product and price competition in a duopoly this paper examines the role of consumer preferences costs and price competition in determining the competitive product strategy of a firm in the model studied here there are two identical firms competing on product quality and price they face consumers who prefer a higher quality product to a lower quality product but differ in how much they are willing to pay for quality the consumers can also choose a substitute if they don t like the product price offerings of the two firms for the firms a higher quality product costs more to produce than a lower quality product the paper shows that the equilibrium strategy for each firm should be to differentiate its product from its competitor with the firm choosing the higher quality choosing the higher margin as well this differentiation however is not efficient that is it is possible to choose two other products and offer them at prices that cover their marginal cost and still satisfy consumers needs better in the aggregate a monopolist by contrast would differentiate his product line efficiently this suggests that cannibalization has different effects on product strategy than competition the paper also shows that if one firm enters the market first then it can defend itself from later entrants and gain a first mover advantage by preempting the most desirable product position

commodity price shocks and civil conflict evidence from colombia how do income shocks aect armed con ict theory suggests two op posite eects if labor is used to appropriate resources violently higher wages may lower con ict by reducing labor supplied to appropriation this is the opportunity cost eect alternatively a rise in contestable income may increase violence by raising gains from appropriation this is the rapacity eect our paper exploits exogenous price shocks in inter national commodity markets and a rich dataset on civil war in colombia to assess how dierent income shocks aect con ict we examine changes in the price of agricultural goods which are labor intensive and natural resources which are capital intensive we focus on coee and oil the two largest exports we nd that a sharp fall in coee prices in the 1990s increased violence dierentially in regions growing more coee by lower ing wages and the opportunity cost of joining armed groups in contrast a rise in oil prices increased violence dierentially in the oil region by in creasing municipal revenue siphoned through rapacity this pattern holds in several other agricultural and natural resource sectors providing robust evidence that price shocks aect con ict in opposite directions depending on the factor intensity of the commodity

quality based competition profitability and variable costs we consider the impact of variable production costs on competitive behavior in a duopoly where manufacturers compete on quality and price in a two stage game in the pricing stage we make no assumptions regarding these costs other than that they are positive and increasing in quality and no assumptions about whether or not the market is covered in the quality stage we investigate a broad family of variable cost functions and show how the shape of these functions impacts equilibrium product positions profits and market coverage we find that seemingly slight changes to the cost function s curvature can produce dramatically different equilibrium outcomes including the degree of quality differentiation which competitor is more profitable the one offering higher or lower quality and the nature of the market itself covered or uncovered our model helps to predict and explain the diversity of outcomes we see in practice something the previous literature has been unable to do

natural resources curse or blessing are natural resources a curse or a blessing the empirical evidence suggests that either outcome is possible this paper surveys a variety of hypotheses and supporting evidence for why some countries benefit and others lose from the presence of natural resources these include that a resource bonanza induces appreciation of the real exchange rate deindustrialization and bad growth prospects and that these adverse effects are more severe in volatile countries with bad institutions and lack of rule of law corruption presidential democracies and underdeveloped financial systems another hypothesis is that a resource boom reinforces rent grabbing and civil conflict especially if institutions are bad induces corruption especially in nondemocratic countries and keeps in place bad policies finally resource rich developing economies seem unable to successfully convert their depleting exhaustible resources into other productive assets the survey also offers some welfare based fiscal rules for harnessing resource windfalls in developed and developing economies

do farmers benefit from participating in specialty markets and cooperatives the case of coffee marketing in costa rica1 historically low prices in the conventional coffee market have caused financial and social hardship among coffee farmers in the face of this crisis specialty markets have attracted the attention of the international donor community these market segments have shown consistent growth over the last decade and exhibit price premiums in international markets therefore if higher prices are passed on to farmers access to specialty markets could help to alleviate the crisis brought on by low prices in the conventional sector the present study attempts to identify the factors that determine farmers participation in specialized markets and whether participation in these markets leads to higher prices for farmers a two stage model is used to analyze farmers marketing decisions and their effect on the prices received this procedure allows us to control for the endogeneity bias introduced by the marketing choice our results indicate that farmers participating in the specialty coffee segment do in fact receive higher prices than those participating in conventional channels additionally we find that participation in cooperatives has a positive impact on the probability that a farmer chooses to grow specialty coffee and analogously on the prices that they receive based on these results it seems that efforts to increase participation in the specialty coffee segment and in cooperatives would help to lessen some of the hardships brought on by low prices in the conventional coffee sector

contractual solutions to the hold up problem this paper considers a general version of the hold up problem where n agents first make relation specific investments and then must agree on some collective action it is shown that first best solutions exist under a variety of different assumptions about the nature of information asymmetries

the logic of political violence this paper offers a unified approach for studying political violence whether it emerges as repression or civil war we formulate a model where an incumbent or opposition can use violence to maintain or acquire power to study which political and economic factors drive one sided or two sided violence repression or civil war the model predicts a hierarchy of violence states from peace via repression to civil war and suggests a natural empirical approach exploiting only within country variation in the data we show that violence is associated with shocks that can affect wages and aid as in the theory these effects are only present where political institutions are non cohesive

option pricing and foreign investment under political risk abstract the paper analyses asset prices in a context of uncertainty over future government policy as current policy is maintained perceived risk abates thus leading to a gradual appreciation of asset prices and a gradual decrease in their conditional variance option values computed under this process have time series and the term structure of conditional volatility which in general are downward sloping in price series without a policy reversal implied volatility from option prices will exceed actual volatility with this wedge progressively disappearing this may be viewed as the volatility analogue of the peso premium for assets subject to large infrequent price drops

do giant oilfield discoveries fuel internal armed conflicts we use new data to examine the effects of giant oilfield discoveries around the world since 1946 on average these discoveries increase per capita oil production and oil exports by up to 50 percent but these giant oilfield discoveries also have a dark side they increase the incidence of internal armed conflict by about 5 8 percentage points this increased incidence of conflict due to giant oilfield discoveries is especially high for countries that had already experienced armed conflicts or coups in the decade prior to discovery

aggregate comparative statics abstract in aggregative games each player s payoff depends on her own actions and an aggregate of the actions of all the players many common games in industrial organization political economy public economics and macroeconomics can be cast as aggregative games this paper provides a general and tractable framework for comparative static results in aggregative games we focus on two classes of games 1 aggregative games with strategic substitutes and 2 nice aggregative games where payoff functions are continuous and concave in own strategies we provide simple sufficient conditions under which positive shocks to individual players increase their own actions and have monotone effects on the aggregate the results are illustrated with applications to public good provision contests cournot competition and technology choices in oligopoly

on sales effort and pricing decisions under alternative risk criteria abstract in the literature different risk criteria are proposed for risk averse decision making but it is often unclear which risk criteria should be used and what their differences may be this study investigates this problem when a risk averse make to order firm decides its pricing and sales effort two factors affecting demand we consider alternative risk criteria commonly used in the literature namely expected utility theory eut mean variance mv mean semideviation ms value at risk var conditional value at risk cvar and loss aversion la we find that all of these criteria lead to similar qualitative behaviors regarding how risk loss averse decisions deviate from risk neutral ones a particularly interesting result is that the form of demand randomness i e additive or multiplicative can completely reverse the effect of risk loss aversion in certain cases we also find that the risk aversion models i e eut mv ms var and cvar are essentially equivalent in inducing the same set of optimal solutions under adverse market states however loss aversion is a mild version of risk aversion in that the la model can only lead to a subset of the solutions generated by other models these results may not be valid for other applications such as the newsvendor pricing problem so we can conclude that the relationship between alternative risk criteria is case sensitive and should be evaluated more carefully

the effect of uncertainty on investment evidence from texas oil drilling this paper estimates the response of investment to changes in uncertainty using data on oil drilling in texas and the expected volatility of the future price of oil using a dynamic model of firms investment problem i find that i the response of drilling activity to changes in price volatility has a magnitude consistent with the optimal response prescribed by theory ii the cost of failing to respond to volatility shocks is economically significant and iii implied volatility data derived from futures options prices yields a better fit to firms investment behavior than backward looking volatility measures such as garch jel c58 d92 g13 g31 l71 q31 the real options literature beginning with marschak 1949 and arrow 1968 and developed in bernanke 1983 pindyck 1991 and dixit and pindyck 1994 explains how firms should make decisions about investments that involve sunk costs real options theory views such investments as options in that at any point in time a firm may choose to either invest immediately or delay and observe the evolution of the investment s payoff a key insight is that the option to delay has value when future states of the world with positive returns to investing and states with negative returns are both possible even holding the expected future return constant at its present level thus in the presence of irreversibility and uncertainty a naive investment timing rule proceed with an investment if its expected benefit even slightly exceeds its cost is suboptimal because it does not account for the value of continuing to hold the option instead firms should delay irreversible investments until a significant gap develops between the investments expected benefits and costs moreover as uncertainty increases real options theory tells us that the incentive to delay should grow stronger and the gap between the expected benefit and cost necessary to trigger investment should widen while real options theory therefore prescribes how firms should carry out irreversible investments in uncertain environments it is not empirically well known

fragile states and development policy it is widely recognized that fragile states are key symptoms of under development in many parts of the world such states are incapable of delivering basic services to their citizens and political violence is commonplace as of yet mainstream development economics has not dealt in any systematic way with such concerns and the implications for development assistance this paper puts forward a framework for analyzing fragile states and applies it to a variety development policies in different types of states

fair trade organic coffee rural livelihoods and the agrarian question southern mexican coffee families in transition summary we use a random sample of coffee producing households in southern mexico to compare opportunities associated with government subsidies and migration to the role of fair trade organic coffee in household livelihoods although land and labor returns among fair trade organic coffee growers are higher than for conventional growers differences in yields are more important than price premiums moreover investment in education and labor opportunities outside coffee dominate those in fair trade organic coffee the results highlight the value of an integrated approach to the agrarian question that improves productivity and prices and supports other pathways for improving incomes

strategic choice of quality when quality is costly the persistence of the high quality advantage in a two firm two stage model of vertical product differentiation i show that for every convex fixed cost function of quality the firm that chooses the higher quality at the first stage earns the higher profits the result holds for the pure strategy equilibrium in the simultaneous quality game and it holds as well if firms choose their qualities in sequential order

non cooperative and cooperative responses to climate catastrophes in the global economy a north south perspective the optimal response to a potential productivity shock which becomes more imminent with global warming is to have carbon taxes to curb the risk of a calamity and to accumulate precautionary capital to facilitate smoothing of consumption this paper investigates how differences between regions in terms of their vulnerability to climate change and their stage of development affect the cooperative and non cooperative responses to this aspect of climate change it is shown that the cooperative response to these stochastic tipping points requires converging carbon taxes for developing and developed regions the non cooperative response leads to a bit more precautionary saving and diverging carbon taxes we illustrate the various outcomes with a simple stylized north south model of the global economy

a positive theory of fiscal deficits and government debt this paper considers an economy in which policymakers with different preferences alternate in office as a result of elections government debt is used strategically by each policymaker to influence the choices of his successors if different policymakers disagree about the desired composition of government spending between two public goods the economy exhibits a deficits bias that is debt accumulation is higher than it would be with a social planner the equilibrium level of debt is larger the larger is the degree of polarization between alternating governments and the less likely it is that the current government will be re elected

guns butter and anarchy a state in the international system implicit in realism must allocate its limited resources between satisfying its intrinsically valued ends and the means of military power i formalize this guns versus butter problem in a simple infinite horizon model in which two states must continually decide how to allocate their resources and whether to attack the other state the analysis establishes sufficient conditions to ensure the existence of an equilibrium in which neither state attacks shows that there is a strictly pareto dominant pair of peaceful equilibrium payoffs characterizes the unique peaceful markov perfect equilibrium that yields them and describes the comparative statics of the equilibrium allocations more broadly the analysis also suggests that the notion of anarchy has little if any substantive significance distinctively related to international politics and that the problem of absolute and relative gains is superfluous

determinants and effects of income diversification amongst farm households in burkina faso using four years of household data from three agroecological zones in burkina faso sahelian sudanian and guinean the article examines the determinants and effects of household income diversification harvest shortfalls and terms of trade are found to drive diversification but land constraints do not income diversification is associated with higher incomes and food consumption and more stable income and consumption over years

a dynamic theory of resource wars we develop a dynamic theory of resource wars and study the conditions under which such wars can be prevented our focus is on the interaction between the scarcity of resources and the incentives for war in the presence of limited commitment we show that a key parameter determining the incentives for war is the elasticity of demand our first result identifies a novel externality that can precipitate war price taking firms fail to internalize the impact of their extraction on military action in the case of inelastic resource demand war incentives increase over time and war may become inevitable our second result shows that in some situations regulation of prices and quantities by the resource rich country can prevent war and when this is the case there will also be slower resource extraction than the hotelling benchmark with inelastic demand our third result is that because of limited commitment and its implications for armament incentives regulation of prices and quantities might actually precipitate war even in some circumstances where wars would not have arisen under competitive markets copyright 2012 oxford university press

what can we learn from past price stabilization policies and market reform in mexico abstract this paper reviews experience with policy reforms in the maize sector in mexico beginning in the 1980s with particular reference to impacts on price variability it analyses mexico s transition from past price stabilization policies under a state trading enterprise to market reforms implemented during the 1990s the nature extent and costs to producers and consumers of maize policies is discussed for both the pre reform and the reform periods although wide ranging reforms have been introduced impacts on efficiency and fiscal outlays have been less than expected

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

workers warriors and criminals social conflict in general equilibrium we incorporate appropriation activities social conflict into canonical models of trade and study how economic shocks and policies affect the intensity of conflict we show that not all shocks that could make society richer reduce conflict positive shocks to labor intensive industries diminish conflict while positive shocks to capital intensive industries increase it the key requirement is that conflict activities be more labor intensive than the economy as this determines how shocks affect the returns and costs of conflict our theory is consistent with several observed patterns of conflict and implies that empirical work should take into account the relative factor intensities of the productive and conflict sectors in each country incorporating appropriation into a canonic general equilibrium model affects what policies may be deemed desirable in order to reduce conflict and generate pareto improvements policy must be distortionary while reforms that appear efficiency enhancing under the unrealistic assumption of perfect property rights may backfire this offers one explanation for why reforms based on traditional models without appropriation may be delayed and become unpopular when implemented and why societies may sympathize with seemingly inefficient redistribution

growth in the shadow of expropriation we propose a tractable variant of the open economy neoclassical growth model that emphasizes political economy and contracting frictions the political economy frictions involve a preference for immediate spending while the contracting friction is a lack of commitment regarding foreign debt and expropriation we show that the political economy frictions slow an economy s convergence to the steady state due to the endogenous evolution of capital taxation the model rationalizes why openness has different implications for growth depending on the political environment why institutions such as the treatment of capital income evolve over time why governments in countries that grow rapidly accumulate net foreign assets rather than liabilities and why foreign aid may not affect growth

vertical product differentiation with entry abstract this paper examines the non cooperative behaviour of established firms that compete in product quality and prices while foreseeing the effects of their rivalry on the decisions made by the later entrants we prove an existence and uniqueness of the equilibrium and show that the dominant firms engage in maximal product differentiation i e select the highest and lowest technologically feasible qualities later entrant however always selects an intermediate quality moreover we show that the equilibrium configuration is identical to that generated by perfect foresight equilibrium in a model of sequential entry furthermore the profits earned by each firm are ranked in the same order as the qualities implifying that the later entrant despite being the last mover ends up with higher profits and larger market share than one of the incumbents

consumer heterogeneity and strategic quality decisions though recent studies show that quality differentiation is an equilibrium outcome products of similar qualities frequently are observed in the marketplace this inconsistency may be explained by incorporating consumer heterogeneity along unobservable attributes into a model of competition in this paper consumers not only take into account the quality and price of a product but also their heterogeneous tastes along other attributes which are unobservable to firms we investigate the effect of heterogeneity along the unobservable attributes on both quality and price equilibrium in a two stage game framework we show that when consumers are sufficiently heterogeneous along the unobservable attributes the firms offer products of identical qualities in equilibrium under low levels of heterogeneity along the unobservable attributes however our results are consistent with past research which argues for quality differentiation

ownership risk investment and the use of natural resources the effect of insecure ownership on ordinary investment and natural resource use is examined insecure ownership is postulated to depend on the type of government regime in power and the prevalence of political violence or instability the political determinants of economy wide investment are estimated from cross country data and the results are used to form an index of ownership security when introduced into empirical models of natural resource use this index has a significant and quantitatively important effect on the use of forests and petroleum contrary to conventional wisdom ownership risk slows resource use in some circumstances

resource extraction and the threat of possible expropriation the role of swiss bank accounts this paper examines the consequences of resource owners being threatened with possible nationalization expropriation if shows that long s j econom theory10 42 53 1975 overextraction result critically depends on availability of a relatively safer investment alternative if all investment alternatives are similiarly uncertain then resource extraction is efficient but the overall savings consumption decision is distorted toward consumption

state capacity and military conflict powerful centralized states controlling a large share of national income only begin to appear in europe after 1500 we build a model that explains their emergence in response to the increasing importance of money for military success when fiscal resources are not crucial for winning wars the threat of external conflict stifles state building as finance becomes critical internally cohesive states invest in state capacity while divided states rationally drop out of the competition causing divergence we emphasize the role of the military revolution a sequence of technological innovations that transformed armed conflict using data from 374 battles we investigate empirically both the importance of money for military success and patterns of state building in early modern europe the evidence is consistent with the predictions of our model

the boundaries of the firm revisited why do firms exist what is their function and what determines their scope these remain the central questions in the economics of organization they are also central questions for business executives and corporate strategists the worldwide volume of corporate mergers and acquisitions exceeded 1 6 trillion in 1997 it is hard to imagine that so much time effort and investment bankers fees would be spent on adjusting firm boundaries unless there was some underlying economic gain indeed the exceptional levels of merger and acquisition activity over the past two decades are a strong indication that economically significant forces do determine organizational boundaries the study of firm boundaries originated with the famous essay by coase 1937 who raised the question of why we observe so much economic activity inside formal organizations if as economists commonly argue markets are such powerful and effective mechanisms for allocating scarce resources coase s answer was in terms of the costs of transacting in a world of imperfect information when the transaction costs of market exchange are high it may be less costly to coordinate production through a formal organization than through a market in large part thanks to the work of williamson 1975 1985 recent decades have seen a resurgence of interest in coase s fundamental insight that firm boundaries can be explained by efficiency considerations our understanding of firm boundaries has been sharpened by identifying more precisely the nature and sources of transaction costs in different circumstances in the process the focus of

competing for low end markets recent business research points to the fortune awaiting to be tapped in low end markets in this paper we investigate how the size of the low end market influences a firm s profits and the pioneering firm s quality choice as low valuation consumers increase in a market on average consumers willingness to pay decreases this may lead us to expect firms profits to decrease as the size of the low end market increases our analysis shows that if the size of the low end market is below a threshold an increase in the size of the low end market may actually dampen price competition and improve profits as firms can then strategically choose their quality levels such that their products are more differentiated conventional wisdom also suggests that the pioneering firm will offer a higher quality product and earn more profits compared with the later entrant in contrast to this notion of quality advantage our analysis identifies circumstances in which a pioneer can offer a lower quality product and yet earn more profits an experimental test lends support for some of our model s predictions we further extend the model to consider markets with multiple firms firms with multiple products and consumers with limited purchasing power

political economy of dynamic resource wars abstract the political economy of exhaustible resource extraction is analysed in three contexts first if an incumbent faces a threat of being removed once and for all by a rival faction extraction becomes more voracious if the factions do not share rents equally second perennial political conflict cycles are more inefficient if constitutional cohesiveness or the partisan in office bias is large and political instability is high third resource wars are more intense if constitutional cohesiveness is weak the incumbent has a partisan in office bias reserves of resources are high the wage is low governments can be less frequently removed from office and fighting technology has less decreasing returns to scale resource depletion in such wars is more rapacious if there is more government instability the political system is less cohesive and the partisan in office bias is smaller

green product design in supply chains under competition abstract in this paper we investigate the green product design issues in supply chains under competition our research questions address how supply chains decisions on the greenness of products are affected by factors such as supply chain structures centralized and decentralized the green product types development intensive product or marginal cost intensive product and the types of competition price competition and greenness competition with a game theoretic approach our model starts with a simple supply chain with one manufacturer and one retailer then the model is expanded to include a horizontal retailer competition case and six cases of competing supply chains our results indicate that 1 the distortion from a non coordinated supply chain the double marginalization effect has counter intuitive impact on the degree of product greenness 2 supply chain price competition at the retailer level may positively influence the equilibrium greenness while the product greenness competition reduces the equilibrium greenness and the joint impact from price and greenness competition on equilibrium greenness depends on the relative strength of the two types of competition

economic backwardness in political perspective government policies and institutions shape economic incentives and via this channel have a first order impact on economic development why then do many societies adopt policies that discourage investment and maintain institutions that cause economic backwardness perhaps politically powerful groups elites are not in favor of economic growth but why it would appear that economic growth would provide more resources for these groups to take over or tax increasing their economic returns so why don t powerful groups always support economic development in this paper we develop a theory of inefficient government policies and institutions all else equal politically powerful groups would welcome superior institutions and technologies but in practice all else is not equal because superior institutions and technologies may reduce their political power and make it more likely that they will be replaced at the center of our theory is therefore the idea that changes in institutions or the introduction of new technologies often create turbulence eroding the political advantages and future economic rents of incumbent elites alternatively new technologies may enrich competing groups increasing their threat to incumbents these considerations make politically powerful groups fear losing power and oppose economic and political change even when such change will benefit society as a whole to understand the mechanism at work and its potential applications consider a concrete example industrialization in the nineteenth century bairoch 1982 estimates that between 1830 and 1913 world manufacturing output increased by a factor of 5 see table 1 panel a nevertheless this process was highly uneven across regions and countries bairoch also calculates that over the same period manufacturing output in developed countries europe and north america increasedbyafactorofover10 whereasitdeclinedinthe third world among developed countries there were

on comparing monopoly and competition in exhaustible resource exploitation abstract it is widely believed that exhaustible resource monopolies do not enjoy as much market power as standard non resource monopolies and may even produce in a socially optimal way we argue that this paradoxical result arises from an inappropriate comparison methodology when similar assumptions are applied to the resource and the conventional cases we show that the resource monopoly behaves as expected i e restricts supply

diversification and labor market effects of the mexican coffee crisis this paper analyses how coffee producing households responded to the low coffee prices prevailing around 2003 we provide theory on differential responses in regions dedicated to coffee growing compared to more diversified or better accessible regions we show how labor market effects can explain why in the former regions value adding activities processing certification are undertaken while in the latter regions off farm activities are adopted farm size favors value adding activities as well as on farm diversification these findings call for policy responses to low prices that distinguish between specialized regions and diversified or well connected regions