buyer search costs and endogenous product design buyer search costs for price are changing in many markets through a model of buyer and seller behavior i consider the effects of changing search costs on prices both when product differentiation is fixed and when it is endogenously determined in equilibrium if firms cannot change product design lower buyer search costs for price lead to increased price competition however if product design is a decision variable lower search costs for price may also lead to higher product differentiation which decreases price competition in this case the overall effect of lower buyer search costs for price may even be higher prices lower social welfare and higher industry profits the result is especially interesting because recent technological changes such as internet shopping can affect the market structure through lowering buyer search costs

choice proliferation simplicity seeking and asset allocation abstract in settings such as investing for retirement or choosing a drug plan individuals typically face a large number of options in this paper we analyze how the size of the choice set influences which alternative is selected we present both laboratory experiments and field data that suggest larger choice sets induce a stronger preference for simple easy to understand options the first experiment demonstrates that in seeming violation of the weak axiom of revealed preference subjects are more likely to select a given sure bet over non degenerate gambles when choosing from a set of 11 options than when choosing from a subset of 3 the second experiment clarifies that large choice sets induce a preference for simpler rather than less risky options lastly using records of more than 500 000 employees from 638 institutions we demonstrate that the presence of more funds in an individual s 401 k plan is associated with a greater allocation to money market and bond funds at the expense of equity funds

strategic price complexity in retail financial markets abstract there is mounting empirical evidence to suggest that the law of one price is violated in retail financial markets there is significant price dispersion even when products are homogeneous also despite the large number of firms in the market prices remain above marginal cost and may even rise as more firms enter in a non cooperative oligopoly pricing model i show that these anomalies arise when firms add complexity to their price structures complexity increases the market power of the firms because it prevents some consumers from becoming knowledgeable about prices in the market in the model as competition increases firms tend to add more complexity to their prices as a best response rather than make their disclosures more transparent because this may substantially decrease consumer surplus in these markets such practices have important welfare implications

dynamic asset allocation with event risk major events often trigger abrupt changes in stock prices and volatility we study the implications of jumps in prices and volatility on investment strategies using the event risk framework of duffie pan and singleton 2000 we provide analytical solutions to the optimal portfolio problem event risk dramatically affects the optimal strategy an investor facing event risk is less willing to take leveraged or short positions the investor acts as if some portion of his wealth may become illiquid and the optimal strategy blends both dynamic and buy and hold strategies jumps in prices and volatility both have important effects

a search cost model of obfuscation this article develops models in which obfuscation is individually rational for oligopolistic firms firms sell a homogeneous good to rational consumers who incur search costs to learn prices search costs are endogenized by allowing obfuscation firms have an unobservable action that increases the time needed to learn their price one model involves search costs convex in shopping time we show that slight convexity can dramatically alter the equilibrium price distribution a second model examines an informational linkage between current and future search costs consumers are uncertain about a component of search costs here a signal jamming mechanism can lead to equilibrium obfuscation

tail risk and robust portfolio decisions this paper formulates a portfolio choice problem in a multiasset incomplete market characterized by ambiguous jumps and arbitrary tail assumptions we derive the optimal portfolio in closed form th

decomposition of optimal portfolio weight in a jump diffusion model and its applications this article solves the portfolio choice problem in a multi asset jump diffusion model we decompose the optimal portfolio weight into components that correspond to a collection of fictitious economies one of which is a standard diffusion economy and the others of which are pure jump economies we derive a semi closed form solution for the optimal portfolio weight and investigate its properties with or without ambiguity aversion we find that an investor may not reduce her investment in risky assets when facing more frequent jumps as suggested by a single asset jump diffusion model moreover an investor who is extremely cautious about her estimates of higher moments of asset returns may still hold risky assets contrary to the prediction of a pure diffusion model with ambiguity aversion to the first moment

robust consumption and portfolio policies when asset prices can jump abstract we study the consumption portfolio allocation problem in continuous time when asset prices follow levy processes and the investor is concerned about potential model misspecification we derive optimal consumption and portfolio policies that are robust to uncertainty about the hard to estimate drift rate jump intensity and jump size parameters we also provide a semi closed form formula for the detection error probability and compare various portfolio holding strategies including robust and non robust policies our quantitative analysis shows that ignoring uncertainty leads to significant wealth loss for the investor

price competition under limited comparability this paper studies market competition when firms can influence consumers ability to compare market alternatives through their choice of price formats we introduce random graphs as a tool for modelling limited comparability of formats our main results concern the interaction between firms equilibrium price and format decisions and its implications for industry profits and consumer switching rates we show that narrow regulatory interventions that aim to facilitate comparisons may have adverse consequences for consumer welfare finally we argue that our limited comparability approach provides a new perspective into the phenomenon of product differentiation

shrouded attributes and information suppression evidence from the field we use eld and natural experiments in online auctions to study the revenue eect of varying the level and disclosure of shipping charges our main ndings are 1 disclosure aects revenues for low shipping charges a seller is better odisclosing 2 increasing shipping charges boosts revenues particularly when these charges are hidden and 3 the level and disclosure of the shipping charge have little eect on the number of bidders attracted to an auction

buyer confusion and market prices we employ a price setting duopoly experiment to examine whether buyer confusion increases market prices each seller offers a good to buyers who have homogeneous preferences sellers decide on the number of attributes of their good and set prices the number of attributes bears no cost to the sellers and does not affect the value of the good to the buyers but adds complexity to buyers evaluation of the goods the experimental results indicate that the buyers make more suboptimal choices and that prices are higher when the number of attributes of the goods is higher moreover prices and profits are higher than those in a benchmark treatment with perfectly rational robot buyers

modeling financial contagion using mutually exciting jump processes we propose a model to capture the dynamics of asset returns with periods of crises that are characterized by contagion in the model a jump in one region of the world increases the intensity of jumps both in the same region self excitation as well as in other regions cross excitation generating episodes of highly clustered jumps across world markets that mimic the observed features of the data we develop and implement moment based estimation and testing procedures for this model the estimates provide evidence of self excitation both in the us and the other world markets and of asymmetric cross excitation with the us market typically having more influence on the jump intensity of other markets than the reverse we propose filtered values of the jump intensities as a measure of market stress and examine their out of sample forecasting abilities

price competition with consumer confusion this paper proposes a model in which identical sellers of a homogenous product compete in both prices and price frames i e ways to present price information we model price framing by assuming that firms frame choices affect the comparability of their price offers consumers may fail to compare prices due to frame differentiation and due to frame complexity in the symmetric equilibrium the firms randomize over both price frames and prices and make positive profits this result is consistent with the observed coexistence of price and price frame dispersion in the market we also show that i the nature of equilibrium depends on which source of consumer confusion dominates and ii an increase in the number of firms can increase industry profits and harm consumers

it takes two to tango equilibria in a model of sales we show that the varian model of sales with more than two firms has two types of equilibria a unique symmetric equilibrium and a continuum of asymmetric equilibria in contrast the 2 firm game has a unique equilibrium that is symmetric for the n firm case the asymmetric equilibria imply mixed strategies that can be ranked by first order stochastic dominance this enables one to rule out asymmetric equilibria on economic grounds by constructing a metagame in which both firms and consumers are players the unique subgame perfect equilibrium of this metagame is symmetric

model misspecification and underdiversification in this paper we study intertemporal portfolio choice when an investor accounts explicitly for model misspecification we develop a framework that allows for ambiguity about not just the joint distribution of returns for all stocks in the portfolio but also for different levels of ambiguity for the marginal distribution of returns for any subset of these stocks we find that when the overall ambiguity about the joint distribution of returns is high then small differences in ambiguity for the marginal return distribution will result in a portfolio that is significantly underdiversified relative to the standard mean variance portfolio

consumer confusion in the mortgage market evidence of less than a perfectly transparent and competitive market consumers often shop with incomplete infor mation about prices even when prices have a take it or leave it character as at the grocery store most shoppers don t know the price of milk at all nearby stores in markets where prices are dickered finding the best deal is more challenging the car shopper paying cash has to make offers and counteroffers to get an idea of the lowest price acceptable to a dealer and work one dealer against another in the mortgage market the shopper s task is even more difficult not only are prices dickered but price has two dimensions the interest rate on the loan and

oligopolistic pricing with sequential consumer search n identical stores compete by choosing prices for a homogeneous good with constant marginal costs consumers search sequentially with perfect recall for the lowest price one class of consumers called shoppers have zero search costs while all other consumers have a positive search cost c there is a unique symmetric nash equilibrium price distribution with the property that it changes smoothly from marginal cost pricing when all consumers are shoppers and or c 0 and monopoly pricing when no consumers are shoppers remarkably as the number of stores increases the nash equilibrium becomes more monopolistic copyright 1989 by american economic association

why does the law of one price fail an experiment on index mutual funds we conduct an experiment to evaluate why individuals invest in high fee index funds in our experiments subjects allocate 10 000 across four s p 500 index funds and are rewarded for their portfolio s subsequent return subjects overwhelmingly fail to minimize fees we can reject the hypothesis that subjects buy high fee index funds because of bundled non portfolio services search costs for fees matter but even when we eliminate these costs fees are not minimized instead subjects place high weight on annualized returns since inception fees paid decrease with financial literacy interestingly subjects who choose high fee funds sense they are making a mistake

systemic risk and international portfolio choice returns on international equities are characterized by jumps moreover these jumps tend to occur at the same time across countries leading to systemic risk we capture these stylized facts using a multivariate system ofjump diffusion processes where the arrival of jumps is simultaneous across assets we then determine an investor s optimal portfolio for this model of returns systemic risk has two effects one it reduces the gains from diversification and two it penalizes investors for holding levered positions we find that the loss resulting from diminished diversification is small while that from holding very highly levered positions is large returns on international equities are characterized by jumps 1 moreover these jumps tend to occur at the same time across countries implying that conditional correlations between international equity returns tend to be higher in periods of high market volatility or following large downside moves 2 our objective in

shrouded attributes consumer myopia and information suppression in competitive markets bayesian consumers infer that hidden add on prices e g the cost of ink for a printer are likely to be high prices if consumers are bayesian firms will not shroud information in equilibrium however shrouding may occur in an economy with some myopic or unaware consumers such shrouding creates an inefficiency which firms may have an incentive to eliminate by educating their competitors customers however if add ons have close substitutes a curse of debiasing arises and firms will not be able to profitably debias consumers by unshrouding add ons in equilibrium two kinds of exploitation coexist optimizing firms exploit myopic consumers through marketing schemes that shroud high priced add ons in turn sophisticated consumers exploit these marketing schemes it is not possible to profitably drive away the business of sophisticates it is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms we show that informational shrouding flourishes even in highly competitive markets even in markets with costless advertising and even when the shrouding generates allocational inefficiencies

duopolistic competition with choice overloaded consumers a large body of experimental work has suggested the existence of a choice overload effect in consumer decision making faced with large menus of choice options decision makers often defer or avoid choice a suggested reason for the occurrence of this effect is that the agents attempt to avoid the cognitive effort that is associated with choosing from larger menus building on this explanation we propose and analyse a model of duopolistic competition where firms compete in menu design in the presence of a consumer population with heterogeneous preferences and overload menu size thresholds the firms strategic trade off is between offering a large menu in order to match the preferences of as many consumers as possible and offering a small menu in order to avoid losing choice overloaded consumers to their rival assuming uniformly distributed preferences we focus on symmetric pure strategy equilibria under various assumptions on the overload distribution and product markups we also propose and analyse a measure of consumer welfare that applies to this environment among other things we provide conditions for maximum and minimum variety equilibria to be possible whereby both firms either offer the entire set of available products or the same one product respectively

downside loss aversion and portfolio management downside loss averse preferences have seen a resurgence in the portfolio management literature this is due to the increasing use of derivatives in managing equity portfolios and the increased use of quantitative techniques for bond portfolio management we employ the lower partial moment as a risk measure for downside loss aversion and compare mean variance m v and mean lower partial moment m lpm optimal portfolios under nonnormal asset return distributions when asset returns are nearly normally distributed there is little difference between the optimal m v and m lpm portfolios when asset returns are nonnormal with large left tails we document significant differences in m v and m lpm optimal portfolios this observation is consistent with industry usage of m v theory for equity portfolios but not for fixed income portfolios

a note on robustness in merton s model of intertemporal consumption and portfolio choice abstract the paper presents a robust version of a simple two assets merton 1969 review of economics and statistics 51 247 57 model where the optimal choices and the implied shadow market prices of risk for a representative robust decision maker rdm can be easily described with the exception of the log utility case precautionary behaviour is induced in the optimal consumption investment rules through a substitution of investment in risky assets with both current consumption and riskless saving for the log utility case precautionary behaviour arises only through a substitution between risky and riskless assets on the financial side the decomposition of the market price of risk in a standard consumption based component and a further price for model uncertainty risk which is positively related to the robustness parameter is independent of the underlying risk aversion parameter

tails fears and risk premia we show that the compensation for rare events accounts for a large fraction of the average equity and variance risk premia exploiting the special structure of the jump tails and the pricing thereof we identify and estimate a new investor fears index the index reveals large time varying compensation for fears of disasters our empirical investigations involve new extreme value theory approximations and high frequency intraday data for estimating the expected jump tails under the statistical probability measure and short maturity out of the money options and new model free implied variation measures for estimating the corresponding risk neutral expectations

strategic pricing consumer search and the number of firms discover prices there are three distinct price dispersed equilibria characterized by low moderate and high search intensity the effects of an increase in the number of firms on search behaviour expected prices price dispersion and welfare are sensitive i to the equilibrium consumers search intensity and ii to the status quo number of firms for instance when consumers search with low intensity an increase in the number of firms reduces search does not affect expected price leads to greater price dispersion and reduces welfare in contrast when consumers search with high intensity increased competition results in more search and lower prices when the number of competitors in the market is low to begin with but in less search and higher prices when the number of competitors is large duopoly yields identical expected price and price dispersion but higher welfare than an infinite number of firms a question that has received much attention in economic theory is how the number of competitors and market outcomes are related despite the existence of work showing the contrary see e g satterthwaite 1979 rosenthal 1980 the prediction that emerges from a market where firms interact in a cournot fashion has come to dominate economic thought namely that an increase in the number of competitors leads to larger aggregate production lower market price and improved market performance measured in terms of some social welfare criterion ruffin 1971 this paper challenges the generality of this belief by presenting an oligopoly model with consumer search where the equilibrium expected price may be constant increasing or nonmonotonic in the number of firms we present an economy with two types of consumers consumers who search for prices at no cost fully informed and consumers who must pay a fixed search cost for each price quotation they observe less informed 1 all buyers have the same willingness to pay for the good and buy either a single unit or nothing at all on the supply side of the market there are n firms producing a homogeneous good at constant marginal cost we analyse a one shot simultaneous move game firms set prices and consumers decide how many prices to search for at the same moment in time our model is essentially an oligopolistic version of burdett and judd 1983 where some consumers search costlessly in this model consumers search using a fixed sample size search strategy i e they choose the number of prices to observe before receiving any offer nonsequential search is appealing when consumers find it more advantageous to gather price information quickly morgan and manning 1985 this occurs when the search outcome is observed with delay and delay is costly for instance an mba graduate looking for a job 1 the presence in the model of consumers who search costlessly captures the fact that some people have a

indifference or indecisiveness choice theoretic foundations of incomplete preferences abstract a commonly held belief in economics is that an individual s preferences that are revealed by her choices must be complete this paper takes issue with this position by showing that one may be able to distinguish between indifference and indecisiveness of an agent upon observing her choice behavior we relax the standard weak axiom of revealed preferences warp and show that a potent theory of individual choice with and without risk can be founded on this weaker axiom when it is coupled with some other standard postulates the most notable features here are that an agent is allowed to be indifferent between certain alternatives and indecisive about others moreover an outside observer can identify which of these actually occur upon examining the observable choice behavior of the decision maker as an application we also show how our theory may be able to cope with the classical preference reversal phenomenon

inattentive consumers and product quality this paper studies a model in which some consumers shop on the basis of price alone without attention to potential differences in product quality a firm may offer a low quality product to exploit these inattentive consumers in the unique symmetric equilibrium of the model firms choose prices with mixed strategies similarly to varian 1980 in which some consumers purchase from a random seller without attention to market prices in our model though firms also choose quality stochastically and there is both price and quality dispersion two stylized policy interventions are considered competition policy which acts to increase the number of sellers and market transparency reforms which act to increase the fraction of attentive consumers with fewer inattentive consumers firms are less likely to cheat i e cut quality which therefore improves welfare but profit and consumer surplus can either increase or decrease when there is a large number of sellers approximately half the sellers cheat regardless of the fraction of inattentive consumers and introducing more sellers boosts consumers surplus and reduces profit while the impact on welfare is ambiguous

keynes meets markowitz the trade off between familiarity and diversification we develop a model of portfolio choice to nest the views of keynes who advocates concentration in a few familiar assets and markowitz who advocates diversification we use the concepts of ambiguity and ambiguity aversion to formalize the idea of an investor s familiarity toward assets the model shows that for any given level of expected returns the optimal portfolio depends on two quantities relative ambiguity across assets and the standard deviation of the expected return estimate for each asset if both quantities are low then the optimal portfolio consists of a mix of familiar and unfamiliar assets moreover an increase in correlation between assets causes an investor to increase concentration in familiar assets flight to familiarity alternatively if both quantities are high then the optimal portfolio contains only the familiar asset s as keynes would have advocated in the extreme case in which both quantities are very high no risky asset is held nonparticipation this paper was accepted by brad barber teck ho and terrance odean special issue editors

truly costly sequential search and oligopolistic pricing we modify the paper of stahl 1989 stahl d o 1989 oligopolistic pricing with sequential consumer search american economic review 79 700 12 by relaxing the assumption that consumers obtain the first price quotation for free when all price quotations are costly to obtain the unique symmetric equilibrium need not involve full consumer participation the region of parameters for which non shoppers do not fully participate in the market becomes larger as the number of shoppers decreases and or the number of firms increases the comparative statics properties of this new type of equilibrium are interesting in particular expected price increases as search cost decreases and is constant in the number of shoppers and in the number of firms welfare falls as firms enter the market we show that monopoly pricing never obtains with truly costly search d 2005 elsevier b v all rights reserved

product differentiation search costs and competition in the mutual fund industry a case study of s p 500 index funds we investigate the role that non portfolio fund differentiation and information search frictions play in creating two salient features of the mutual fund industry the large number of funds and the sizeable dispersion in fund fees in a case study we find that despite the financial homogeneity of s p 500 index funds this sector exhibits the fund proliferation and fee dispersion observed in the broader industry we show how extra portfolio mechanisms explain these features these mechanisms also suggest an explanation for the puzzling late 1990s shift in sector assets to more expensive and often newly entered funds an influx of highinformation cost novice investors

determinants of foreign direct investment a tale of nine theoretical models abstract this paper presents a review of nine theoretical models of foreign direct investment fdi discussed are early studies of determinants of fdi 1 as well as determinants of fdi based on the neoclassical trade theory 2 ownership advantages 3 aggregate variables 4 the ownership location and internalization advantage framework 5 horizontal and vertical fdi models 6 the knowledge capital model 7 diversified fdi and risk diversification models 8 and policy variables 9 from each of the nine theories the relevant determinants of fdi are derived empirical studies indicate the importance of these determinants in the real world the paper shows that there is not one single theory of fdi but a variety of theoretical models attempting to explain fdi and the location decision of multinational firms therefore any analysis of determinants of fdi should not be based on a single theoretical model instead fdi should be explained more broadly by a combination of factors from a variety of theoretical models such as ownership advantages or agglomeration economics market size and characteristics cost factors transport costs protection risk factors and policy variables

a model of add on pricing this paper examines competitive price discrimination with horizontal and vertical taste differences consumers with higher valuations for quality are assumed to have stronger brand preferences two models are considered a standard competitive price discrimination model in which consumers observe all prices and an add on pricing game in which add on prices are naturally unobserved and firms may advertise a base good at a low price in hopes of selling add ons at high unadvertised prices in the standard game price discrimination is self reinforcing the model sometimes has both equilibria in which the firms practice price discrimination and equilibria in which they do not the analysis of the add on pricing game focuses on the chicago school argument that profits earned on add ons will be competed away via lower prices for advertised goods a conclusion is that add on practices can raise equilibrium profits by creating an adverse selection problem that makes price cutting unappealing although profitable when jointly adopted using add on pricing is not individually rational in a simple extension with endogenous advertising practices and costless advertising several models that could account for add on pricing are discussed

spurious complexity and common standards in markets for consumer goods behavioural and industrial economists have argued that because of cognitive limitations consumers are liable to make sub optimal choices in complex decision problems firms can exploit these limitations by introducing spurious complexity into tariff structures weakening price competition this paper models a countervailing force consumers choice problems are simplified if competing firms follow common conventions about tariff structures because such a common standard promotes price competition a firm s use of it signals that its products offer value for money if consumers recognize this effect there can be a stable equilibrium in which firms use common standards and set competitive prices

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

general equilibrium pricing of options on the market portfolio with discontinuous returns when the price process for a long lived asset is of a mixed jump diffusion type pricing of options on that asset by arbitrage is not possible if trading is allowed only in the underlaying asset and a risk less bond using a general equilibrium framework we derive and analyze option prices when the underlying asset is the market portfolio with discontinuous returns the premium for the risk of jumps and the diffusion risks forms a significant part of the prices of the options in this economy an attempted replication of call and put options by the black scholes type of trading strategies may require substantial infusion of funds when jumps occur we study the cost and risk implications of such dynamic hedging plans article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

ambiguity and nonparticipation the role of regulation we investigate the implications of ambiguity aversion for performance and regulation of markets in our model agents decision making may incorporate both risk and ambiguity and we demonstrate that nonparticipation arises from the rational decision by some traders to avoid ambiguity in equilibrium these participation decisions affect the equilibrium risk premium and distort market performance when viewed from the perspective of traditional asset pricing models we demonstrate how regulation particularly regulation of unlikely events can moderate the effects of ambiguity thereby increasing participation and generating welfare gains our analysis demonstrates how legal systems affect participation in financial markets through their influence on ambiguity the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press