an experimental validation of hypothetical wtp for a recyclable product using a within subject experiment we compare hypothetical andreal willingness to pay wtp for an improvement in therecyclability of a product subjects are faced with a real paymentscenario after they have responded to a hypothetical question contrary to most of the results obtained in similar studies at apopulation level there are no significant median differencesbetween actual and hypothetical stated values of wtp however within subject comparisons between hypothetical and actual valuesindicate that subjects stating a low high hypothetical wtp tendto underestimate overestimate the value of their actualcontributions

influencing the influencers a theory of strategic diffusion the growth of the internet and assorted technologies has made it possible to collect and process detailed information on social networks this article investigates how firms and governments can harness the power of social networks to promote their goals we show that the optimal use of social networks leads to higher sales and greater profits however an increase in the level and dispersion of social interaction can increase or decrease the optimal influence strategy and profits of the player depending on the content of the interaction optimal influence strategies will target individuals with low or high connections depending on the content of interaction finally the returns to investing in market research on social networks are greater in more unequal networks

advertising learning and consumer choice in experience good markets an empirical examination this article empirically analyzes different effects of advertising in a nondurable experience good market a dynamic learning model of consumer behavior is presented in which i allow both informative effects of advertising and prestige or image effects of advertising this learning model is estimated using consumer level panel data tracking grocery purchases and advertising exposures over time empirical results suggest that in this market advertising s primary effect was that of informing consumers the estimates are used to quantify the value of this information to consumers and evaluate the welfare implications of an alternative advertising regulatory regime

customer referral incentives and social media we study how to optimally attract new customers using a referral program whenever a consumer makes a purchase the firm gives her a link to share with friends and every purchase coming through that link generates a referral payment the firm chooses the referral payment function and consumers play an equilibrium in response the optimal payment function is nonlinear and not necessarily monotonic in the number of successful referrals if we approximate the optimal policy using a linear payment function the approximation loss scales with the square root of the average consumer degree using a threshold payment the approximation loss scales proportionally to the average consumer degree combining the two using a linear payment function with a threshold bonus we can achieve a constant bound on the approximation loss this paper was accepted by noah gans stochastic models and simulation

word of mouth communication and percolation in social networks this paper develops a model of demand pricing and advertising in the presence of social learning via word of mouth communication between friends in the model consumers must receive information about a monopolist s product in order to consider purchasing it the presence of word of mouth is not sufficient for demand to be more elastic and prices to be lower compared to an informed population i derive the comparative static results of connectivity mean preserving spread of friendships and clustering of friends on prices the optimal targets for advertising are not generically the individuals with the most friends jel l12 l14 a fundamental issue for economists is understanding the process by which demand is formed through social learning by consumers this article develops a framework based on random graphs for understanding the ways social learning via

do reminders of substitutes and budget constraints influence contingent valuation estimates a test is performed of the recommendation by the noaa panel on contingent valuation that respondents be reminded about other substitute resources and their budget constraint prior to answering the willingness to pay wtp question the context for this experiment is a cvm study of the benefits from reducing fire hazards to old growth forests in oregon the test was performed using two mail surveys that were otherwise identical except for the inclusion of reminder statements prior to the wtp question the dichotomous choice logit equations were not statistically different between versions and the mean wtp results were identical

a new product growth for model consumer durables this article originally appeared in management science january 1969 volume 15 number 5 pp 215 227 published by the institute of management sciences a growth model for the timing of initial purchase of new products is developed and tested empirically against data for eleven consumer durables the basic assumption of the model is that the timing of a consumer s initial purchase is related to the number of previous buyers a behavioral rationale for the model is offered in terms of innovative and imitative behavior the model yields good predictions of the sales peak and the timing of the peak when applied to historical data a long range forecast is developed for the sales of color television sets

decision making under uncertainty capturing dynamic brand choice processes in turbulent consumer goods markets we construct two models of the behavior of consumers in an environment where there is uncertainty about brand attributes in our models both usage experience and advertising exposure give consumers noisy signals about brand attributes consumers use these signals to update their expectations of brand attributes in a bayesian manner the two models are 1 a dynamic model with immediate utility maximization and 2 a dynamic forward looking model in which consumers maximize the expected present value of utility over a planning horizon given this theoretical framework we derive from the bayesian learning framework how brand choice probabilities depend on past usage experience and advertising exposures we then form likelihood functions for the models and estimate them on nielsen scanner data for detergent we find that the functional forms for experience and advertising effects that we derive from the bayesian learning framework fit the data very well relative to flexible ad hoc functional forms such as exponential smoothing and also perform better at out of sample prediction another finding is that in the context of consumer learning of product attributes although the forward looking model fits the data statistically better at conventional significance levels both models produce similar parameter estimates and policy implications our estimates indicate that consumers are risk averse with respect to variation in brand attributes which discourages them from buying unfamiliar brands using the estimated behavioral models we perform various scenario evaluations to find how changes in marketing strategy affect brand choice both in the short and long run a key finding obtained from the policy experiments is that advertising intensity has only weak short run effects but a strong cumulative effect in the long run the substantive content of the paper is potentially of interest to academics in marketing economics and decision sciences as well as product managers marketing research managers and analysts interested in studying the effectiveness of marketing mix strategies our paper will be of particular interest to those interested in the long run effects of advertising note that our estimation strategy requires us to specify explicit behavioral models of consumer choice behavior derive the implied relationships among choice probabilities past purchases and marketing mix variables and then estimate the behavioral parameters of each model such an estimation strategy is referred to as structural estimation and econometric models that are based explicitly on the consumer s maximization problem and whose parameters are parameters of the consumers utility functions or of their constraints are referred to as structural models a key benefit of the structural approach is its potential usefulness for policy evaluation the parameters of structural models are invariant to policy that is they do not change due to a change in the policy in contrast the parameters of reduced form brand choice models are in general functions of marketing strategy variables e g consumer response to price may depend on pricing policy as a result the predictions of reduced form models for the outcomes of policy experiments may be unreliable because in making the prediction one must assume that the model parameters are unaffected by the policy change since the agents in our models choose among many alternative brands their choice probabilities take the form of higher order integrals we employ monte carlo methods to approximate these integrals and estimate our models using simulated maximum likelihood estimation of the dynamic forward looking model also requires that a dynamic programming problem be solved in order to form the likelihood function for this we use a new approximation method based on simulation and interpolation techniques these estimation techniques may be of interest to researchers and policy makers in many fields where dynamic choice among discrete alternatives is important such as marketing decision sciences labor and health economics and industrial organization

cellular telephone new products and the cpi since their introduction in 1983 cellular telephones adoption has grown at 25 35 per year at year end 1997 about 55 million cellular telephones were in use in the united states the bureau of labor statistics bls did not know that cellular telephones existed at least in terms of calculating the consumer price index cpi until 1998 when they were finally included in the cpi omitting cellular telephones from the cpi created a significant bias i estimate a bias in the bls estimate of the telecommunications services index of between 8 1 9 per year because of the omission of the cellular telephone rather than telecommunications service prices increasing at about 1 1 per year the correct calculation has them decreasing at about 8 per year omission of new goods from the cpi for significant periods of time leads to important bias in the calculation of the cpi

monopoly pricing and diffusion of social network goods abstract i present a model of dynamic pricing and diffusion of a network good sold by a monopolist in the model the network good is a subscription social network good this means that in each period each consumer has to pay a subscription price to use the good and the utility derived from subscribing to the good increases as more of her neighboring consumers subscribe consumers myopically optimize their subscription decisions and the monopolist chooses a sequence of subscription prices that maximizes his discounted sum of per period profits three main results emerge first i characterize a unique steady state of the monopoly market second i find that optimal sequences of subscription prices oscillate around the subscription price at the steady state third i analyze how changes in the monopolist s discount factor and the density of the social network affect the subscription price subscription rate and deadweight loss at the steady state

meeting strangers and friends of friends how random are social networks we present a dynamic model of network formation where nodes find other nodes with whom to form links in two ways some are found uniformly at random while others are found by searching locally through the current structure of the network e g meeting friends of friends this combination of meeting processes results in a spectrum of features exhibited by large social networks including the presence of more high and low degree nodes than when links are formed independently at random having low distances between nodes in the network and having high clustering of links on a local level we fit the model to data from six networks and impute the relative ratio of random to network based meetings in link formation which turns out to vary dramatically across applications we show that as the random network based meeting ratio varies the resulting degree distributions can be ordered in the sense of stochastic dominance which allows us to infer how the formation process affects average utility in the network

consumer search with observational learning this article studies observational learning in a consumer search environment consumers observe the purchasing decision of a predecessor with similar preferences consumers rationally emulate by initiating their search at the firm from which their predecessor purchased free riding on search effort and reacting less to price changes prices are nonmonotone in search costs and may be as low as marginal costs we discuss several extensions and show that the effect of emulation on prices is stronger when i the number of firms increases ii consumers first visits are more elastic with respect to market shares and iii prices are adjusted more frequently

confidence intervals for evaluating benefits estimates from dichotomous choice contingent valuation studies i evaluate the potential usefulness of nonmarket valuation concepts and techniques from environmental economics for improving wildlife conservation the concepts include distinguishing between on site recreation use value and off site passive use or

a new paradigm for valuing non market goods using referendum data maximum likelihood estimation by censored logistic regression abstract this paper challenges the w m hanemann amer j agr econom 66 332 341 1984 and c sellar j p chavas and j r stoll j environ econom management 13 382 390 1986 utilizations of logit models to estimate the value of non market resources from referendum survey data these data are more informative than conventional choice data the random utility interpretation of logit models is therefore too restrictive bypassing the utility function entirely it will be shown that parameters and standard errors for utility theoretic inverse hicksian demand functions can be extracted directly and much more simply estimated demand functions need not be limited to those corresponding to the linear in parameters utility difference specifications which can be handled by packaged logit programs

conversations among competitors conversation is a central part of economic life a wide range of information gets passed from one person to another via word of mouth communication and a number of authors argue that the nature of connections between people i e the structure of social networks can have a

diffusion of behavior and equilibrium properties in network games situations in which agents choices depend on choices of those in close proximity be it social or geographic are ubiquitous selecting a new computer platform signing a political petition or even catching the flu are examples in which social interactions have a significant role while some behaviors or states propagate and explode within the population e g windows os the hiv virus others do not e g certain computer viruses our goal in this paper is twofold first we provide a general dynamic model in which agents choices depend on the underlying social network of connections second we show the usefulness of the model in determining when a given behavior expands within a population or disappears as a function of the environment s fundamentals we study a framework in which agents face a choice between two actions 0 and 1 e g whether to pursue a certain level of education switch to linux os etc agents are linked through a social network and an agent s payoffs from each action depend on the number of neighbors she has and her neighbors choices the diffusion process is defined so that at each period each agent best responds to the actions taken by her neighbors in the previous period assuming that her neighbors follow the population distribution of actions a mean field approximation steady states correspond to equilibria of the static game under some simple conditions equilibria take one of two forms some are stable so that a slight perturbation to any such equilibrium would lead the diffusion process to converge back to that equilibrium point other equilibria are unstable so that a slight change in the distribution of actions leads to a new distribution of actions and eventually to a stable steady state we call such equilibria tipping points we analyze how the environment s fundamentals cost distribution payoffs and network structure affect the set of equilibria and characterize the adoption patterns within the network the paper relates to recent work on network games and network diffusion including work by stephen morris 2000 pastor satorras and vespignani 2000 mark e j newman 2002 dunia lopez pintado 2004 jackson and brian w rogers 2007 jackson and yariv 2005 and andrea galeotti et al 2005 henceforth ggjvy its contribution is in characterizing diffusion of strategic behavior and analyzing the stability properties of equilibria and employing methods that allow us to make comparisons across general network structures and settings given that social networks differ substantially and systematically in structure across settings e g ethnic groups professions etc understanding the implications of social structure on diffusion is an important undertaking for a diverse set of applications

gender specific starting point bias in choice experiments evidence from an empirical study abstract in this paper we test whether preferences and willingness to pay estimates obtained in a choice experiment study are susceptible to starting point bias as is often the case in dichotomous choice contingent valuation studies on the basis of a multinomial probit model we find that preferences are indeed susceptible to starting point bias in a split sample design our results suggest that varying the price levels displayed in a so called instructional choice set presented prior to the actual preference eliciting choice sets significantly impacts respondents preferences and willingness to pay for protecting danish nature areas from new motorway development in particular our results show that the bias is gender specific only female respondents are significantly affected results further reveal that the impact of the starting point bias decays as respondents evaluate more and more choice sets this supports the discovered preference hypothesis and on the basis of this we suggest a number of ways to potentially mitigate the starting point bias

durability choice under demand uncertainty this paper examines the impact of demand uncertainty on a monopolist s durability choice within a simple two period framework the analysis shows that the firm will produce the socially optimal durability if its output is rented and demand uncertainty is small but that it may produce units with inefficiently short life spans if output is sold however the model reveals that this planned obsolescence may be reduced from certainty levels depending upon the impact of uncertainty on future demand thus uncertainty may actually increase the firm s product durability relative to certainty levels

pricing network effects the increase in the information that firms can collect or purchase about network effects across consumers motivates two important questions how does a firm s pricing strategy react to detailed information on network effects are the availability and use of such information beneficial or detrimental to consumer surplus we develop a model in which a monopoly sells a network good and price discriminates based on information about consumers influence and consumers susceptibility to influence the monopoly optimally offers consumers price discounts for their influence and charges price premia for their susceptibility the price premia and the price discounts are simple functions of the pattern of network effects we determine under which conditions relative to uniform price consumer surplus increases and we characterize the value of information on network effects for the monopoly

filtered social learning knowledge sharing is economically important but also typically incomplete we filter our communication this paper analyzes the consequences of filtering in the model homogeneous agents share knowledge with their peers whenever the private benefits exceed communication costs the welfare implications of this transmission mechanism hinge on whether units of knowledge complement substitute for or are independent of each other both substitutability and complementarity generate externalities cheaper communication eliminates externalities in the former case but not necessarily in the latter complementary basic skills such as numeracy catalyze technology adoption and adoption may be path dependent even when payoffs are certain and independent across agents

noisy contagion without mutation in a local interaction game agents play an identical stage game against their neighbours over time for nearest neighbour interaction it is established that starting from a random initial configuration in which each agent has a positive probability of playing the risk dominant strategy a sufficiently large population coordinates in the long run on the risk dominant equilibrium almost surely our result improves on blume 1995 ellison 2000 and morris 2000 by showing that the risk dominant equilibrium spreads to the entire population in a two dimensional lattice and without the help of mutation as long as there is some randomness in the initial configuration

stability analysis of financial contagion due to overlapping portfolios abstract common asset holdings are widely believed to have been the primary vector of contagion in the recent financial crisis we develop a network approach to the amplification of financial contagion due to the combination of overlapping portfolios and leverage and we show how it can be understood in terms of a generalized branching process this can be used to compute the stability for any particular configuration of portfolios by studying a stylized model we estimate the circumstances under which systemic instabilities are likely to occur as a function of parameters such as leverage market crowding diversification and market impact although diversification may be good for individual institutions it can create dangerous systemic effects and as a result financial contagion gets worse with too much diversification there is a critical threshold for leverage below it financial networks are always stable and above it the unstable region grows as leverage increases note that our model assumes passive portfolio management during a crisis however we show that dynamic deleveraging during a crisis can amplify instabilities the financial system exhibits robust yet fragile behavior with regions of the parameter space where contagion is rare but catastrophic whenever it occurs our model and methods of analysis can be calibrated to real data and provide simple yet powerful tools for macroprudential stress testing

innovation diffusion in heterogeneous populations contagion social influence and social learning new ideas products and practices take time to diffuse a fact that is often attributed to some form of heterogeneity among potential adopters this paper examines three broad classes of diffusion models contagion social influence and social learning and shows how to incorporate heterogeneity into each at a high level of generality without losing analytical tractability each type of model leaves a characteristic footprint on the shape of the adoption curve which provides a basis for discriminating empirically between them the approach is illustrated using the classic study of ryan and gross 1943 on the diffusion of hybrid corn

how people respond to contingent valuation questions a verbal protocol analysis of willingness to pay for an environmental regulation abstract this paper investigates what a respondent is thinking when answering a willingness to pay question in a contingent valuation using a think aloud technique from psychology called verbal protocol analysis the willingness to pay responses we observed seem to be constructed from a variety of considerations including an obligation to pay a fair share of the cost of the solution and signaling concern for a larger set of environmental issues the finding that respondents seem to construct their values at the time they are asked rather than reporting a more well defined value is seen as consistent with over two decades of research on the psychology of decision making potential uses of verbal protocols in contingent valuation studies are also discussed

generics and new goods in pharmaceutical price indexes drug prices and their rate of inflation are a major focus of current policy debates on u s health care in this paper we show that where patent expiration and generic entry are significant as they are for many important classes of drugs movements in the official price indexes may be poor indicators of the actual prices paid and the resulting changes in consumer welfare when a drug goes off patent those consumers who regard the branded and generic versions as more or less perfect substitutes experience a substantial price decline and concomitant welfare gain which the current methods used by the statistical agencies fail to capture we suggest a number of alternative ways of proceeding although our computations are based on a limited number of cases they imply that the overall rate of inflation in drug prices may be quite seriously overstated while generic pharmaceuticals are the topic of our calculations the problem discussed is also of wider importance generic drugs are a special and possibly easy case

monopoly pricing in the presence of social learning a monopolist offers a product to a market of consumers with heterogeneous quality preferences although initially uninformed about the product quality they learn by observing past purchase decisions and reviews of other consumers our goal is to analyze the social learning mechanism and its effect on the seller s pricing decision consumers follow an intuitive non bayesian decision rule under conditions that we identify we show that consumers eventually learn the product s quality we show how the learning trajectory can be approximated in settings with high demand intensity via a mean field approximation that highlights the dynamics of this learning process its dependence on the price and the market heterogeneity with respect to quality preferences two pricing policies are studied a static price and one with a single price change finally numerical experiments suggest that pricing policies that account for social learning may increase revenues considerably relative to policies that do not this

pricing and referrals in diffusion on networks abstract when a new product or technology is introduced potential consumers can learn its quality by trying it at a risk or by letting others try it and free riding on the information that they generate we propose a dynamic game to study the adoption of technologies of uncertain value when agents are connected by a network and a monopolist seller chooses a profit maximizing policy consumers with low degree few friends have incentives to adopt early while consumers with high degree have incentives to free ride the seller can induce high degree consumers to adopt early by offering referral incentives rewards to early adopters whose friends buy in the second period referral incentives thus lead to a double threshold strategy by which low and high degree agents adopt the product early while middle degree agents wait we show that referral incentives are optimal on certain networks while inter temporal price discrimination is optimal on others

contingent valuation and the budget constraint abstract one of the most vehemently debated techniques for the valuation of environmental goods is the contingent valuation method critics of this method question its validity and reliability in many respects however at the moment the contingent valuation method is the only technique at hand for the assessment of non use values of environmental goods therefore it seems worthwhile to have a closer look at some of the criticism raised in this debate this paper deals with the so called budget constraint bias which is suspected of distorting the results of contingent valuation studies according to the critics of the contingent valuation method the stated willingness to pay for an environmental good as assessed by contingent valuation studies is systematically biased upwards because participants of such surveys do not properly observe their personal budget constraints it is maintained that respondents when asked about their willingness to pay for an environmental good do not regard the amount stated by them as reducing their budget left for the purchase of private goods in this paper it is shown that from a theoretical point of view respondents intuitively do the right thing when ignoring the seeming relationship between their willingness to pay for an environmental good and their capacity to buy private goods it is elucidated that contingent valuation surveys should focus on the assessment of the shadow price of an environmental good rather than of the respective willingness to pay therefore it seems that the budget constraint bias is meaningless with respect to the validity of the contingent valuation method

new product diffusion with influentials and imitators we model the diffusion of innovations in markets with two segments influentials who are more in touch with new developments and who affect another segment of imitators whose own adoptions do not affect the influentials this two segment structure with asymmetric influence is consistent with several theories in sociology and diffusion research as well as many viral or network marketing strategies we have four main results 1 diffusion in a mixture of influentials and imitators can exhibit a dip or chasm between the early and later parts of the diffusion curve 2 the proportion of adoptions stemming from influentials need not decrease monotonically but may first decrease and then increase 3 erroneously specifying a mixed influence model to a mixture process where influentials act independently from each other can generate systematic changes in the parameter values reported in earlier research 4 empirical analysis of 33 different data series indicates that the two segment model fits better than the standard mixed influence the gamma shifted gompertz and the weibull gamma models especially in cases where a two segment structure is likely to exist also the two segment model fits about as well as the karmeshu goswami mixed influence model in which the coefficients of innovation and imitation vary across potential adopters in a continuous fashion

dynamics of consumer demand for new durable goods most new consumer durable goods experience rapid prices declines and quality improvements suggesting the importance of modeling dynamics this paper specifies a dynamic model of consumer preferences for new durable goods with persistently heterogeneous consumer tastes rational expectations and repeat purchases over time we estimate the model on the digital camcorder industry using panel data on prices sales and characteristics we find that the 1 year elasticity in response to a transitory industrywide price shock is about 25 percent less than the 1 month elasticity standard cost of living indices overstate welfare gain in later periods due to a changing composition of buyers

consumption risk sharing in social networks we develop a model of informal risk sharing in social networks where relationships between individuals can be used as social collateral to enforce insurance payments we characterize incentive compatible risk sharing arrangements and obtain two results 1 the degree of informal insurance is governed by the expansiveness of the network measured by the number of connections that groups of agents have with the rest of the community relative to group size twodimensional networks where people have connections in multiple directions are su ciently expansive to allow very good risk sharing we show that social networks in peruvian villages satisfy this dimensionality property thus our model can explain townsend s 1994 puzzling observation that village communities often exhibit close to full insurance 2 in second best arrangements agents organize in endogenous risk sharing islands in the network where shocks are shared fully within but imperfectly across islands as a result network based risk sharing is local socially closer agents insure each other more

commodity specification and the framing of contingent valuation questions contingent valuation studies comprise a process of information transfer a researcher through a survey instrument conveys information about the item being valued and repondents in turn provide information about the value they place on this item considering contingent valuation from this perspective nearly all of the research evaluating the validity of this valuation method is in a general sense focused on examining the effects of information structures on value estimates a comparison of various questioning techniques represents such an examination boyle and bishop 1988 randall hoehn and tolley 1981 smith desvousges and fisher 1986 on a more specific level the selection of a payment vehicle also forms part of the information set and may affect statements of value greenley walsh and young 1982 1985 mitchell and carson 1985 these examples suggest that the validity of estimated contingent values relies heavily on the information conveyed to survey respondents since varying information structures can affect the magnitude of estimated values