a model of product line design and introduction sequence with reservation utility abstract cannibalization is a major concern for a firm when designing a product line in addition external options from outside the firm s product line may also play a significant role in this paper we investigate the impact of external options represented by reservation utility on product line design and introduction sequence we find that a heterogeneous reservation utility defines the relative attractiveness of segments and corresponding product line b reservation utility makes it more favorable to introduce products sequentially rather than simultaneously c aggregating segments is an effective way to mitigate cannibalization when it becomes too difficult to manage with different values of reservation utility across multiple segments and d introducing products in a non monotone order of quality can improve profit from simultaneous introduction when the value of reservation utility of a middle segment is particularly high

designing supply contracts contract type and information asymmetry this paper studies the value to a supplier of obtaining better information about a buyer s cost structure and of being able to offer more general contracts we use the bilateral monopoly setting to analyze six scenarios three increasingly general contracts wholesale pricing schemes two part linear schemes and twopart nonlinear schemes each under full and incomplete information about the buyer s cost structure we allow both sides to refuse to trade by explicitly including reservation profit levels for both for the supplier this is implemented through a cutoff policy we derive the supplier s optimal contracts and profits for all six scenarios and examine the value of information and of more general contracts our key findings are as follows first the value of information is higher under two part contracts second the value of offering two part contracts is higher under full information and third the proportion of buyers the supplier will choose to exclude can be substantial

the name your own price channel in the travel industry an analytical exploration name your own price nyop retailers such as priceline offer an alternative distribution channel for service providers in the travel industry such as airlines hotels and car rental companies our research employs an analytical model to identify and understand key trade offs driving the decision by a service provider to employ an nyop channel assuming that such a channel is available this decision requires the existence of forces that counteract the adverse consequences of cannibalization of sales through traditional posted price channels our analysis provides some insight into these forces contracting with the nyop retailer facilitates market segmentation and price discrimination and allows for disposal of excess capacity after meeting business travel demand however the cost of this flexibility is that the service provider can no longer credibly precommit to maintaining high prices when there is unsold capacity also when contracting with an independent retailer the service provider is unable to extract the entire revenue generated from nyop consumers a key insight from our model is that the rationale for contracting with an nyop retailer is driven by the uncertainty in business travel demand not the expectation of excess capacity indeed all else equal the larger the capacity the less likely it is that contracting with an nyop retailer is the right decision on the part of the service provider

new tests of the life cycle and tax discounting hypotheses abstract we first test a version of the permanent income consumption function recently suggested by barro the results support the theory except that consumption expenditures show sensitivity to transitory income next we use the consumption model to test the tax discounting hypothesis which is strongly supported this support for tax discounting disagrees with results from some earlier studies using more traditional specifications of the consumption function however we show that when certain obviously inadequate estimation procedures are corrected the traditional models also support tax discounting this uniform support for tax discounting suggests that the sensitivity of consumption to transitory income is not due to liquidity constraints

measuring heterogeneous reservation prices for product bundles this paper develops a model for capturing continuous heterogeneity in the joint distribution of reservation prices for products and bundles our model is derived from utility theory and captures both within and among subject variability furthermore it provides dollarmetric reservation prices and individual level estimates that allow the firm to target customers and develop customized and nonlinear pricing policies our experiments show that regardless of whether the products are durables or nondurables the model captures heterogeneity and predicts well models that assume homogeneity perform poorly especially in predicting choice of the bundle furthermore the methodology is robust even when respondents evaluate few profiles self stated reservation prices do not have any informational content beyond that contained in the basic model the direct elicitation method appears to understate overstate the variation in reservation prices across consumers for low priced high priced products and bundles hence this method yields biased demand estimates and leads to suboptimal product line pricing policy the optimization results show that the product line pricing policy depends on the degree of heterogeneity in the reservation prices of the individual products and the bundle a uniformly high price strategy for all products and bundles is optimal when heterogeneity is high otherwise a hybrid strategy is optimal

design for the environment a quality based model for green product development green product development which addresses environmental issues through product design and innovation as opposed to the traditional end of pipe control approach is receiving significant attention from customers industries and governments around the world in this paper we develop a quality based model for analyzing the strategic and policy issues concerning the development of products with conflicting traditional and environmental attributes on the demand side of the problem we use the framework of conjoint analysis to structure the preferences of the ordinary and green customers on the supply side we apply the theories in optimal product design and market segmentation to analyze the producer s strategic decisions regarding the number of products introduced and their prices and qualities on the policy side we evaluate the effects of environmental standards on the economic and environmental consequences of green product development by jointly considering the interactions among the customers preferences the producer s product strategies and the environmental standards imposed by governments we present some interesting findings that can be used to manage and regulate the development of green products two major findings show that green product development and stricter environmental standards might not necessarily benefit the environment

the effects of selling packaged goods on inventory decisions in this paper we study within a newsboy type modeling framework the common business practice of retail firms to sell products not only as independent items but also as part of multiproduct packets packaged goods our emphasis is on understanding the effects of such practices on the inventory decisions of the firm we provide insights on the resulting level of suboptimality when inventory decisions are made with demand information only on the independent items and without accounting for the demand substitution structure induced between independent items and packaged goods our stylized model studies an environment with two products that are not direct substitutes for each other sold either independently or as part of a packet that contains one unit of each we provide necessary and sufficient optimality conditions for this model and suggest an efficient numerical search for obtaining the optimal stocking levels an extensive computational study allowed us to provide insights on the nature of the optimal stocking policies the suboptimality of independent newsboy policies the effects of demand correlation among individual products and multiproduct packets and the determining role of induced substitution structure among products during stockout occasions on the profitability of the inventory system

pricing and the news vendor problem a review with extensions in the newsvendor problem a decision maker facing random demand for a perishable product decides how much of it to stock for a single selling period this simple problem with its intuitively appealing solution is a crucial building block of stochastic inventory theory which comprises a vast literature focusing on operational efficiency typically in this literature market parameters such as demand and selling price are exogenous however incorporating these factors into the mode l can provide an excellent vehicle for examining how operational problems interact with marketing issues to influence decision making at the firm level in this paper we examine an extension of the newsvendor problem in which stocking quantity and selling price are set simultaneously we provide a comprehensive review that synthesizes existing results for the single period problem and develop additional results to enrich the existing knowledge base we also review and develop insight into a dynamic inventory extension of this problem and motivate the applicability of such models

pricing market coverage and capacity can green and brown products co exist abstract environmental strains are causing consumers to trade up to greener alternatives and many brown products are losing market coverage to premium priced green rivals in order to tackle this threat many companies currently offering only brown products are contemplating the launch of a green product to complement their product portfolio this paper provides strategic insights into and tactical ramifications of expanding a brown product line with a new green product our analysis explicitly incorporates a segmented consumer market where individual consumers may value the same product differently the economies of scale and the learning effects associated with new green products and capacity constraints for the current production system it is shown that a single pricing scheme for the new green product limits a firm s ability to appropriate the value different customers will relinquish in a segmented market and or to avoid cannibalization a two level pricing structure can diminish and even completely avoid the salience of cannibalization however when resources are scarce a firm can never protect his products from the threat of cannibalization by just revising the pricing structure which can spell the end of his brown product s presence in the market or preclude the firm from launching the green product at this point the degree of cannibalization is higher for the brown product when the green product offers a sufficiently differentiated proposition to green segment consumers

value for money german local government efficiency in a comparative perspective in this article we investigate the cost efficiency of german local governments in the state of baden wurttemberg in 2004 using a stochastic frontier approach besides being the first study on german data we add two elements to the literature first we provide a comparative perspective allowing us to embed our results in the broader literature second unlike most previous studies we explicitly account for exogenous or nondiscretionary influences when estimating municipal efficiency scores the results suggest that disregarding such exogenous factors can lead to significant and systematic bias in the estimated inefficiency levels particularly underestimation of efficiency occurs for municipalities with high tourist activity while the reverse is true for municipalities with high unemployment

consumption saving and fiscal policy when this year s nobel laureate robert solow and ely lecturer alan blinder teamed their impressive talents several years ago to ask does fiscal policy matter the answer they gave was a resounding yes working in a then sophisticated neo keynesian is lm tradition blinder and solow presented a parsimonious macroeconomic model and some statistical and historical evidence suggesting that changes in the weighted standardized government surplus did indeed substantially affect real economic activity the profession was pretty much convinced that the permanent income hypothesis pih or life cycle hypothesis lch almost provided a sufficient framework for analyzing consumption and saving and hence the effects of fiscal policy curiously the large keynesian effect of a tax induced rise in current disposable income was reconciled with the very small effect predicted by the longerhorizon models with more of a whimper than a bang since then the profession has moved some distance from complete acceptance of the life cycle and permanent income hypotheses and perhaps even further from the traditional consumption function specification in vogue at that time indeed robert barro 1974 rekindled the notion that a tax fordebt swap would have no real effects an avalanche of analytical and empirical research has sharpened our understanding of the issues involved the econometric difficulties in estimating the relevant parameters and even the care necessary in defining what is meant when one asks whether fiscal policy has any real economic effects surprisingly despite numerous caveats new and improved data and estimation techniques and improved perspectives offered by analytical insights not yet prevalent when blinder and solow wrote their paper my conclusion is that their answer is essentially correct fiscal policy does matter both for short run stabilization purposes and for long run capital accumulation i believe the preponderance of the evidence strongly supports this view although the empirical research suggests that the impact of say tax cuts on consumption is perhaps only one third as large as the typical keynesian estimate of two decades ago but much larger than the neutrality predicted by ricardian equivalence or the very small effect predicted by the pih or lch

is everything neutral in his well known analysis of the national debt robert barro introduced the notion of a dynastic family this notion has since become a standard research tool particularly in the areas of public finance and macroeconomics in this paper we critique the assumptions on which the dynastic model is predicated and argue that this framework is not a suitable abstraction in contexts in which the objective is to analyze the effects of public policies we reach this conclusion by formally considering a world in which each generation consists of a large number of distinct individuals as opposed to one representative individual we point out that family linkages form complex networks in which each individual may belong to many dynastic groupings the resulting proliferation of linkages between families gives rise to a host of neutrality results including the irrelevance of all public redistributions distortionary taxes and prices since these results are not at all descriptive of the real world we conclude

bundling retail products models and analysis we consider the impact of bundling products on retail merchandising we consider two broad classes of retail products basic and fashion for these product classes we develop models to calculate the optimal bundle prices order quantities and profits under bundling we use this analysis to establish conditions and insights under which bundling is profitable our analysis confirms that bundling profitability depends on individual product demands bundling costs and the nature of the relationship between the demands of the products to be bundled we also provide detailed numerical examples

probabilistic selling in quality differentiated markets probabilistic selling the sale of synthetic products consisting of a lottery between two distinct goods has been extensively analyzed in horizontal markets in this research we investigate probabilistic selling in quality differentiated markets this is an important new dimension of inquiry because of the widespread prevalence of quality differentiated markets as well as significant differences in the preference structure across these markets in fact this latter consideration casts doubt as to whether probabilistic selling will even emerge in quality differentiated markets we find that probabilistic selling emerges in quality differentiated markets as a way to profitably dispose excess capacity moreover probabilistic selling remains viable even under endogenous quality choice in addition in markets where sellers employ strong quality differentiation the introduction of an intermediate probabilistic good actually causes closer quality levels in a product line and enhances consumer welfare in contrast in markets where sellers employ weak quality differentiation the introduction of an intermediate probabilistic good increases quality separation and degrades consumer welfare overall we view our contribution as one of characterizing the optimality implementation and policy implications of probabilistic selling in quality differentiated markets this paper was accepted by pradeep chintagunta marketing

the effect of social security on retirement in the early 1970s we analyze detailed longitudinal data on a cohort of males aged 58 67 in 1969 1973 a period of substantial increases in real social security benefits we find the following 1 the accelerating decline in labor force participation of elderly men in 1969 1973 can be explained by the large increase in real social security benefits 2 there is evidence of a liquidity constraint effect for an important subgroup of the elderly 3 the magnitude of this induced retirement effect is large enough that ignoring it can lead to serious underestimation of the fiscal implications of changes in benefit provisions our results are interpreted in the historical context of a particular cohort undergoing major unanticipated transfers of wealth the steady state effects of social security on retirement may not be the same

the implications of costs capacity and competition on product line selection we consider a situation in which a manufacturer has to select the product s to sell as well as the selling price and production quantity of each selected product there are two substitutable products in the consideration set where product 2 has a higher quality and reservation price than that of product 1 by considering the cannibalization effect that depends on the selling price of each product the manufacturer needs to evaluate the profit function associated with three different product line options sell both products or only one of the 2 products in order to examine the impact of costs capacity and competition on the optimal product line selection optimal price and optimal production quantity analytically we present a stylized model in this paper so that we can determine the conditions under which a particular option is optimal

using game theory to model competition the article is an exposition of the basic concepts of noncooperative game theory and their application to advertising product and price competition

turf wars product line strategies in competitive markets in this paper we study product line scope and pricing decisions in a horizontally differentiated duopoly past research has shown that a firm may offer a broader product line to attract higher demand or charge a higher price or both and benefit at the expense of its competitor we show that such outcomes may be reversed especially when consumers have relatively high valuation and low heterogeneity in their preferences for the line extension we find that an equilibrium exists such that only one firm prefers to expand scope but profits may be higher for both firms even in the absence of market size expansion this is because a broader scope permits that firm to effectively price discriminate by raising prices for its core customers the competitor optimally responds by lowering prices to gain share and earn a higher profit thus higher prices for the firm expanding its product line translate into higher demand for the competing firm thus increasing profit for both we show that our results hold when firms deploy generic offensive or defensive strategies during product line expansion

the effect of liquidity constraints on consumption a cross sectional analysis this paper examines the effect of liquidity constraints on consumption expenditures using a single year cross section data set a reduced form equation for consumption is estimated on high saving households by the tobit procedure to account for the selectivity bias since high saving households are not likely to be liquidity constrained the estimated equation is an appropriate description of how desired consumption that would be forthcoming without liquidity constraints is related to the variables available in the cross section data when the reduced form equation is used to predict desired consumption the gap between desired consumption and measured consumption is most evident for young households

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

market segmentation self selection and product line design the purpose of this paper is to develop a theory of market segmentation based on consumer self selection the extant theory is based on the third degree price discrimination model of pigou central assumptions of which are that the firm can directly address individual segments and isolate them by using consumer self selection i am relaxing these assumptions in the context of a monopolist designing a product line i show that this relaxation has significant implications for how the products and prices are chosen and what they look like in particular segments may be aggregated even though there are no economies of scale furthermore consumer self selection enables us to model cannibalization and competition among firms

determining the appropriate depth and breadth of a firm s product portfolio abstract some firms have broad product lines others have lean product lines to determine the appropriate number of entries in a specific firm s product line the author develops a model that balances the benefits of increased revenue from a broad product line against production and engineering costs two innovations were central in the development of the model 1 redefining how products are scored on various product attributes so that attribute scores vary normally across the population of products and 2 redefining how the number of entries in a product portfolio is calculated in order to discount the significance of entries that are highly similar to existing products the author also introduces the notion of a centroid time to more easily adjust sales and total development costs for product life cycle and investment life cycle effects these redefinitions enable a firm s profit to be modeled as a simple function of its effective number of product entries the effective number of competitors entrie

government deficits and aggregate demand abstract the evidence presented in this paper indicates that changes in government spending transfers and taxes can have substantial effects on aggregate demand the estimates also indicate that the promise of future social security benefits significantly reduces private saving each the basic implications of the so called ricardian equivalence theorem is contradicted by the data the results are consistent with the more general view of the effects of fiscal actions and fiscal expectations that is described in the paper

interest rates and expected future budget deficits in the united states several recent empirical studies have found no evidence of a positive association between interest rates and current and past budget deficits one possible explanation for this finding is that interest rates are related much more to the expectation of future budget deficits than to current and past budget deficits in this paper i investigate whether this explanation is valid finding no evidence that it is section ii briefly formulates and discusses the hypothesis under consideration stating some of its implications section iii presents the results of regressing the commercial paper rate moody s aaa bond rate and the ex post real commercial paper rate on current and past government spending budget deficits and real money supplies the regressions have been fitted to the entire sample of monthly data spanning the period between june 1908 and march 1984 and to 11

a classification of the literature on the planning of substitutable products abstract a company s assortment of products and corresponding inventory levels are constrained by available resources such as production capacity storage space and capital to acquire the inventory thus customers may not always be able to find a most preferred product at the time of purchase this unsatisfied demand is often substituted with an alternative in the extant literature there have been an increasing number of studies that consider product substitution when planning product assortment inventory and capacity in conjunction with pricing in this paper we classify the literature on the planning of substitutable products published in the major om and marketing journals during the past thirty years 1974 2013 and present a comprehensive taxonomy of the literature one criterion is adopted to discuss modeling objectives and three major criteria are provided to define the nature of product substitution including substitution mechanism substitution decision maker and direction of substitutability we also identify research gaps to provide guidance for related research in the future

gaussian demand and commodity bundling in an important and widely cited essay adams and yellen 1976 examine the use of package selling as a price discrimination device they consider a monopolist producing two goods with constant unit costs and facing buyers with diverse tastes the marginal utility of a second unit of either good is assumed to be zero for all buyers the two goods are independent in demand for all buyers so that any buyer s reservation price for the first unit of either good is independent of the market price of the other thus the maximum amount any buyer would pay for a bundle consisting of one unit of each good is the sum of the two reservation prices and buyers are completely described by the values of those two prices 2 resale markets are assumed away in order to obtain comparative results for alternative pricing strategies the distribution of reservation prices in the adams yellen framework is assumed to be bivariate normal implications of gaussian demand are explored pure bundling is shown to operate by reducing buyer diversity thus facilitating the capture of consumers surplus it generally makes buyers worse off than unbundled sales it is more profitable if average reservation prices are high enough mixed bundling combines advantages of both pure bundling and unbundled sales and it is generally strictly more profitable than either bundling which treats goods symmetrically seems most attractive under symmetric reservation price distributions i am indebted to severin borenstein for superb research assistance to the ford motor company for research support through a grant to m i t and to the harvard economics department for housing me as a visiting scholar while most of this research was performed of course only i can be held responsible for this essay s shortcomings 1 the first clear recognition of this possibility seems to have been by stigler 1968 but also see burstein 1960 2 paroush and peles 1981 relax the assumption that consumers purchase at most one unit of each good but they consider only two types of buyers both with linear demand functions they retain the assumption that demands are independent for all buyers telser 1979 and phillips 1981 use different frameworks to analyze bundling policies spence 1980 explores the relation between bundling across commodities as here and bundling multiple units of the same

heuristics for pricing and positioning a product line using conjoint and cost data designing and pricing a product line is the very essence of every business in recent years quantitative methods to assist managers in this task have been gaining in popularity conjoint analysis is already widely used to measure preferences for different product profiles and build market simulation models in the last few years several papers have been published that suggest how to optimally choose a product line based on such data we formalize this problem as a mathematical program where the objective of the firm is either profit or total welfare unlike alternative published approaches we introduce fixed and variable costs for each product profile the number of products to be introduced is endogenously determined on the basis of their desirability fixed and variable costs and in the case of profits their cannibalization effect on other products while the problem is difficult np complete we show that the maximum welfare problem is equivalent to the uncapacitated plant location problem which can be solved very efficiently using the greedy interchange heuristic based on past published experience with this problem and on simulations we perform we show that optimal or near optimal solutions are obtained in seconds for large problems we develop a new greedy heuristic for the profit problem and its application to simulated problems shows that it too runs quickly and with better performance than various alternatives and previously published heuristics we also show how the methodology can be applied taking existing products of both the firm and the competition into account

relicensing as a secondary market strategy secondary markets in the information technology industry where used or refurbished equipment is traded have been growing steadily for original equipment manufacturers oems in this industry the importance of secondary markets has grown in parallel not only as a source of revenue but also because of their impact on these firms competitive advantage and market strategy recent articles in the press have severely criticized some oems who are perceived to be actively trying to eliminate the secondary market for their products other oems have policies that enhance their secondary markets the goal of this paper is to understand how an oem s incentives and optimal strategies vis a vis the secondary market are shaped contingent on her relative competitive advantage product characteristics and consumer preferences the critical trade off that we examine is whether the indirect benefit from maintaining an active secondary market the resale value effect can outweigh the potentially negative effect of the sales of used products at the expense of new product sales the cannibalization effect to that end we develop a durable good model where the oem can directly affect the resale value of her product through a relicensing fee charged to the buyer of the refurbished equipment we analyze the oem s strategy in both the monopoly and the duopoly cases characterize the optimal relicensing fee set by the oem and draw conclusions on the conditions that favor stimulating or deterring the secondary market this paper was accepted by candace a yano operations and supply chain management

government debt government spending and private sector behavior a current period tax reduction financed by issuing government debt shifts the timing of tax collection from the current period to the future if the future taxes implied by government debt are not fully perceived and discounted by the private sector there will be a net wealth effect that increases private sector consumption thus reducing capital accumulation and growth if on the other hand the implied future taxes are perceived and discounted by the private sector the current period tax reduction will be used to increase private saving to pay for the future taxes and government debt will be absorbed without any real effects on the economy the effects of government spending financed by current period taxation also depend upon private sector perceptions 2 if the benefits of government spending are ignored private sector consumption will decrease in accordance with the reduction in permanent disposable income to the extent that government spending is on consumption type goods that are perceived as substitutes for privately provided consumption goods there will be a relatively greater reduction in private sector consumption to the extent that government spending is on investment type goods yielding future goods and services that are perceived as substitutes for future privately provided consumption goods there will be a relatively smaller reduction in private sector consumption the standard approach to modeling private sector consumption saving behavior involves a rather asymmetric set of assumptions as to how the private sector perceives the various elements of government fiscal policy 3 current period taxes are assumed to be fully perceived but current period government spending is implicitly assumed to be completely ignored by the private sector in considering permanent personal disposable income the private sector is assumed to be forward looking in its assessment of income and taxation the stock of government debt is nevertheless included as part of the stock of private wealth the implicit assumption associate professor of economics graduate school of business university of chicago 1101 east 58th street chicago il 60637 i thank eugene fama levis kochin michael mussa paul evans and an anonymous referee for helpful comments i am particularly grateful to daniel benjamin for contributing many hours of discussion and laura lahaye who was a research assistant and valuable adviser on earlier drafts the theoretical debate on the burden of the debt has been long standing gerald o driscoll 1977 documents ricardo s nineteenth century position robert barro 1974 reopened the debate by introducing the fundamental issue of intergenerational transfers also discussed in merton miller and charles upton 1974 the empirical side of the debate was initiated by levis kochin s 1974 attempt to test for the effects of deficits on consumption and by martin feldstein s 1974 attempt to test for the effects of social security wealth on consumption other empirical contributions include jess yawitz and laurence meyer 1976 myself 1978 and j earnest tanner 1978 1979 with respect to the effects of government deficits and debt and barro 1978 michael darby 1979 and dean leimer and selig lesnoy 1982 with respect to social security wealth see also interesting recent papers by john seater 1982 who generates detailed tests of the effects of deficits and debt on consumption charles plosser 1982 who explores the effects of government spending and debt shocks on interest rates and feldstein 1982 who attempts tests similar to some in this paper see fn 29 2martin bailey s 1962 1971 development of the effects of government spending on private consumption and aggregate economic activity is the seminal contribution paul david and john scadding 1974 extend bailey s ideas and provide some supporting empirical evidence more recently willem buiter 1977 and myself 1978 developed models based on bailey s earlier work barro 1981 has an interesting paper on related issues see also david aschauer 1982 3the standard approach incorporates fiscal policy through the concept of personal disposable income and by including the stock of government debt as part of personal wealth see for example the empirical specification of albert ando and franco modigliani 1963 which has been the basis of most empirical consumption studies since and feldstein 1974 for one of the more influential papers based on the ando modigliani specification

does non traded input necessarily deepen the international non diversification puzzle i the one good case abstract this paper shows that with non traded inputs and only one good the optimal portfolio should contain a larger share of foreign assets than domestic it deepens the international non diversification puzzle

the economics of product variety a survey demand for variety may arise from a taste for diversity in individual consumption and or from diversity in tastes even when each consumer chooses a single variant the full degree of variety potentially demanded will not in general be supplied because scale economies even to a small degree mean that the potential welfare or revenue gain from greater variety must be balanced against the lower unit production costs with fewer variants the economics of product variety consists essentially in analysing the effect of this balance in different situations and comparing the degree of product variety for different market structures with each other and with the optimum the survey commences with the work on market structures with single product firms generalized monopolistic competition tracing modern developments in both the chamberlinian and hotelling traditions the latter has been particularly fruitful due to the expansion of the original locational ideas into virtual spaces in product characteristics the emphasis in recent work on product variety has been on multiproduct firms in both monopolistic and oligopolistic structures including strategic market preemption although most work has been in a full information context there have been advances in product variety under imperfect information either by consumers to properties of the firms products or firms as to consumers demands

cournot competition in a differentiated oligopoly abstract this paper studies product quantity equilibria in an oligopoly products are interpreted as qualities and each firm chooses a quality quantity pair simultaneously it is well known that a pure strategy equilibrium in product price pairs does not exist in this model but a pure strategy equilibrium in product quantity pairs exists furthermore in an example widely studied in the literature the equilibrium has nice asymptotic properties

comments on firm specific differentiation and competition among multiproduct firms the main innovation here is the simultaneous consideration of both quality attributes and location attributes katz interprets the former as a product s quality and the latter as brand image reputation of the firm hitherto the product differentiation literature has considered each of these attributes in isolation examples of quality models are mussa and rosen 1978 gabszewicz and thisse 1979 1980 stokey 1980 and moorthy 1982a examples of location models are hotelling 1929 d aspremont gabszewicz and thisse 1979 and novshek 1980 the immediate practical result of considering both product quality and brand image is that even if two firms produce the same quality of product they may each enjoy positive profits in price equilibrium some consumers prefer one brand some the other in particular unless one brand s image dominates the other s that is one firm is more reputable than the other profits for each firm increase as the consumer s brand sensitivity increases another distinguishing feature of this paper is the restriction that each firm produce the same number of product qualities as the number of consumer quality sensitivities t in katz s notation one doesn t expect the number of product qualities to be greater than the number of types but it can be lower in fact we expect it to be lower the reason is not only fixed costs of producing new product varieties but also the self selection constraints in section iila of the paper where katz analyzes the quality choices of a monopolist the first order con

profitable pricing when market segments overlap in this paper we analyze profitable pricing strategies when market segments overlap overlapping markets are segments that are not perfectly sealed and leakage between them can occur different consumers are assumed to incur possibly different transaction costs if they choose to purchase in the low price market a monopolist seller knows the distribution of transaction costs across consumers and must choose an optimal pricing strategy in particular the monopolist must decide whether to charge a single price or to price differentiate conditions are derived under which price differentiation will be the most profitable strategy when price differentiation is optimal the equilibrium amount of leakage is determined endogenously unlike the standard economics textbook model of price discrimination in which zero leakage is determined exogenously and is usually given as a necessary condition for price discrimination we show that zero leakage is not necessary for differential pricing to be optimal and that

pricing and product line strategy in a supply chain with risk averse players abstract we study the pricing and product line strategy of a risk averse manufacturer who sells her products through a risk averse retailer we identify the conditions under which the manufacturer extends her product line or replaces the old product with a new product and find that i a higher retailer s risk aversion decreases the retail price but increases the unit wholesale price ii the manufacturer extends the product line if the price caps for both products are sufficiently high both her risk aversion and product substitutability are sufficiently low iii the manufacturer discontinues the old product if the relative price cap of the new product to the old product is sufficiently high her risk aversion is medium and product substitutability are sufficiently high further we find that i the decentralization of supply chain may increase product line length if the retailer s risk aversion and product substitutability are sufficiently high otherwise it may decrease product line length ii the endogenization of quality design increases the motivation to introduce a new product and iii the manufacturer extends or replaces the product line if quality cost is not too high

savings of the elderly and desired bequests cross section data often show that the wealth of the elderly increases with age even at advanced ages these and other results suggest that the life cycle hypothesis of consumption should be augmented to include a bequest motive for saving in this paper the author proposes a model of bequests and a test for a bequ est motive using panel data he finds that over a ten year period the elderly in the data set dissaved in contradiction to most cross section results the test offers no support for a bequest motive copyright 1987 by american economic association

optimal forestry contracts under asymmetry of information in this paper i analyze optimal royalty contracts in forestry when the harvesting firm has private information on the cost of harvesting this infinite horizon forest rotation model with asymmetry of information on the cost parameter results in a dynamic incentive problem depending on whether the costs are correlated over time or not the firm either receives rent or receives no rent associated with the continuation part of the rotation choice i characterize the optimal contract explicitly in both cases i also examine the loss in expected welfare surplus resulting from the use of a linear contract instead of the more general non linear contract

optimal product bundling with dependent valuations the price of independence abstract in this paper we investigate the tactical problem of pricing a bundle of products when the underlying valuations of the bundle components are dependent we use copula theory to model the joint density of reservation prices and provide analytical derivations for the prices under different bundling strategies and sharp bounds for the profit function we discover that when only the bundle is offered and the marginal costs are relatively small the seller is better off by bundling products that have a negative association between their valuations while the converse is true when the marginal costs are relatively high we also show that the net benefit of offering a full product line containing both the bundle and the components decreases for mild to strong associations between the component valuations compared to offering just the bundle finally we analyze how the typical literature assumption of independence of reservation prices impacts the seller s profitability when in fact the valuations are dependent and find that this gap in profitability which we call the price of independence can be arbitrarily large

a generalized production frontier approach for estimating determinants of inefficiency in u s dairy farms this article investigates farm level efficiency of u s dairy farmers by estimating their technical and allocative efficiency technical inefficiency is assumed to be composed of a deterministic component that is a function of some farm specific characteristics and a random component by doing this we extend the stochastic frontier methodology in which determinants of technicial inefficiency are explicitly introduced in the model given the inputs variations in efficiency of farms are then explained by both deterministic and random components of technical inefficiency the empirical results indicate that a levels of education of the farmer are important factors determining technical inefficiency and b large farms are more efficient technically than small and medium sized farms both technical and allocative inefficiency are found to decrease with increase in the level of education of the farmer

multiproduct nonlinear pricing typically work on mechanism design has assumed that all private information can be captured in a single scalar variable this paper explores one way in which this assumption can be relaxed in the context of the multiproduct nonlinear pricing problem it is shown that the firm will choose to exclude some low value consumers from all markets a class of cases that allow explicit solution is derived by making use of a multivariate form of integration by parts in such cases the optimal tariff is cost based

product bundling impacts of product heterogeneity and risk considerations abstract bundling has been extensively studied in the literature and its benefits have been manifested through three perspectives of achieving better price discrimination helping to save costs and preserving the power for deterring a potential entrant in this study we examine two aspects of bundling which have not been studied before we examine the impact of product heterogeneity on bundling decisions we also address risk considerations in a bundling problem specifically we consider a retailer who has the option of selling a bundle of two products pure bundling policy or selling the products separately no bundling policy the retailer could also face a product selection problem for which we consider three scenarios of choosing two products with perfectly positively correlated perfectly negatively correlated or independent reservation prices we use a mean variance approach to include retailer s risk through her profit variability when maximizing the expected value of profit we characterize the conditions under which a policy or scenario performs better than the others under the influence of product heterogeneity and or retailer s risk aversion among other findings we show that optimal bundling price chosen by a risk averse decision maker cannot be larger than the one chosen by a risk neutral decision maker

durable goods leasing in the presence of exporting used products to an international secondary market abstract with the rapid growth of global trade used durable goods from wealthy countries increasingly find their way into the secondary market of less wealthy countries exporting used products to a physically separate market not only removes cannibalization for new products at home but also fetches additional revenue in this paper we investigate the implications of exporting used products to international secondary markets in the durable goods industry we find that such a practice may significantly stimulate new product lease on the home market an effect in which the market attractiveness and product quality are mutually reinforcing we discover that removing cannibalization pressure is more of a priority than generating additional revenue while exporting used products if the export is carried out by an agent who exports used products bought from oem original equipment manufacturer we observe the disadvantage of double marginalization in a channel structure which slows down export and causes quantity distortion and also reduces the effectiveness of government stimulus however if the agent and oem set export price based supply and demand equilibrium this reduces the quantity distortion one special characteristic of used products trade across borders is the involvement of governments on both sides of the border the government measures include penalties imposed on aging durable goods and trade barriers we find that legislation of penalizing used products on the domestic market can stimulate export but it does not have an intended effect of stimulating new products produced at home the channel structure worsens the problem

lowering customer evaluation costs product differentiation and price competition when match uncertainty is resolved via costly evaluation the first product sampled by a customer is more likely to make the sale this prompts firms to lower their products evaluation costs to attract customers to sample their products first such efforts by firms are called customer learning investment cli when product quality is freely observable but horizontal match is not we examine how cli choices interact with quality and price competition in a duopoly cli has a competition effect in that a higher cli of a firm increases its demand but decreases that of its rivals in the market covered duopoly both qualities will decrease increase when the high end low end firm invests more in customer learning and remain unchanged when they invest equally relative to when neither firm invests we further show that the firm with a higher relative production efficiency invests more in customer learning than the competitor in the market not covered duopoly cli by the low end firm also creates a market

on the relationship between inventory costs and variety benefits in retailassortments consider a category of product variants distinguished by some attribute such as color or flavor a retailer must construct an assortment for the category i e select a subset variants to stock and determine purchase quantities for each offered variant we analyze this problem using a multinomial logit model to describe the consumer choice process and a newsboy model to represent the retailer s inventory cost we show that the optimal assortment has a simple structure and provide insights on how various factors affect the optimal level of assortment variety we also develop a formal definition of the level of fashion in a category using the theory of majorization and examine its implications for category profits

tax policy and economic growth lessons from the 1980s the past seven years of u s economic policy and performance constitute a truly remarkable if confusing experiment few would have guessed in 1980 that inflation would fall rapidly to 4 percent and hold pretty steady during a lengthy recovery that productivity growth would partially rebound the national debt more than double capital imports reach 150 billion in a single year or that employment would continue to expand at rates envied by other advanced economies perhaps fewer still would have predicted two major and two minor tax reforms would be passed in six years a flip flop in depreciation schedules and a top personal tax rate below 30 percent while it is always easier to draw inferences concerning economic growth its determinants and policies affecting the determinants with long historical hindsight this paper will attempt to provide information evaluation and conjecture to draw some tentative lessons about the effects of tax policies in the 1980s on long run economic growth the good news from the 1980s is the remarkable achievement of substantially lower marginal tax rates making the government a much smaller silent partner in many economic decisions for example the tax advantage of debt finance is reduced substantially with the much lower marginal tax rates the bad news is that the nation could not afford all of the good news the very large budget deficits add to the instability in the tax code in addition to whatever other problems they cause moreover in a country with the lowest saving and investment rates in the advanced world the consequence of which may be to decrease our long run growth potential and short run trade competitiveness the remaining anti saving and investment features of our tax law while probably less important in the long run than the u s

a graphical analysis of bundling by comparing the demand for a bundle and the vertical sum of the demands for its components this article analyzes the profitability and welfare consequences of bundling if it does not lower costs bundling tends to be profitable when reservation values are negatively correlated and high relative to costs if bundling lowers costs and costs are high relative to average reservation values positively correlated reservation values increase the incentive to bundle bundling and charging a price equal to the sum of the components prices lowers consumer surplus bundling can however increase consumer surplus when it results in lower prices copyright 1995 by university of chicago press

chapter 11 pricing models in marketing publisher summary this chapter brings together a set of diverse efforts in the recent literature on the modeling of price decisions and related questions in marketing there has been an impressive growth in the array of topics investigated in the literature various trends in the development of pricing models are evident from the foregoing review first one trend has been to develop theoretical models to describe observed pricing strategies in the marketplace and to derive conditions under which certain strategies are optimal this trend is clearly evident when one considers the area of dynamic pricing models another trend is an attempt to develop pricing models in which certain aspects of consumer behavior e g asymmetric response to price increases versus price decreases are incorporated this development is quite recent and does offer a large potential a third dominant direction is the use of game theoretic models for developing equilibrium pricing strategies

increasing quality sequence when is it an optimal product introduction strategy in this paper we analyze the optimal introduction timing of a seller s products targeted at segments that differ in their willingness to pay for quality past studies suggest that an introduction sequence of a high quality product followed by a lower quality version of the product may mitigate the cannibalization effects of the low quality product on profits from the high quality product we show that if customers who value quality more possess an outside option such as a substitute product as may be the case with replacement buyers a seller may find it optimal to follow a low quality product with a higher quality one the latter being targeted at replacement buyers furthermore the ability of the seller to commit to future qualities accentuates the sequential increase in quality in the presence of such buyers thus we show that conditions other than uncertainty or technological improvements occurring over time may justify a seller adopting a strategy of sequentially increasing quality this paper was accepted by j miguel villas boas marketing

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

multiproduct monopoly commodity bundling and correlation of values through what selling strategy can a multiproduct monopolist maximize his profits when his knowledge about individual consumers preferences is limited one possibility extensively studied in the context of a single good monopoly is to use quantity dependent pricing as a means of discriminating among customers with differing tastes see for example oi 1971 and maskin and riley 1984 an alternative technique for price discrimination first suggested by stigler 1968 and analyzed further by adams and yellen 1976 is for the monopolist to package two or more products in bundles rather than selling them separately through a series of examples adams and yellen illustrate that bundling can serve as a useful price discrimination device even when all consumers willingnesses to pay for each of the goods individually are unaffected by whether they are also consuming the other product a typical example is illustrated in figure i adapted from figure iv in adams and yellen where there are two goods three consumers ab c who consume at most one unit of each good with reservation values for each good that are independent of whether the other good is consumed and zero costs of production there a bundle offered at a price of 100 fully extracts all potential surplus which would be impossible pricing the goods independently unfortunately though these authors do not provide any general characterization of the circumstances in which bundling is actually a multiproduct monopolist s optimal strategy their examples however such as figure i create the impression that the profitable use of bundling

new product introduction and capacity investment by incumbents effects of size on strategy we analyze a duopoly where capacity constrained firms offer an established product and have the option to offer an additional new and differentiated product we show that the firm with the smaller capacity on the established market has a higher incentive to innovate and reaches a larger market share on the market for the new product an increase in capacity of the larger firm can prevent its competitor from innovating whereas an increase in capacity of the smaller firm cannot prevent innovation of its larger competitor in equilibrium the firm with smaller capacity on the established market might outperform the larger firm with respect to total payoffs

how forward looking are consumers further evidence for the united states this paper extends a standard model of consumption to test for the existence of myopic consumers the extended model includes rule of thumb consumers as well as consumers who are assumed to solve a dynamic programming problem the model allows this second set of consumers however to be boundedly rational for a variety of reasons they may be unable to fully account for their future uncertain labor income the model predicts that this inability to correctly value future resources leads to the breakdown of the simple permanent income hypothesis and that consumption responds to predictable changes in income using data for the united states for the period 1951 1990 the paper finds evidence of such myopic behavior

when more alternatives lead to less choice this paper shows that when the alternatives offered to consumers span the preference space as it would be chosen by a firm search or evaluation costs may lead consumers not to search and not to choose if too many or too few alternatives are offered if too many alternatives are offered then the consumer may have to engage in many searches or evaluations to find a satisfactory fit this may be too costly and result in the consumer avoiding making a choice altogether if too few alternatives are offered then the consumer may not search or choose fearing that an acceptable choice is unlikely these two forces result in the existence of a finite optimal number of alternatives that maximizes the probability of choice

an integrated product planning model for pricing and bundle selection using markov decision processes and data envelope analysis abstract when bundling products during the product planning stage there are a number of possible combinations that can be offered to customers consider a firm that offers n distinctive products then there are 2 n n 1 possible bundling combinations now if we wish to make pricing and bundle selection decisions keeping in my mind limited inventory and a finite time horizon then the size of the state space could be very large and finding an optimal solution could be impossible to tackle this issue we formulate an integrated model that utilizes a markov decision process and data envelope analysis bundle selections are made using data envelope analysis in each decision epoch once the efficient bundles are selected they are priced by solving a markov decision process using dynamic programming numerical examples are solved to exhibit the model s potential in solving real world problems

designing a family of development intensive products faced with fragmented markets saturated and demanding customers and global competition firms increasingly must design and offer a line of innovative quality differentiated products to target customers with differing willingness to pay wtp in this context designing a special class of products that we term development intensive products dips for which the fixed costs of development far outweigh the unit variable costspresents some unique managerial challenges examples of such development intensive offerings abound in a number of industries including the pharmaceutical information and entertainment sectors of the economy our contributions in this paper are threefold a to show that managerial insights from the traditional approach to product line design developed for unit variable cost intensive products do not carry over to dips b to present new mechanisms and managerial guidelines for designing a family of products for which development costs cannot be ignored and c to illustrate the insights with an extended industry example we find that the design approach based on degrading or subtracting value from a high end product to obtain a subsumed low end edition shown in the literature to be an effective approach for designing unit cost intensive products can be inappropriate for dips this limitation of value subtraction has implications for the number of variants and the sequence in which they are developed as an alternative to a subsumed product design strategy we propose and examine the overlapped product design approach in which a low end product is not completely subsumed within its high end counterpart but differentiated on additional vertical quality dimensions our results both explain the recent challenges of firms with subsumed low end products and guide them in designing a product line to successfully address emerging low end market segments

explaining differences in productive efficiency an application to belgian municipalities the purpose of this paper is to measure and explain variations in productive efficiency of municipal governments in belgium technical efficiency is evaluated using a non parametric method based on the free disposal hull fdh reference technology we first calculate input output and graph farrell efficiency measures for a cross section of all 589 belgian municipalities in a second stage of the analysis we explain the calculated differences in efficiency in terms of variables related to the structural characteristics of municipalities and to the institutional environment

commonality decisions when designing for multiple markets abstract it is well established that a manufacturer s commonality decisions between related products are driven by trade offs between cost savings from standardization and demand effects of customization prior research has examined these trade offs in the context of product line design for a single geography where cannibalization is a primary concern however the insights from a single market may not readily apply when serving related products for different geographies where cannibalization ceases to be a concern the downside of commonality for geographically separated markets arises from a mismatch in customer preferences which results in disutilities in this paper we model the trade off between the consumer side disutilities and the cost side scale economies in the presence of demand uncertainty and derive the optimal extent of commonality between products for both the markets in the context of two product development strategies i primary market centric design pmd and ii design for multiple markets dfm our insights from analytical and numerical analysis show that when consumers are very picky and market uncertainty is low the dfm strategy outperforms the pmd strategy counter to the practice of introducing primary market centric products into emerging markets our study demonstrates the need for more customization especially in small but uncertain markets our research has important implications for automakers in integrating the diversity in tastes while making commonality decisions for multiple markets

chapter 17 marketing strategy models publisher summary despite the advances in the sophistication and proliferation of marketing science models relatively few true marketing strategy models have been developed and those that have been developed generally had limited impact on management the gap between management needs for models that help them generate evaluate and implement better marketing strategies and the available models especially non traditional is narrowing as the environment and the characteristics of successful businesses are changing the nature of the marketing paradigm and the nature of desired marketing strategy models is changing as well

does accrual accounting improve municipalities efficiency evidence from germany the stressed financial situation in the public sector and the continuous aspiration for austerity in western governments and public bodies is omnipresent as one core element in the new public management shift germany like many other countries has experienced significant reforms in public sector accounting and reporting in the last decade we analyse the effect of new accounting and budgeting regimes we therefore analyse the cost efficiency of german local governments in the state of north rhine westphalia over 3 years using a stochastic frontier approach this study presents evidence for increased efficiency amongst municipalities due to the adoption of accrual accounting

assortment planning and inventory decisions under a locational choice model we consider a single period assortment planning and inventory management problem for a retailer using a locational choice model to represent consumer demand we first determine the optimal variety product location and inventory decisions under static substitution and show that the optimal assortment consists of products equally spaced out such that there is no substitution among them regardless of the distribution of consumer preferences the optimal solution can be such that some customers prefer not to buy any product in the assortment and such that the most popular product is not offered we then obtain bounds on profit when customers dynamically substitute using the static substitution for the lower bound and a retailer controlled substitution for the upper bound we thus define two heuristics to solve the problem under dynamic substitution and numerically evaluate their performance this analysis shows the value of modeling dynamic substitution and identifies conditions in which the static substitution solution serves as a good approximation