advertising and prices as signals of quality in a regime of price rivalry abstract this paper addresses the issue of whether firms use price or advertising to signal quality and whether advertising has pro or anti competitive effects we show that when there is price rivalry advertising may be necessary to signal quality in contrast to single firm models signaling through price alone prevails for sufficient inter brand quality differentials joint price advertising signals prevail when the quality differential is small finally advertising in the form of variable rather than fixed costs is shown to increase the feasibility of signaling quality

investment in cleaner technology and signaling distortions in a market with green consumers abstract i analyze the pricing and investment behavior of a firm that signals the environmental attributes of its production technology through its price to uninformed environmentally conscious consumers i then analyze the effect of change in environmental regulation on the signaling outcome and the firm s ex ante incentive to invest in cleaner technology when regulation is weak a firm signals cleaner technology through higher price in this case the firm earns lower profit when it has cleaner technology and thus has no incentive to invest in cleaner technology the price charged by the clean firm declines sharply beyond a critical level of regulation when regulation is sufficiently stringent the firm with cleaner technology charges lower price but earns higher signaling profit and ex ante the firm has positive incentive to invest in cleaner technology with weak regulation the incentive of the firm to directly disclose its environmental performance rather than signal it through price is increasing in the level of regulation the opposite holds when regulation is sufficiently stringent

the informational role of prices we consider a dominant firm with a competitive fringe in order to address the informational role of prices the fringe is necessary for the existence of a unique fully revealing equilibrium in which the price reveals the quality of the good to uninformed buyers a higher price triggers more sales on the part of the competitive fringe reducing both residual demand and profits we find that a larger share of uninformed buyers increases the price reduces the quantity sold by the dominant firm but increases the quantity sold by the competitive fringe this in turn reduces consumer surplus and welfare this article is protected by copyright all rights reserved

buyer experimentation and introductory pricing we study the pricing decisions of a monopolist seller in a two period model in which buyers and the seller are all uncertain about a good s quality we assume that buyers not only learn from experience but also may experiment that is increase the amount of information by consuming more we define an introductory price to be a first period equilibrium price lower than that which maximizes period 1 profit the motivation for introductory pricing is that under certain conditions the seller prefers its buyers to be better informed about quality a lower initial price increases consumption and hence information we consider two versions of the model identical buyers with a public signal of quality heterogeneous buyers who each receive a private quality signal 2001 elsevier science b v all rights reserved

global liquidity through the lens of monetary aggregates this paper examines how the financial activities of non financial corporations nfcs in international markets potentially affects domestic monetary aggregates and financial conditions monetary aggregates reflect in part the activities of nfcs who channel capital market financing into the domestic banking system thereby influencing funding conditions and credit availability periods of capital inflows are also those when the domestic currency is appreciating and such periods of rapid exchange rate appreciation coincide with increases in the central bank s foreign exchange reserves increasing the stock of narrow money the paper examines economic significance of cross country panel data on monetary aggregates and other measures of non core bank liabilities non core liabilities that reflect the activities of nfcs reflect broad credit conditions and predict global trade and growth

buyer initiated vs seller initiated information revelation sales presentations are the core of the selling process where salespeople provide information to prospects one challenge is that the amount of information available to be potentially communicated may exceed salespeople s ability to communicate or customers ability to process there is limited bandwidth between the firm and customers one important decision then is which information should customers see what the firm chooses to tell customers may be informative in itself when constrained to a seller initiated information revelation format where the firm chooses which feature to show the firm never finds it optimal to offer more features than it is able to inform customers about consequently customers never find credible a claim that the product has all features the important implication is that price alone cannot serve as a signal of quality in this setting in contrast a buyer initiated information revelation format where customers decide which information to receive increases the probability of a sale and also results in the production of higher quality products in a competitive setting by adopting buyer initiated information revelation firms are able to attain positive profits this is due to the fact that customers infer the product s quality from the price along with the information revelation format customers know that at some prices firms find it profitable to produce high quality products and at other lower prices this is not the case thus customer empowerment leads to higher profits

money back guarantees and market experimentation abstract we study the use of money back guarantees as a form of market experimentation in a market for experience goods with repeat purchases we show that extending the customer base in the second period by using a money back guarantee can be optimal only if a monopolist faces an uncertain distribution of buyers within the second period a money back guarantee allows the monopolist to discriminate between new and repeat purchasers while a pure price reduction does not thus whenever money back guarantees are feasible an optimal experimentation strategy includes a money back guarantee in the second period but not necessarily a price reduction

effects of the change from rate of return to price cap regulation this article focuses on the use of incentive regulation in the telephone industry in the united states we first characterize some of the difficulties that have led regulators to move away from traditional rate ofreturn cost based regulation and toward systems of regulation that provide incentives for increasingly efficient production allowing firms to share in the social gains from efficiency with increased profits we then discuss the basic structure of incentive regulation as it has most commonly been adopted in the telephone industry in the united states the first is price cap pc regulation which typically allows the firm to

signaling quality with a money back guarantee the role of transaction costs direct marketing is witnessing explosive growth as consumers increasingly purchase products from their homes their ability to judge the quality of products they buy is significantly reduced in this paper we study how money back guarantees can signal product quality in such environments we interpret product quality broadly to mean both the level of attributes promised as well as the firm s consistency in delivering on those promises key aspects of our formulation are the explicit consideration of transaction costs and alternative signals of product quality transaction costs are the costs the seller or buyer faces when redeeming a money back guarantee we show that money back guarantees signal quality by exploiting the higher probability of returns for a lower quality product and the attendant higher transaction costs however if the seller s transaction costs are very large then there are less costly ways to signal namely charging a high price we compare the signaling performance of 1 price 2 price with uninformative advertising and 3 price with a money back guarantee whereas uninformative advertising does not work at all in our model under certain conditions a money back guarantee is necessary to signal and under other conditions a money back guarantee is a useful supplement to price

commitment and fairness in a dynamic regulatory relationship this paper considers a multiperiod model of a regulated firm that has stationary private information which may be revealed through performance if it cannot make commitments to future policies the regulator has an incentive to exploit any information the firm reveals and laffont and tirole show that there is no regulatory policy that is separating over any closed interval a fairness arrangement is proposed in which the firm agrees not to quit if in future periods the regulator allows it to earn a nonnegative profit given the type it revealed in earlier periods the properties of such arrangements are studied and an example is presented in which both the firm and the regulator prefer a fairness arrangement to a policy feasible without commitment

strategic pricing signalling and costly information acquisition abstract consider a market where an informed monopolist sets the price for a good or asset with a value unknown to potential buyers upon observing the price buyers may pay some cost for information about the value before deciding on purchases under a belief restriction which generalizes the idea of the cho kreps intuitive criterion we establish a version of the grossman stiglitz paradox there is no separating equilibrium with fully revealing prices yet we also resolve the paradox there is a unique equilibrium and as the cost of information becomes small the equilibrium approaches the full information outcome and prices become perfectly revealing

pricing and patents of hiv aids drugs in developing countries this article provides empirical evidence on the impact of patents on drug prices across developing countries it uses sales data on human immunodeficiency virus hiv acquired immuno deficiency syndrome aids drugs in a sample of 34 low and middle income countries between 1995 and mid 2000 the main findings are that patents do shift drug prices up drug prices are correlated to per capita income levels and drug firms follow a skimming strategy when pricing new hiv aids drugs that is there is across country and intertemporal price discrimination in the global drug markets

the double marginalization problem of transfer pricing theory and experiment in this paper we find that the idea of using optional two part tariffs as a basis for tariff renegotiations in a bilaterally monopoly setting is a solution to the double marginalization problem that theoretically 1 creates a stable equilibrium 2 at the overall efficient level 3 without the presence of a central management through experimental testing we find that the efficiency of this mechanism is significantly higher than the efficiency of simple direct negotiation both under symmetrically and asymmetrically distributed information

a simple model of pharmaceutical price dynamics abstract branded pharmaceutical firms use price and promotional strategy to manage public knowledge about their drugs we propose a dynamic theory of pharmaceutical pricing and conduct an exploratory empirical analysis inspired by the theory our theory predicts a pattern of increasing prices and decreasing promotional activities over a drug s life cycle prices are kept low and advertising levels high early in the life cycle in order to build public knowledge about the drug as knowledge grows prices rise and advertising falls if the management of this stock is important enough this tendency of prices to rise can overwhelm the price decreasing effect of entry by generic competitors late in the drug life cycle we argue that our theory of price dynamics explains empirical regularities in this industry

price premium variations as a consequence of buyers lack of information it appears that buyers sometimes knowingly pay a price that is higher than that justified by the relative quality of the product such a price premium is argued to be an economically rational attempt by quality conscious buyers to ensure that the seller does not provide a lower than promised level of quality for experience products conversely for search products price premiums are argued to be the consequence of lack of search by buyers who are less quality conscious results from a survey conducted in an organizational buying setting indicate that buyers tendency to pay a price premium for experience products increases with an increase in their quality consciousness while for search products this tendency decreases with an increase in their quality consciousness the implications of this finding are discussed further analysis leads to additional speculation regarding some other mechanisms that buyers may use to assure product quality

hybrid revenue caps and incentive regulation abstract this paper analyzes the incentive effects of a hybrid revenue cap on a regulated monopolistic firm using non discriminatory two part pricing it is shown that the fixed and the variable part of the cap have different meanings in terms of regulation the fixed part of a hybrid revenue cap should be used to control the profit level of the regulated firm while the variable part should be used to control the social efficiency level since detailed information about the firm s cost function is required to determine the revenue cap parameters the overall conclusion is that revenue caps are a rather bad idea in the area of incentive regulation

how limiting deceptive practices harms consumers there are two competing sellers of an experience good one offers high quality one low the low quality seller can engage in deceptive advertising potentially fooling a buyer into thinking the product is better than it is although deceptive advertising might seem to harm the buyer we show that he could be better off when the low quality seller can engage in deceptive advertising than not we characterize the optimal deterrence rule that a regulatory agency seeking to punish deceptive practices should adopt we show that greater protection against deceptive practices does not necessarily improve the buyer welfare

zero interest rate policy and unintended consequences in emerging markets since 2009 central banks in the major advanced economies have held interest rates at very low levels to stabilise financial markets and support the recovery of their economies this paper outlines the unintended consequences of the prolonged period of very low world funding interest rates in emerging markets the paper is informed by a mises hayek bis view on credit booms and mises law of unintended consequences consistent with the presented credit boom view i provide evidence that the very low world funding interest rates are associated with a rise in volatile capital flows and asset market bubbles in fast growing emerging markets in line with mises law i further show that these unintended consequences give rise to a new wave of interventionism as policymakers in emerging markets increasingly reintroduce financially repressive measures to isolate the economies from foreign capital inflows

integration of price cap and yardstick competition schemes in electrical distribution regulation the disadvantages of traditional rate of return regulation for distribution tariffs have led to he development of new regulatory schemes to stimulate efficiency in the provision of the service under what has been called benchmark regulation the paper assesses the chilean model company regulation that aims at making the private distribution monopoly compete with a reference efficient model company through a yardstick competition approach it compares it with the price cap scheme used in electricity distribution in england and wales it contributes with a proposal to integrate both schemes the proposed hybrid methodology is developed and evaluated capturing the best characteristics of both regulatory schemes mathematical models to relate operational costs with electrical variables are developed

oligopolistic competition in price and quality abstract we consider an oligopolistic market where firms compete in price and quality and where consumers have heterogeneous information some consumers know both the prices and quality of the products offered some know only the prices and some know neither we show that if there are sufficiently many uninformed consumers then there exists a unique equilibrium where price is a perfect indicator of quality this equilibrium is characterized by dispersion and pareto inefficiency of the price quality offers where better price quality combinations are associated with lower prices

high and declining prices signal product quality high and declining prices signal a high quality product high prices are the efficient means of signaling because the consequent loss of sales volume is most damaging for lower cost lower quality products as time passes and the number of informed consumers increases the signaling distortion lessens resulting in a declining price profile the prediction of high and declining prices is robust across a variety of dynamic models and is consistent with recent empirical findings copyright 1991 by american economic association

causes and consequences of price premiums existing literature that argues for the prevalence of price premiums is examined an evaluation of an extant model identifies several possible boundary conditions that limit the applicability of the model a set of propositions is developed based on these boundary conditions linking buyer seller and market factors to the magnitude of price premiums that should be available alternative means for empirical testing of the propositions are offered and some implications and applications of this line of thinking for pricing and brand management are described copyright 1996 by university of chicago press

two part pricing for experience goods in the presence of adverse selection abstract because customers learn something when they purchase an experience good for the first time a firm selling experience goods may face different demand curves from new and repeat customers the firm can exploit these differences by using a two part pricing strategy to price discriminate between new and repeat customers the firm may also use a two part pricing strategy to mitigate the information problems of adverse selection when its quality is uncertain the analysis is particularly applicable to service markets where customers and firms seek long term relationships and firms maintain customer records which facilitate price discrimination

optional two part tariffs constrained by price caps abstract cost reducing incentives possibly generated by price cap regulation may invoke allocative inefficiencies however if the regulated firm can offer optional two part tariffs in addition to the price caps then pareto optimal outcomes will be reached under quite general conditions

consumer demand for fair trade evidence from a multistore field experiment abstract we provide new evidence on consumer demand for ethical products from experiments conducted in a u s grocery store chain we find that sales of the two most popular coffees rose by almost 10 when they carried a fair trade label as compared to a generic placebo label demand for the higher priced coffee remained steady when its price was raised by 8 but demand for the lower priced coffee was elastic a 9 price increase led to a 30 decline in sales while consumers attach value to ethical sourcing there is significant heterogeneity in willingness to pay for it

quality uncertainty and informative advertising we present a price signalling model with informative advertising a costly advertisement informs of the good s quality directly and therefore the seller determines the fraction of informed buyers endogenously we show that informative advertising only occurs in pooling equilibria for an advertising pooling equilibrium to exist consumer valuation for high quality advertising cost prior probability that quality is high and inaccuracy of the buyers pre purchase information must be sufficiently high for some parameters there is a unique undefeated advertising pooling equilibrium if advertising is used in equilibrium the adverse selection problem is mitigated

credible signals of the release of new versions i introduction many products are marketed some time after they have been developed for instance a new smartphone may be developed and tested well before it is available for purchase a new car might be prototyped and driven months before it comes to the market indeed a firm will often have several products concurrently in a development pipeline consumers may know a product is in that pipeline without knowing its progress towards the market because the outcome of such development and testing is not visible to outsiders the firm knows whether it can market a product before consumers do consumers are uninformed about when and if the new product will be marketed to them economists have long recognized that the present demand for durable goods depends on future prospects such as the future price or the introduction of an improved version 1 the existence of such an improved version is often the seller s private information if consumers anticipate a new version some will defer purchases until the new version is available and the seller will face low demand for the present version disclosing the new version is not in a monopoly seller s interest a seller whose good does not have a new version would also like to communicate that fact to consumers while a firm with a successful product innovation can credibly disclose the new version with relative ease a firm that has failed to develop a new product could have great difficulty convincing consumers that the product has no new version in such situations it is important to examine whether prices can inform consumers whether a new version will be marketed in the near future in a recent paper choi et al 2010 developed a model with a risky product development process in which reputation effects allow cheap talk announcements to signal successful product development to consumers an announcement induces consumers to delay or divert purchases to the announcer s coming product which increases the announcer s profit and can improve welfare 2 in their model the announcer and her non innovative rivals supply the original good competitively because of this an announcement does not reduce profit on the current version this paper will focus on markets where the seller has substantial market power before innovating so announcing a successful product development has a cost in terms of current revenue further because we attend to prices as signals this model may also apply to markets where a long run relationship between consumers and firms may not be sustainable another objective of this paper is to examine the welfare effects of mandatory disclosure a government policy mandating disclosure of any new version is an alternative means of informing consumers 3 as long as firms are not willing to lie to the government such a policy would credibly communicate whether a new version of a durable is coming mandatory disclosure would bring about full information as consumers are informed about any improved future version before observing the price of the current version in this paper we explore a two period model of a durable good monopoly in which consumers are initially uninformed about whether there will be a new version of the current good the monopoly seller is privately informed if he will be able to market an improved version in the second period in the first period consumers must decide whether to purchase the good now or wait for an upgraded version they may be able to infer from the price of the current version whether the seller will bring a new version to the market it is important to see first whether prices can serve as signals and second how welfare compares between any signaling outcome and a full information benchmark corresponding to mandatory disclosure we will show that there is a unique equilibrium supported by intuitive beliefs in this equilibrium the seller s private information about an improved version is completely revealed to consumers

an empirical analysis of scarcity strategies in the automobile industry recent product introductions such as the xbox 360 sony playstation 2 and pt cruiser have been characterized by shortage of these products some experts have suggested that such scarcity can be a deliberate strategy for making the product more desirable in this paper we empirically examine the relationship between introductory inventory levels and consumer preference in the u s automobile industry and show that relative scarcity of a car at the time of introduction is associated with higher consumer preference for the product furthermore we perform an empirical test of alternative theories about the rationale for introductory product scarcity specifically we consider two theories of supplier induced scarcity namely the buying frenzy theory and the signaling theory and an alternative theory that suggests that demand uncertainty causes introductory product scarcity we find more support for the signaling theory of supplier induced scarcity than the buying frenzy theory or the demand uncertainty theory in our analysis of the automobile market

strategic pricing of new pharmaceuticals this paper provides empirical evidence on the leading factors affecting the prices of new pharmaceuticals both at introduction and after 4 6 and 8 years most important is the extent of therapeutic advance embodied in a new product for drugs which represent important therapeutic gains launch prices can be two or three times those of existing drugs used for the same purposes while drugs that largely duplicate the actions of currently available products are typically priced at comparable levels in addition the number of branded substitutes has a substantial negative effect on launch prices which reflects the importance of competitive pressures duplicate products thereby play an important economic role in pharmaceutical markets

welfare gains from quality certification of infant foods results from a market experiment in mali in low income countries malnutrition is often most severe among infants of six to twenty four months they need higher density foods than the family diet but density is a credence attribute we hypothesize that the premium now paid for heavily advertised brands reflects demand for quality assurance which could be provided at lower cost to competing firms through third party certification we use a new market experiment to find that mothers average willingness to pay for certification is about 1 75 kg or four times its cost so that total economic surplus gains from introducing certification to mali would be on the order of 1 million annually

toward an economic theory of fashion strong as is the desire for variety it is weak compared with the desire for distinction a feeling which if we consider its universality and its constancy that it affects all men at all times that it comes with us from the cradle and never leaves us until we go to the grave may be pronounced to be the most powerful of human passions nassau senior 1 with the greater part of rich people the chief enjoyment of riches consists in the parade of riches which in their eyes is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves adam smith 2 i introduction positively sloped demand curves are used in marketing textbooks to explain the pricing of fashion merchandise 3 snob or prestige effects are alluded to in support of the claim that price increases can lead to an increase in the quantity demanded in the tenth edition of their text e jerome mccarthy and william d perreault 1990 offer a demand curve with a positively sloped segment they explain prestige pricing is setting a rather high price to suggest high quality or high status some target customers want the best so they will buy at a high price but if the price seems cheap they worry about quality and don t buy p 506 footnote omitted emphasis in the original in another text ralph m gaedeke and dennis tootelian 1983 also discuss a positively sloped demand curve some products do not have the traditional downward sloping demand curve previously described but a more curved slope illustrated in exhibit 13 6 demand curve with upward sloping portion not shown this reflects the real impact of price as a part of the product s value quite obviously as a product s price rises above p sub 0 demand will begin to drop as some consumers will simply be unable to afford the product however that decline is rather slow until very high prices are reached but demand also begins to drop at prices below p sub 0 showing that part of the reason for owning the product lies in its high price it has prestige value economists react by asserting that marketing explanations are ad hoc devoid of economic content conversely marketers say that economic models are naive and incapable of explaining the marketing of fashion goods as economists we have a bias towards economic explanations but these explanations are incomplete and not highly valued by the market in stark contrast the advice of professional marketers that economists contend is muddled or worse is amply rewarded in consulting work is there a market failure in the consulting market or does marketing provide an insight that economics lacks we start with the premise that the intuition behind marketing explanations that people desire prestige has validity this notion can be incorporated into economic theory using kelvin lancaster s 1971 notion that when a purchase is made what is bought is a bundle of services or characteristics the salient feature of a fashion good is its ability to confer prestige or status 4 the argument is straightforward there is a sociobiological basis for status seeking behavior status seeking is an evolved trait that is innate to humans as well as to many other animals given the pervasiveness of status seeking human cultures have developed effective signals of status fashion being just one we incorporate the status yielding nature of fashion goods into a standard demand model by assuming that the value consumers attach to a fashion good depends on the stock held by other consumers this interdependency among consumers allows us to explain the upward sloping constructs labeled demand curves that populate marketing texts our model has downward sloping demand curves throughout but because of the interdependencies generates cyclical price behavior that can be misconstrued as aberrant positively sloped demand functions

price quality and reputation evidence from an online field experiment we examine the link between price quality seller claims and seller reputation in internet auctions after purchasing actual baseball cards and having them professionally graded we find that some buyers in the online graded market are misled by incredible claims of quality they pay higher prices but do not receive better quality and in fact are defrauded more often online seller reputation is effective for identifying good faith sellers but conditional on completed auctions reputable sellers do not provide better quality evidence also suggests that high claim sellers target less experienced buyers we attribute these patterns to two loopholes in the ebay rating system we benefited from the comments of austan goolsbee raphael thomadsen john shea dan vincent david reiley larry ausubel peter cramton v joseph hotz jeff smith jimmy chan vincent crawford mark duggan and attendees at numerous seminars and conferences we are particularly grateful to seth sanders and john list for their constructive advice at the early stage of the research to timothy bresnahan rachel kranton and thomas hubbard for their detailed suggestions in reshaping earlier versions and to editor ariel pakes and two anonymous referees for their careful readings special thanks to eight friends who acted as our agents in purchasing baseball cards in retail markets and to numerous sports card store owners who shared their insights on the sportscard industry excellent research assistance from randy alexander moore and krzysztof fizyta is gratefully acknowledged any remaining errors are ours

when cheaper is better fee determination in the market for equity mutual funds abstract in this paper we develop a model of the market for equity mutual funds that captures three key characteristics of this market first there is competition among funds second fund managers ability is not observed by investors before making their investment decisions third some investors do not make optimal use of all available information the main results of the paper are that 1 price competition is compatible with positive mark ups in equilibrium and 2 worse performing funds set fees that are greater or equal to those set by better performing funds these predictions are supported by available empirical evidence

ethical products less strong how explicit and implicit reliance on the lay theory affects consumption behaviors many consumers implicitly associate sustainability with lower product strength this so called ethical less strong intuition elsi poses a major threat for the success of sustainable products this article explores this pervasive lay theory and examines whether it is a key barrier for sustainable consumption patterns even more importantly little is known about the underlying mechanisms that might operate differently at the implicit and explicit levels of the consumer s decision making to fill this gap three studies examine how the implicit judgments that consumers activate automatically shape their consumption behaviors in concert with their more controlled explicit beliefs about sustainable products the main study investigates the elsi s imprint on actual shopping patterns and disentangles the implicit and explicit mechanisms of the lay theory this paper also asks how this negative influence can be attenuated by examining whether the consumer s interest in sustainable consumption reduces reliance on the elsi two follow up studies confirm the robustness from different methodological and practical perspectives implications for companies and policy makers are derived

adaptive learning models of consumer behavior abstract in a model of dynamic duopoly optimal price policies are characterized assuming consumers learn adaptively about the relative quality of the two products a contrast is made between belief based and reinforcement learning under reinforcement learning consumers can become locked into the habit of purchasing inferior goods such lock in permits the existence of multiple history dependent asymmetric steady states in which one firm dominates in contrast belief based learning rules must lead asymptotically to correct beliefs about the relative quality of the two brands and so in this case there is a unique steady state

multidimensional separating equilibria and moral hazard an empirical study of national football league contract negotiations this paper empirically tests for a multidimensional separating equilibrium in contract negotiations and tests for evidence of the moral hazard inherent in many contracts using contract and performance data on players drafted into the national football league from 1986 through 1991 we find evidence that players use delay to agreement and incentive clauses to reveal their private information during contract negotiations in addition our empirical tests of the moral hazard issue indicate that a player s effort level is influenced by the structure of his contract

price endings when prices signal quality this paper provides a theoretical explanation for why firms behave as though they use round prices to signal quality by replacing the linear demand curve in bagwell and riordan s 1991 price as a signal of quality model with a kinked demand curve and analyzing what price endings firms are most likely to use the following observations can be made 1 firms that are using high prices to signal quality are more likely to set those prices at round numbers and 2 price endings themselves are not necessarily signals of quality a simulation was conducted to demonstrate that these findings generally hold true even in the presence of demand spikes at 9 ending prices e g schindler and kibarian 1996 finally empirical evidence is provided to demonstrate that firms tend to use more round prices for higherquality products and that this relationship is even stronger for product categories where consumers are less able to detect the true level of quality prior to purchase

green greener greenest eco label gradation and competition abstract this paper analyzes two common features of markets in which eco label programs certify that products are green gradation single programs offering multiple certification standards e g platinum gold silver and competition multiple programs vying to certify to their respective standards we find that depending on whether programs are sponsored by industry environmental groups or a government they have strikingly different incentives to grade or compete industry sponsors are indifferent about both environmentalist sponsors optimally grade or compete with other environmentalist sponsors only if consumer preferences for green consumption are skewed in a specific way and government sponsors decisions depend on the relative importance of private vs public benefits generated by the green market we find also that it is no accident that green markets frequently have an environmentalist program competing with an industry one for each of the cases examined our analysis is consistent with casual empirical evidence

regulating without cost information the incremental surplus subsidy scheme the authors propose a regulatory mechanism called the incremental surplus subsidy iss scheme that can be implemented even when the regulato r has no knowledge of the monopolist s cost structure the regulator need only share the firm s knowledge of demand which may be imperfec t and be able to observe with a lag the firm s expenditures the i ss scheme induces the firm to set marginal cost prices to minimize p roduction costs and to undertake efficient investment levels it als o severely limits the firm s rents and eliminates them altogether if the firm s discount rate is known copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

quality signaling through certification in developing countries this paper studies how signaling the credence attributes of consumer goods distorts their market equilibrium in developing countries costs of certification sunk in order to achieve credibility play a key role in producing an oligopolistic market leading to high prices that form a barrier for consumers in the south to lower the cost certification is better achieved by a single independent body which can be financed either by end consumers through a fee or by public subsidies the paper identifies the conditions under which each funding mechanism is most efficient taking into account the government s budget constraint the theoretical analysis is motivated with reference to agricultural seed certification

quality signaling through ex ante voluntary information disclosure in entrepreneurial networks evidence from franchising this paper examines antecedents of ex ante voluntary information disclosures for standardized contracts in entrepreneurial networks entrepreneurs e g franchisors may make such disclosures to prospective business partners in order to signal profitability of partnering attract financial and managerial resources and develop their entrepreneurial networks in practice only a fraction of franchisors make financial performance representations fprs an ex ante voluntary information disclosure to prospective franchisees we address gaps in the signaling voluntary information disclosure franchising entrepreneurship and small and medium enterprise sme literatures we draw on signaling theory to develop a theoretical framework and investigate factors that influence a franchisor s disclosure decision we evaluate hypotheses from our theoretical framework through econometric analyses of multi sector panel data for the us franchising industry we estimate a logit model and use lagged independent variables to address our dichotomous independent variable and potential endogeneity respectively our results support the view that firms signal their quality through fprs to attract potential business partners and expand their entrepreneurial networks beyond the extant literature we find that rigorous partner qualification is another driver of voluntary information disclosure in franchising our findings also provide empirical support for the complementary role played by multiple quality signaling mechanisms used by franchisors and yield public policy implications for franchising

promotions and product pricing parsimony versus veblenesque demand the veracity of the parsimonious law of demand has long been challenged by analyses of the veblen effect and prestige pricing backward bending demand curves often attend discussions of conspicuous consumption probing the sociological and psychological intricacies of potential consumer interdependencies scholars in economics and marketing have overlooked mundane product promotions for a monopolistic firm we formalize the relationship between the optimal price quantity combination and the thoroughness of product promotions iterating toward the profit maximizing thoroughness of product promotion gives rise to a backward bending price quantity locus challenges to the law of demand that ignore product promotions are thereby undercut

influence of informed buyers in markets susceptible to the lemons problem it is shown that the presence of informed buyers is necessary but not always sufficient for producers to use prices as signals of product quality a sufficiently high fraction of informed buyers eliminates the lemons problem a small fraction of informed buyers mitigates the lemons problem provided that buyers prior belief of high quality is sufficiently pessimistic price reveals high quality at a signaling cost which increases with market power however if buyers prior belief of high quality is optimistic when the market is poorly informed then the lemons problem is not overcome

information and the provision of quality differentiated products governments often enact information provision policies to overcome asymmetric information of product qualities we show that increasing awareness among consumers of the quality of a good can but will not always encourage firms to produce goods with higher levels of quality even if product qualities increase social welfare may fall as information provision results in too much product differentiation we show that the effectiveness of emission taxes and output subsidies are affected by the level of consumer knowledge of product quality and we identify conditions under which information provision is welfare enhancing relative to these price instruments jel l15 q58 i introduction in the past 20 years consumers have become increasinglyconscious ofthe undesirable health and safety attributes of the products they consume and surveys suggest that a growing percentage of consumers are willing to pay more for higher quality products such as organic foods and household cleaners and detergents that contain less toxic ingredients guber 2003 other high quality products facing higher demand include energy efficient products like extended life lightbulbs and improved home insulation often these highquality products provide private benefits that are excludable to buyers as well as public benefits that are nonrival and nonexcludable for example reduced pesticide and chemical residue on food may lower the risk of cancer while also reducing contaminated run off that degrades ground and surface water quality extended life lightbulbs and improved home insulation may reduce an individual s utility bill while also reducing greenhouse gas emissions from lower energy consumption although interest in these types of high quality productsisgrowing demand isoften relatively small market shares of organic produce for

the economics of nested names name specificity reputations and price premia a good can be identified by its region or country of origin the firm that produces it and its product name in other words names can nest within each other to categorize goods with increasing specificity this article develops a conceptual framework for jointly analyzing the effect of product firm and collective reputations on market price the model is estimated via quantile regression with california wine market data the results portray how the structure and relative importance of reputations change as product prices vary specifically reputation premia migrate from collective to specific names as prices increase

pricing strategy quality signaling and entry deterrence abstract i investigate a pricing strategy that is aimed at deterring entry by applying a two period model of a durable goods monopolist there exists an incumbent that is of two types that is high and low quality types they differ in terms of their r d capabilities and the incumbent s type is assumed to be unknown to an entrant if the entrant decided to enter the market nash bertrand price competition ensues between the incumbent and the entrant i show that not only limit pricing but also prestige pricing signals the incumbent s quality type which serves to discourage entry in the prestige pricing the high quality type sells the products at an intentionally higher price i also show that although limit pricing is more desirable than prestige pricing from a social welfare viewpoint the incumbent can still choose prestige pricing

report cards the impact of providing school and child test scores on educational markets this paper studies study the impact of providing school and child test scores on subsequent test scores prices and enrollment in markets with multiple public and private providers a randomly selected half of the sample villages markets received report cards this increased test scores by 0 11 standard deviations decreased private school fees by 17 percent and increased primary enrollment by 4 5 percent heterogeneity in the treatment impact by initial school quality is consistent with canonical models of asymmetric information information provision facilitates better comparisons across providers improves market efficiency and raises child welfare through higher test scores higher enrollment and lower fees

information in cournot signaling with incomplete control abstract we embed signaling in the classical cournot model in which several firms sell a homogeneous good the quality is known to all the firms but only to some buyers the quantity setting firms can manipulate the price to signal quality because there is only one price in a market for a homogeneous good each firm incompletely controls the price signal through the quantity decision we characterize the unique signaling cournot equilibrium in which the price signals quality to the uninformed buyers we then compare the signaling cournot equilibrium with the full information cournot equilibrium signaling is shown to increase the equilibrium price moreover under certain conditions regarding the composition of buyers the number of firms and the distribution of costs across firms the effects of signaling and market externality cancel each other in other words the profits under signaling cournot equal the profits of a cartel in a full information environment

response to competitive entry a rationale for delayed defensive reaction empirical studies examining responses to new product entries come to the puzzling conclusion that in general an incumbent reacts to a new entrant after a significant delay even easy to implement price cuts are observed after significant lag following entry these findings seem to contradict the existing literature that either implicitly assumes or strongly advocates immediate defensive responses to limit competitive encroachment when a competing firm enters the market consumers may be uncertain about the entering firm s product quality the incumbent firm through rigorous tests may fully know the entrant s quality suppose the incumbent aggressively lowers price this may cause the consumers to wonder if indeed the entrant s quality is high in other words an incumbent s reaction may cause the consumers to make inferences about the entrant s quality such strategic implications of the incumbent s reactions have to be carefully analyzed before determining the optimal response by the incumbent in this paper we propose a conceptual framework for understanding differences in the magnitude and timing of incumbents responses to competitive entries we consider a model in which a monopolist incumbent firm faces competitive entry the incumbent firm knows the true quality of the entrant with certainty although consumers are aware of the incumbent s product quality through their prior experience they are initially uncertain of the entrant s product quality in such a situation a high quality entrant has the incentive to signal her true quality through her strategic price choice however the uncertainty about the entrant s quality is favorable to the incumbent in the sense that consumers believe with a high probability that the entrant s quality is low as a result the strategic incentives facing the incumbent and the entrant oppose each other while the entrant wants to signal her high quality the incumbent wants to prevent her from doing so we demonstrate that one way the incumbent can prevent the quality signaling is to select a higher than his optimal competitive duopoly price in other words the incumbent can prevent or jam the entrant s quality signaling by choosing a price higher than his optimal competitive price when consumers are fully informed about the entrant s true quality though the signal jamming price is lower than the monopoly price the price is substantially higher than the competitive price this marginal reduction in the incumbent s price from the pre entry monopolistic price represents a muted or lack of response by the incumbent to the competitive entry however once the entrant s quality gets revealed in subsequent periods through consumer usage and word of mouth the entrant has no incentive to engage in quality signaling and the incumbent has no incentive to jam it therefore the market reverts to the complete information competitive prices and the incumbent lowers his price considerably this temporal pattern of muted price reduction in the first period followed by a sharp price reduction in the second period corresponds to a delayed defensive reaction in our model although the empirical studies suggest that the delayed reaction may arise due to factors such as managerial inertia or indecision we demonstrate that such a behavior is indeed an optimal strategy for a profit maximizing firm thus our model reconciles empirical results with the equilibrium outcome of a strategic analytical framework furthermore in an experimental setting we test the predictive power of our framework and establish that consumers indeed form conjectures about the entrant s quality based on the incumbent s reactions in the first experimental study we find strong support for the notion that the incumbent s price reaction may indicate entrant s quality in a follow up study we observe that whenever the incumbent lowers prices respondents judge the quality of the entrant to be higher as compared to the case when prices are the same or increased the managerial implication of this paper is that well established incumbent firms should be cautious in the implementation of their defensive responses to product introductions of uncertain quality by competitors of particular concern are situations where the reactions are easily observable by consumers a strong reaction may suggest that the incumbent takes the competitive threat seriously leading consumers to believe in the quality of the competitor s product

on efficiency inducing taxation for a non renewable resource monopolist the problem of using taxes to induce a monopolist supplier of a non renewable resource to extract efficiently has been solved under the assumption that the government has perfect information about the monopolist s cost function and reserves and is able to precommit to an entire sequence of taxes over time we extend this literature by constructing an efficiency inducing tax mechanism that does not require the government to have any information about the cost function or reserves and which does not require it to precommit to a sequence of taxes over time

demand signalling under unobservable effort in franchising linear and nonlinear price contracts we study the signalling strategy of a principal who is privately informed about its high demand potential to an uninformed risk neutral agent we analyze the model in the context of a contract between a franchisor and a franchisee we examine the distortions of a two part pricing scheme necessary to credibly inform the franchisee agent we also study whether the inability of the franchisor principal to observe the agent s effort moderates or exaggerates the distortions from the first best two part pricing scheme a surprising outcome is that even though the principal incurs greater signalling cost the magnitude of distortion in the two part scheme is smaller when service is unobservable than when it is not thus a signalling strategy employing the fixed and variable fees is harder to detect under moral hazard empirical studies failing to control for moral hazard may incorrectly conclude that signalling strategy does not occur we later consider a three part scheme to verify whether or not the schem

asymmetric information incentives and price cap regulation a regulatory incentive mechanism is presented in which the regulated firm has superior information about both cost and demand compared to the regulator the mechanism leads to truthful revelation of the demand function and extracts all rents due to private demand information in a nondistorting way the scheme assumes that the regulator can observe lagged expenditures by the firm this mechanism leads to efficient pricing operating and investment behavior by the firm finally it is shown that the mechanism is closely related to recent proposals for price cap regulation and that under certain assumptions simple modifications of these proposals will lead to the mechanisms discussed herein

competition and confidentiality signaling quality in a duopoly when there is universal private information abstract we model non cooperative signaling by two firms that compete over a continuum of consumers assuming each consumer has private information about the intensity of her preferences for the firms respective products and each firm has private information about its own product s quality we characterize a symmetric separating equilibrium in which each firm s price reveals its respective product quality we show that the equilibrium prices the difference between those prices the associated outputs and profits are all increasing functions of the ex ante probability of high safety if horizontal product differentiation is sufficiently great then equilibrium prices and profits are higher under incomplete information about quality than if quality were commonly known thus while signaling imposes a distortionary loss on a monopolist using price to signal quality duopolists may benefit from the distortion as it can reduce competition finally average quality is lower since signaling quality redistributes demand towards low quality firms

short run subsidies and long run adoption of new health products evidence from a field experiment short run subsidies for health products are common in poor countries how do they affect long run adoption a common fear among development practitioners is that one off subsidies may negatively affect long run adoption through reference dependence people might anchor around the subsidized price and be unwilling to pay more for the product later but for experience goods one off subsidies could also boost long run adoption through learning this paper uses data from a two stage randomized pricing experiment in kenya to estimate the relative importance of these effects for a new improved antimalarial bed net reduced form estimates show that a one time subsidy has a positive impact on willingness to pay a year later inherit to separately identify the learning and anchoring effects we estimate a parsimonious experience good model estimation results show a large positive learning effect but no anchoring we black then discuss the types of products and the contexts inherit for which these results may apply

the regulation of privatized monopolies in the united kingdom this article examines the experience in the united kingdom with the regulation of privatized monopolies its conclusions are 1 that there are significant differences between rpi x or price cap and u s rate of return regulation which provides greater scope for bargaining in the former system 2 that u k regulators have taken seriously their duty to promote competition but that the existing economic literature is of limited help in this task 3 that price regulation is likely to be more effective where technology is changing slowly and or where technology is changing rapidly and 4 that the case for rpi x price cap rather than rate of return regulation is strongest in telecommunications gas supply and electricity supply and least strong in gas and electricity transmission grids

effects of long term tariff regulation on investments under low credibility of rules rate of return and price cap in russian electricity grids abstract the transition from a short term cost plus tariff regulation to either a long term rate of return or long term price cap regulation in russia started in 2009 and was completed in 2012 causing substantial changes in investment over the course of the reform we estimate panel data of 46 russian electricity distribution entities with a dynamic investment model using the system generalized method of moments and addressing potential endogeneity issues we show that despite the noncredible regulatory policy the transition from short to long term regulation had a positive and significant effect on the investment rate of regulated entities the specific long term regulation design applied in russia from 2008 to 2017 either rate of return or price cap had no effect on the investment rate these results are important for the introduction of changes in regulatory frameworks in developing countries

strategic it investments the impact of switching cost and declining it cost the declining cost of information technology it over time provides the later entrant in information intensive industries a cost advantage on the other hand the earlier entrant has the potential to build and retain its market share if consumers incur a cost in switching to the later entrant we investigate the impact of a decline in the it cost and the switching cost on it investment strategies of firms we find that a declining it cost always hurts the early entrant s profit the early entrant may assume an aggressive investment strategy or a defensive investment strategy in response to a decline in the it cost depending on whether the switching cost relative to the extent of decline in the it cost is high or low respectively a decline in it cost also hurts the later entrant s profit if the switching cost is high a surprising result is that when the decline in the it cost is higher than a critical value a higher switching cost increases consumer surplus when firms control the switching cost the early entrant increases its investment in quality and switching cost and maintains its quality and its market share leadership irrespective of the extent of decline in the it cost

the effect of recipient contribution requirements on support for social programs abstract a large literature examines the use of recipient contribution requirements in social programs to target people who most need and value aid yet little is known about public support for such requirements in a field experiment with a nationally representative sample we examine the effect of recipient contributions on charitable donations to a food aid program the response to recipient monetary contributions is non monotonic donations increase when recipients make small monetary contributions and return to baseline under large recipient contributions recipient time contribution requirements also increase program support results from additional treatments suggest that individuals use contribution requirements to increase both allocative efficiency screening recipients who most value the good and targeting efficiency screening recipients most in need our work informs the design of social programs which must respond to the preferences of voters and donors who provide political and financial support

monetary policy and financial spillovers losing traction abstract has financial globalisation compromised central banks effectiveness in managing domestic financial conditions this paper tackles this question by studying the dynamics of bond yields encompassing 31 advanced and emerging market economies to gauge the extent to which external financial conditions complicate the conduct of monetary policy we isolate a contagion component by focusing on comovements in measures of bond return risk premia that are unrelated to domestic economic fundamentals our contagion measure is designed to more accurately capture relative to simple yield correlation spillovers driven by exogenous global shifts in risk preference or appetite in contrast to what simple comovements in bond yields suggest emerging market economies appear to be much less susceptible to global contagion than advanced economies and the overall sensitivities to contagion have not increased after the global financial crisis the extent to which financial spillovers have compromised policy traction thus appears to be lower relative to studies based on common variation in bond yields

dynamics of price regulation we study the dynamics of price regulation for an industry adjusting to exogenous technological progress first we characterize the optimal capacity path and replacement cycles in a neoclassical investment model second we show that naive rate ofreturn regulation which ignores components of economic depreciation eventually results in a deficient level of capacity due to excessively high retail prices burdened by the need to recover the underdepreciated costs of historical investments third we explain how price cap regulation leads to more efficient capital replacement decisions compared to naive rate of return regulation and we show how finite price cap horizons distort capital replacement finally we interpret recent regulatory reforms in telecommunications markets

the relationships between permanent and transitory movements in u s output and the unemployment rate this paper estimates the permanent and transitory movements in u s output and the unemployment rate and the relationships between them the results suggest that permanent movements in u s output and the unemployment rate are important for explaining overall fluctuations further the correlation between changes in these series arises in large part due to the relationship between their permanent components

the rise of dollar credit in emerging market economies and us monetary policy this paper examines the hypothesis that the boom in dollar credit in the emerging market economies is associated with excessively low interest rate in the us for this purpose we use a multivariate correlated unobserved component model that allows for correlation between shocks to dollar credit interest rates and dollar index both in the short run and in the long run in addition it also provides us a quantitative estimate of the permanent and transitory movements in dollar credit in emerging markets us interest rate and the dollar index the results from this model do suggest that a temporary decline in interest rate and dollar index below their long run levels are associated with an increase in dollar credit with a very high degree of negative correlation the estimate of the cyclical component of the dollar credit in emerging market from our model captures the recent boom and bust in this market and compares favorably to a univariate trend cycle decomposition benchmark

on distributive effects of optimal regulation for power grid expansion to date the distributive implications of incentive regulation on electricity transmission networks have not been explicitly studied in the literature more specifically the parameters that a regulator might use to achieve distributive efficiency under price cap regulation have not yet been identified to discern these parameters is the motivation for the research presented in this paper we study how different weight parameters affect the distributive characteristics of optimal price cap incentive regulation for electricity transmission we find that a regulator s use of ideal laspeyres weights tends to be more beneficial for the transco consumers than for consumers the transco

strategic nonlinear pricing under price cap regulation we examine profit maximizing nonlinear pricing under a stylized version of the fcc s price cap plan for at t whereby the firm s average revenue in each period is constrained not to exceed some fixed level when average revenue in each period is calculated as the ratio of total revenue in that period to output in the preceding period as in the fcc s plan for at t incentives are created for the firm to engage in strategic nonlinear pricing these incentives can lower both consumers surplus and total surplus under price cap regulation we propose alternative implementations of price cap regulation that eliminate these incentives for strategic pricing we also examine whether current profits should influence future revisions of the cap we show that small amounts of such linkage can enhance total surplus due to pricing distortions that arise under price cap regulation

the political economy of oil production in latin america 1990s witnessed a significant increase in investments in the oil and gas sector in latin america in most countries private investment took the lead after the privatization and liberalization of the sector in argentina bolivia brazil ecuador and venezuela private oil investment or some form of privatization or both generated significant increases in hydrocarbon production and reserves in the last five years however the region has experienced a new wave of resource nationalism with increases in the government s take and state control oil taxes have risen significantly in argentina bolivia ecuador and venezuela in addition bolivia and venezuela have partially nationalized oil projects we argue that the recent trend is largely the outcome of the rise in the international oil price furthermore we show how the likelihood of expropriation increased after a period of successful investment in exploration and production at the same time the timing of these changes and direction in which the sector has evolved varies considerably across the region in contrast to most other countries in the region brazil colombia and peru have generally strengthened the institutional framework and the property rights of private oil producers this paper provides a political economy rationale for the divergent evolution

modifying customer expectations of price decreases for a durable product we study the introductory signalling strategy for a durable product that faces optimistic expectations among customers about price declines over time the firm introducing the product knows that experiential learning is low for the product however customers being uncertain about the extent of experiential learning assign a nonzero probability that the firm s new product will enjoy a high cost reduction with cumulative experience the optimistic expectations of customers reduce their willingness to pay a high price at the product s introduction while predisposing them to buying later the challenge facing the low experience firm is to choose an introductory strategy that will credibly convey the low experience curve effect to customers we use the sequential equilibrium concept in a game theoretic framework to identify the firm s signalling strategy we identify the unique separating equilibrium of the game after refining the set of separating equilibria we demonstrate that a high introductory price credibly signals the low experiential learning to customers we also show that signalling causes an artificial learning curve effect

optimal export policy for a new product monopoly a new welfare enhancing role is identified for a policy of export subsidization in a new product industry an export subsidy policy promotes the rational perception that a high quality export can be provided at a relatively low price thus an export subsidy generates a first order benefit to welfare by enabling a high quality export to be sold at a less distorted high price the subsidy will also introduce

pricing natural gas distribution in mexico abstract we examine regulation of distribution tariffs in the mexican natural gas industry average revenue in each period is constrained not to exceed an upper bound and is calculated as the ratio of total revenue to output in the current period this regime implies incentives for strategically setting two part tariffs the usage charge is typically dropped to its lowest feasible level while the fixed charge is raised to compensate for the loss of profit the regime also creates a stochastic effect that implies decreased values of consumer surplus for lower levels of risk aversion and uncertainty

collective marketing arrangements for geographically differentiated agricultural products welfare impacts and policy implications this paper examines the incentive of atomistic agricultural producers within a specific geographical region to differentiate and collectively market products we develop a model that allows us to analyze the market and welfare effects of the main types of real world producer organizations using it to derive economic insights regarding the circumstances under which these organizations will evolve and describing implications of the results obtained in the context of an ongoing debate between the european union and united states as the anticipated fixed costs of development and marketing increase and the anticipated size of the market falls it becomes essential to increase the ability of the producer organization to control supply in order to ensure the coverage of fixed costs whenever a collective organization allows a market with a new product to exist that otherwise would not have existed there is an increase in societal welfare counterintuitively stronger property right protection for producer organizations may be welfare enhancing even after a differentiated product has been developed the reason for this somewhat paradoxical result is that legislation aimed at curtailing the market power of producer organizations may induce large technological distortions

quality uncertainty and price in monopoly markets this paper examines a monopoly firm s pricing strategy in a market in which consumers have varying and imprecise estimates of the quality of the firm s product it is shown that the firm s price declines in response to an increase in the level of consumer uncertainty about quality when consumer tastes for the product are sufficiently similar and their uncertainty about quality is sufficiently small when one or both of these conditions fails to hold however it is shown that the monopoly firm s price is positively related to the level of consumer uncertainty about quality copyright 1996 by blackwell publishing ltd

financial globalisation and emerging markets volatility the volatility of capital flows to emerging market em countries and frequency of financial crises have imposed high welfare costs on the countries involved the empirical literature provides at best a mixed picture on the relationship between long run em country growth and financial integration meanwhile the prevailing policy discourse regarding reform of the international financial system remains incomplete the focus has largely been on either institutional and policy measures required of em countries or international crisis resolution procedures the role played by private financial markets and institutions in the developed world has not received adequate attention this paper describes some of the structural features inherent in today s financial markets that directly contribute to the instability in em capital flows