers and so on down to late adopters a communication network helps coordination in exactly two ways by informing each stage about earlier stages and by creating common knowledge within each stage we then consider two examples first we show that low dimensional networks can be better for coordination even though they have far fewer links than high dimensional networks second we show that wide dispersion of insurgents people predisposed toward participation can be good for coordination but too much dispersion can be bad although collective action depends on both social structure and individual incentives these integral aspects have been formalized separately in the fields of social network theory and game theory by considering them together this paper engages the classic question of which structures are conducive to coordination and shows that structure and strategy are related in a mutually interesting way here we consider a coordination game in which each person wants to participate only if others participate social structure is thought of as a communication network by which people tell each other their willingness to participate each person knows whether her neighbours in the network are willing but does not know about anyone else our model is thus a game of incomplete information in which each person given his local knowledge decides whether to participate the main result is a characterization of the minimal sufficient networks for coordination in terms of a hierarchy of social roles or stages initial adopters then followers and so on down to late adopters for example a communication network helps coordination in exactly two ways by informing each stage about earlier stages and by creating common knowledge within each stage we also consider two simple examples first we show that low dimension or strong link networks can be better for coordination even though they have far fewer links than high dimension or weak link networks second we show that wide dispersion of insurgents people predisposed toward participation can be good for coordination but too much dispersion can be bad this paper is built on the assumption that the most basic and common mechanism for coordination is the i ll go if you go mechanism individuals first communicate with each other about their preferences and then each individual chooses whether to participate or not hence a person s participation depends on what he knows about his neighbours it does not depend solely on their participation itself either through learning adaptation or social influence the physical analogies of contagion or diffusion are not

rationalizability learning and equilibrium in games with strategic complementarities we study a rich class of noncooperative games that includes models of oligopoly competition macroeconomic coordination failures arms races bank runs technology adoption and diffusion r d competition pretrial bargaining coordination in teams and many others for all these games the sets of pure strategy nash equilibria correlated equilibria and rationalizable strategies have identical bounds also for a class of models of dynamic adaptive choice behavior that encompasses both best response dynamics and bayesian learning the players choices lie eventually within the same bounds these bounds are shown to vary monotonically with certain exogenous parameters we study the class of noncooperative supermodular games introduced by topkis 1979 and further analyzed by vives 1985 1989 who also pointed out the importance of these games in industrial economics supermodular games are games in which each player s strategy set is partially ordered the marginal returns to increasing one s strategy rise with increases in the competitors strategies so that the game exhibits strategic complementarity 2 and if a player s strategies are multidimensional marginal returns to any one com ponent of the player s strategy rise with increases in the other components this class turns out to encompass many of the most important economic applications of noncooperative game theory in macroeconomics diamond s 1982 search model and bryant s 1983 1984 rational expectations models can be represented as supermodular games in each of these models more activity by some members of the economy raises the returns to increased levels of activity by others in oligopoly theory some models of bertrand oligopoly with differentiated products qualify as supermodu lar games in these games when a firm s competitors raise their prices the marginal profitability of the firm s own price increase rises a similar structure is present in games of new technology adoption such as those of dybvig and spatt 1983 farrell and saloner 1986 and katz and shapiro 1986 when more users hook into a communication system or more manufacturers adopt an interface standard the marginal return to others of doing the same often rises similarly in some specifications of the bank runs model introduced by diamond and dybvig 1983 when more depositors withdraw their funds from a bank it is more worthwhile for other depositors to do the same in the warrant exercise

a review of bubbles and crashes in experimental asset markets this paper discusses the literature on bubbles and crashes in the most commonly used experimental asset market design introduced by smith et al it documents the main findings based on the results from 41 published papers 3 book chapters and 20 working papers

the decomposition of promotional response an empirical generalization price promotions are used extensively in marketing for one simple reason consumers respond the sales increase for a brand on promotion could be due to consumers accelerating their purchases i e buying earlier than usual and or buying more than usual and or consumers switching their choice from other brands purchase acceleration and brand switching relate to the primary demand and secondary demand effects of a promotion gupta 1988 captures these effects in a single model and decomposes a brand s total price elasticity into these components he reports for the coffee product category that the main impact of a price promotion is on brand choice 84 and that there is a smaller impact on purchase incidence 14 and stockpiling 2 in other words the majority of the effect of a promotion is at the secondary level 84 and there is a relatively small primary demand effect 16 this paper reports the decomposition of total price elasticity for 173 brands across 13 different product categories on average we find that 25 of the elasticity is due to primary demand expansion i e purchase acceleration and 75 to secondary demand effects or brand switching thus while gupta s finding that the majority of promotional response stems from brand switching is supported the average magnitude of the effect appears to be smaller than first thought more important there is ample evidence that promotions have a significant primary demand effect the relative emphasis on purchase acceleration and brand switching varies systematically across categories and the second goal of the paper is to explain this variation as a function of exogeneous covariates in doing this we recognize that promotional response is the consumer s reaction to a price promotion and therefore develop a framework for understanding variability in promotional response that is based on the consumer s perspective of the benefits from a price promotion these benefits are posited to be a function of i category specific factors ii brand specific factors and iii consumer characteristics the framework is formalized as a generalized least squares meta analysis in which the brand s price elasticity is the dependent variable several interesting results emerge from this analysis category specific factors brand specific factors and consumer demographics explain a significant amount of the variance in promotional response for a brand at both the primary and secondary demand levels category specific factors have greater influence on variability in promotional response and its decomposition than do brand specific factors there are several instances where exogenous variables do not affect total elasticities yet significantly affect individual components of total elasticity in fact the lack of a significant relationship between the variables and total elasticity is often due to offsetting effects within two or more of the three behavioral components of elasticity this is particularly true for brand specific factors which typically have no effect on total elasticity yet have important effects on the individual behaviors there is some evidence to suggest that not all promotion related increases in primary demand are due to forward buying in some cases promotions appear to increase consumption we use these results to illustrate how category and brand specific factors work to drive primary and secondary demand elasticities in different directions in short this paper offers an empirical generalization of a key finding on promotional response how elasticities decompose across brand choice purchase incidence and stockpiling and new insights into factors that explain variance in promotional response these findings are likely to be of interest to researchers who are concerned with theory development and the generalizability of marketing phenomena and to managers who plan promotion campaigns

contingent valuation from dubious to hopeless abstract approximately 20 years ago peter diamond and i wrote an article for this journal analyzing contingent valuation methods at that time peter s view was that contingent valuation was hopele

optimal consumption portfolio rules with biased beliefs abstract we extend the model of optimal consumption and asset allocation by incorporating the biased agent beliefs overconfidence and overextrapolation it predicts that overconfidence entails overconsumption lower overconfidence induced hedging demand and overinvestment in the risky assets while overextrapolation induces underconsumption higher overextrapolation induced hedging demand and underinvestment our model provides an alternative explanation for an agent s mis consumption hedging and portfolio misallocation from the perspective of biased beliefs

the cross price effect on willingness to pay estimates in open ended contingent valuation abstract previous literature has shown that potential buyers use a reference price or product to form their opinion about the value of a new product therefore the pricing decision is an interactive process we investigate the two generalizations of the cross price effect the neighborhood price effect and the asymmetric price effect on consumer willingness to pay wtp for multiple similar products in an open ended contingent valuation context results show that the cross price effect on wtp is prominent with the neighborhood price effect holding in contingent valuation no conclusions are reached about the asymmetric price effect

democracy the market and the logic of social choice this article compares the types of knowledge democracy and the market require to rationally allocate resources i argue that high levels of public ignorance and voters inability to compare the effects of different parties policies make it difficult for parties and elections to rationally allocate resources markets mitigate these problems because the simultaneous existence of multiple firms products facilitates comparisons that mimic the conditions of scientific experimentation the economy of knowledge involved in such comparisons indicates there are epistemic advantages to using firms and markets instead of political parties and elections to allocate scarce resources however in contrast to arguments that markets merely provide better information than political decisions i argue markets epistemic advantages are derived from the way they facilitate comparisons that minimize decision makers need for knowledge or understanding