project based mechanisms for emissions reductions balancing trade offs with baselines project based mechanisms for emissions reductions credits like the clean development mechanism pose important challenges for policy design because of several inherent characteristics participation is voluntary so it will not occur without sufficient credits evaluating reductions requires assigning an emissions baseline for a counterfactual that cannot be measured some investments have both economic and environmental benefits and might occur anyway uncertainty surrounds both emissions and investment returns and parties to the project are likely to have more information than the certifying authority the certifying agent is limited in its ability to design a contract that would reveal investment intentions as a result rules for benchmarking emissions may be systematically biased to overallocate and they also risk creating inefficient investment incentives this paper evaluates in a situation with asymmetric information the efficacy of the main baseline rules currently under consideration historical emissions an average industry emissions standard and expected emissions

frictionless commerce a comparison of internet and conventional retailers there have been many claims that the internet represents a new nearly frictionless market our research empirically analyzes the characteristics of the internet as a channel for two categories of homogeneous products books and cds using a data set of over 8 500 price observations collected over a period of 15 months we compare pricing behavior at 41 internet and conventional retail outlets we find that prices on the internet are 9 16 lower than prices in conventional outlets depending on whether taxes shipping and shopping costs are included in the price additionally we find that internet retailers price adjustments over time are up to 100 times smaller than conventional retailers price adjustments presumably reflecting lower menu costs in internet channels we also find that levels of price dispersion depend importantly on the measures employed when we compare the prices posted by different internet retailers we find substantial dispersion internet retailer prices differ by an average of 33 for books and 25 for cds however when we weight these prices by proxies for market share we find dispersion is lower in internet channels than in conventional channels reflecting the dominance of certain heavily branded retailers we conclude that while there is lower friction in many dimensions of internet competition branding awareness and trust remain important sources of heterogeneity among internet retailers

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

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

information provision in a vertically differentiated competitive marketplace this paper examines the interaction of information provision product quality and pricing decisions by competitive firms to explore the following question in a competitive market where consumers face uncertainty about product quality and or their preference for quality which firms those that sell higher or lower quality products have the higher incentive to provide what type of information we find that while the higher quality firm should always provide information resolving consumer uncertainty on product quality the lower quality firm under certain conditions will have the higher incentive to and will be the one to provide information resolving consumer uncertainty about their quality preferences in the analysis we trace the latter result to competition and to free riding on the information provision specifically in a monopoly market or when consumer free riding is restricted by the costliness of store visits the lower quality firm would have a lower incentive to provide information resolving consumer preference uncertainty than otherwise the model is also adapted to examine product returns as a possible strategy of information provision

explaining presidential priorities the competing aspiration levels model of macrobudgetary decision making this article develops a new statistical model of trade offs among defense nondefense and fiscal policy concerns as they are reflected in the presidential budgetary process the competing aspiration levels model calm builds on crecine s 1971 great identity argument unlike most previous attempts to model presidential budgeting calm explicitly represents the interdependence of decisions about defense nondefense and totalfederal expenditures calm models this interdependence as the result of the interaction of minimal aspirations for defense and nondefense expenditures with a maximum acceptable level of expenditures from a fiscal policy standpoint statistical analyses of presidential budgets for the fiscal years from 1955 through 1980 provide strong support for the calm formulation substantively the results indicate that fiscal constraints on total expenditures have progressively weakened that the maximum acceptable expenditure level has generally exceeded the minimal expenditure aspiration level and that when a potential fiscal surplus has existed the nondefense sector has been more successful in capturing a share of this surplus than the defense sector in keeping with traditional incrementalist arguments the results indicate that previous year expenditure levels provide a relatively secure budgetary base for both the defense and nondefense sectors both sectors tend to receive their minimal aspiration levels plus a share of whatever fiscal surplus exists the analysis also indicates that the executive branch has not been as strong a direct force for budgetary growth as congress

trading for the future signaling in permit markets abstract permit markets are celebrated as a policy instrument since they allow i firms to equalize marginal costs through trade and ii the regulator to distribute the burden in a politically desirable way these two concerns however may conflict in a dynamic setting anticipating the regulator s future desire to give more permits to firms that appear to need them firms purchase permits to signal their need this raises the price above marginal costs and the market becomes inefficient if the social cost of pollution is high and the government intervenes frequently in the market the distortions are greater than the gains from trade and non tradable permits are better the analysis helps to understand permit markets and how they should be designed

competition and the number of firms in a market are duopolies more competitive than atomistic markets this paper uses a variant of the standard search model to examine market equilibrium and the consequences for market equilibrium of an increase in the number of firms if marginal search costs increase with the number of searches then the demand curve facing any firm will be kinked with the elasticity of demand with respect to price decreases being less than with respect to price increases prices may not change in response to changes in marginal costs as the number of firms increases the maximum price that is consistent with equilibrium increases to the monopoly price but the minimum price decreases on the other hand if marginal search costs decrease with the number of searches equilibrium if it exists is characterized by a

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

information gatekeepers on the internet and the competitiveness of homogeneous product markets we examine the equilibrium interaction between a market for price information controlled by a gatekeeper and the homogenous product market it serves the gatekeeper charges fees to firms that advertise prices on its internet site and to consumers who access the list of advertised prices gatekeeper profits are maximized in an equilibrium where a the product market exhibits price dispersion b access fees are sufficiently low that all consumers subscribe c advertising fees exceed socially optimal levels thus inducing partial firm participation and d advertised prices are below unadvertised prices introducing the market for information has ambiguous social welfare effects

long run carbon emission implications of energy intensive infrastructure investments with a retrofit option abstract investments in long lived fossil fuel intensive infrastructure can have large effects on carbon emissions over a long future period we simulate a 2 period model of infrastructure investment with subsequent retrofit to purge its carbon emissions under uncertainty about climate and retrofit costs the energy intensity chosen upon investment depends on current and expected future energy and environmental costs and on future retrofit cost simulations of a simplified but realistic model indicate that energy consumption and carbon emissions can be highly excessive when future energy and climate costs are not considered at the time infrastructure investments are made and charged at globally suboptimal rates when operated often by more than 50 when energy costs are undervalued at this rate both ex ante and ex post good anticipated retrofit options reduce ex post energy costs but lead to ex ante choice of more energy intensive infrastructure which could more than fully offset the energy reducing effect of the retrofit these results are of particular importance for emerging economies with large current and anticipated energy related investments where long term climate policy goals may be seriously jeopardized by policy makers facing too low energy prices now and in the future

facilitating fit revelation in the competitive market this study examines firms strategic decisions in the competitive market regarding whether to engage in marketing activities to assist consumers in finding the fit between their personal tastes and products horizontal attributes we find that competitive firms strategies to facilitate fit revelation critically depend on the product qualities they offer in particular a firm offering a high quality product is more likely to facilitate fit revelation in the competitive market than it would as a market monopolist whereas a firm offering a low quality product is less likely to do so in addition the firm offering the high quality product implements fit revealing activities in a greater intensity than its rival that offers the low quality product if the quality difference between the two products is small and both products qualities are sufficiently high

the principle of minimum differentiation holds under sufficient heterogeneity the so called principle of minimum differentiation stated by hotelling has been challenged by many authors this paper restores the principle by showing that n firms locate at the center of the market and charge prices higher than the marginal cost of production when heterogeneity in consumers tastes is large enough

search costs and investment in quality in this paper we analyze how lower search costs aect rms incentives to invest in quality we identify two con icting eects on the one hand lower search costs increase incentives to invest in quality by eroding the market share of low quality rms and increasing the market share of high quality rms on the other hand by intensifying price competition lower search costs adversely aect high quality rms more than low quality rms the net eect of a change in the search cost on quality is shown to depend on the initial quality distribution there is a critical value such that if the average quality in the market is initially above this value lower search costs lead to lower quality whereas if the initial quality is below this value lower search cost leads to higher quality we show that our results are consistent with a superstar eect

an alternative approach to understanding budgetary trade offs in this paper we criticize existing research on budgetary trade offs on a number of grounds including 1 its focus on only a limited form of trade off behavior 2 its use of a modeling strategy that avoids an explanation of trade off outcomes and likely results in specification error and 3 its generally weak development of the central concept of trade off accordingly we propose an alternative methodology for studying budgetary trade offs we begin by presenting a general taxonomy of trade offs then we analyze when and where the various types of trade offs are likely to occur within the u s federal budget process finally we conduct empirical analysis of two trade off choices in the federal process that between defense and domestic spending and that between transfer spending and consumption unlike previous trade off studies our models assume that trade off outcomes will vary depending on environmental conditions foreign policy factors seem to be the key determinants of the domestic defense trade off outcome while economic conditions appear critical to the choice between transfers and consumption

a fuzzy set model of search and consideration with an application to an online market several two stage choice models consideration stage plus choice stage have been proposed in the marketing literature we extend this literature by developing a more general model that incorporates how consumer search influences the degree to which they consider various brands to test the validity and value of our model we operationalized it with data obtained from peapod an online grocer where we tracked consumers search processes we demonstrate that our model performs better than competing models on all the key criteria new choice models such as the ones proposed here are necessary for deriving managerially relevant understanding of choice behavior in online markets our empirical results suggest that consumers search both their internal memory and external information at the store to determine the degree to which they consider various brands consumers are also heterogeneous with respect to their capability to process external information for some consumers external information search dramatically increases the degree to which they consider various brands but for others it has little impact on their consideration we also find that certain features e g personal lists reduce consideration set sizes whereas other features e g sort increase consideration set sizes

elections keynes bureaucracy and class explaining u s budget deficits 1961 1978 the determination of u s federal budget deficits and surpluses during a period of keynesian fiscal activism is modeled in light of relevant social science literatures rational choice emphases upon electoral manipulation of the economy and keynesian stabilization marxian emphases upon monopolization andfiscal control of labor militancy organizational decision theory emphases upon budgeting inertia and a number of additional thrusts from other literatures are supported by time series regression analyses of 1961 1978 surpluses deficits the final model is statistically well behaved analysis of so called high employment measures of discretionary surpluses deficits supports all interpretations requiring discretionary policy making but an indication of automatic stabilization emerges as well a focus upon executive policy making roles is suggested as one means to further theoretical integration of explanations of state macroeconomic policy

research note additional learning and implications on the role of informative advertising observers argue that evidence for the persuasive role of advertising comes from competitive categories where increases in advertising lead to higher average prices conversely others claim that advertising serves a purely informational role here higher levels of advertising lead to better informed consumers and this should increase competition and stimulate lower prices the objective of this study is to neither confirm nor refute either of these perspectives it is rather to show that increases in informative advertisingalone can lead to both higher or lower prices i further show that the direction of this relationship depends on the level of differentiation between competing firms similar to grossman and shapiro 1984 i examine conditions where the differences between competing products are small but i also examine conditions where the differences are significant the role of advertising is to inform consumers about individual products and higher advertising for a product means that more of the potential market knows about it higher levels of advertising increase the relative importance of fully informed consumers compared to partially informed consumers this dynamic is the basis for explaining why informative advertising can push prices either up or down in a uniformly distributed spatial market

the political policy cycle presidential effort vs presidential control after disentangling presidential budget proposals from budgetary changes attributable to fluctuations in the economy and to congressional action we find consistent evidence for a presidential macroeconomic policy cycle attuned to the elctoral cycle proposed budgets are more expansionary in election years than at other times the congress however also plays a significant role in determining fiscal outcomes its budgets are systematically related to those of the president and in general reinforce presidential efforts to respond to the electoral cycle

on the design of optimal grandfathering schemes for emission allowances to meet its commitment under the kyoto protocol the eu plans to implement an emissions trading system whith grandfathering of allowances besides having distributional impacts the choice of the grandfathering scheme may affect efficiency if firms anticipate how future allocations depend on upcoming decisions in this paper we determine central design rules for optimal grandfathering within a simple two period model we find that for small open trading systems where allowance prices are exogenous first best second period grandfathering schemes must not depend on firm specific decisions in the first period second best schemes correspond to a ramsey rule of optimal tax differentiation and are generally based on both previous emissions and output however ofr closed emissions trading systems i e endogeneous allowance prices firstand second best rules coincide and must not depend on previous output levels they consist of an assignment proportional to the emissions in the first period plus a term which does not depend on firm specific decisions in either of the two periods

informative advertising and product match abstract this paper studies informative advertising in a variety of market structures for which some consumers are informed about two differentiated products while other consumers are uninformed we characterize a unique symmetric subgame perfect nash equilibrium in advertising and pricing and analyze the welfare properties of the equilibrium remarkably total surplus is non monotonic in advertising in a duopoly market the equilibrium level of advertising may be more or less than socially optimal we also study the effect of a trade association and compare these results with the first best solution and a multiproduct monopolist

informative advertising with differentiated products in this paper we study the role of promotional expenditures by sellers in a model of product differentiation advertising conveys full and accurate information about the characteristics of products heterogeneous consumers who have no source of information other than advertisements seek to purchase the products that best fit their needs despite the roles played by advertising in improving the matching of products and consumers and in increasing the elasticity of demand faced by each firm we find that the market determined levels of advertising are excessive given the extent of diversity in the market we derive a promotional equilibrium based on a specific information transmission technology paying explicit attention to the structure of consumer information and its impact on firms demand curves this allows us to study the effects of changes in the advertising technology including an increased ability to target messages to specific groups of consumers on the equilibrium in the product market we find that decreased advertising costs may reduce profits by increasing the severity of price competition

is there really a green paradox abstract in the absence of a co2 tax the anticipation of a cheaper renewable backstop increases current emissions of co2 since the date at which renewables are phased in is brought forward and more generally future emissions of co2 will decrease the effect on global warming is unclear green welfare falls if the backstop is relatively expensive and full exhaustion of fossil fuels is optimal but may increase if the backstop is sufficiently cheap relative to the cost of extracting the last drop of fossil fuels plus marginal global warming damages as then it is attractive to leave more fossil fuels unexploited and thus limit co2 emissions we establish these results by analyzing depletion of non renewable fossil fuels followed by a switch to a clean renewable backstop paying attention to timing of the switch and the amount of fossil fuels remaining unexploited we also discuss the potential for limit pricing when the non renewable resource is owned by a monopolist finally we show that if backstops are already used and more backstops become economically viable as the price of fossil fuels rises a lower cost of the backstop will either postpone fossil fuel exhaustion or leave more fossil fuel in situ thus boosting green welfare however if a market economy does not internalize global warming externalities and renewables have not kicked in yet full exhaustion of fossil fuel will occur in finite time and a backstop subsidy always curbs green welfare

the additionality problem with offsets optimal contracts for carbon sequestration in forests abstract carbon offsets are a frequently discussed tool for reducing the costs of an emissions reduction policy however offsets have a basic problem stemming from asymmetric information sellers of offsets have private information about their opportunity costs leading to concerns about whether offsets are additional non additional offsets can undermine a cap and trade program or if the government purchases them directly result in enormous government expenditures we analyze contracts for carbon sequestration in forests that mitigate the asymmetric information problem landowners are offered a menu of two part contracts that induces them to reveal their type under this scheme the government is able to identify ex post how much additional forest each landowner contributes and minimize ex ante its expenditures on carbon sequestration to explore the performance of the contracting scheme we conduct a national scale simulation using an econometric model of land use change the results indicate that for an increase in forest area of 61 million acres government expenditures are 5 3 billion lower under the contracting approach compared to a uniform subsidy offered to all landowners this compares to an increase in private opportunity costs of just 110 million dollars under the contracts thus the contracting scheme is preferable from society s perspective

emissions trading with updated allocation effects on entry exit and distribution allocation of emissions allowances may have significant distributional and efficiency effects it is well known that cost efficiency may be achieved if allowances are auctioned or distributed in a lump sum manner e g based on emissions levels before the start of the system grandfathering bohringer and lange eur econ rev 49 2041 2055 2005 show that a cost effective outcome can also be achieved if the base year for allocation is continually updated updating given that banking and borrowing are prohibited in this paper we examine whether updating alters the entry and exit conditions for firms compared to grandfathering and how it affects profits for new and existing firms we find that the two schemes function surprisingly similar first the incentives to entry and exit are identical second the total value of free quotas to existing firms based on emissions before the system starts is also identical without any auctioning with updating initial claims for free allowances have a shorter lifetime compared to grandfathering but quota prices are higher as firms anticipate the effect of current emissions on future claims to free allowances the two effects exactly cancel each other out if there is some combination of auction and free allocation the total value of free quotas will always be highest under grandfathering if the auction rate is the same entry and exit incentives are still equal

defense expenditures and national well being the existence of a trade off between military expenditures and social spending is widely hypothesized but often difficult to establish empirically this article constructs a model to test the effects of changes in military spending on federal expenditures for health and education from 1941 through 1979 important economic demographic and political changes are controlled no systematic tradeoff between military spending and federal health and education expenditures is found nor in this period was there any significant depressing effect on health and education expenditures by republican presidential administrations thus the current reagan administration under which there are major increases in military spending and major cuts in health and education spending emerges as exceptional

selling formats for search goods the paper offers a comparative analysis of different ways to sell products selling formats when buyers incur evaluation costs since these costs are sunk at the moment of trade buyers may refrain from incurring them for fear of later opportunism on the part of sellers it is found that the use of many common selling formats can be explained in terms of their ability to alleviate this problem specifically i explain price advertising seller colocation and bargaining the theory explains much of the divergence in retail trading institutions and leads to several testable predictions

bertrand supertraps we study oligopoly price competition between multiproduct firms firms whose products interact in the profit function specifically we focus on the impact of intrafirm product interactions on the level of equilibrium profits this impact may be decomposed in two different ways a a direct effect keeping the competitors actions fixed plus a strategic effect i e through the competitors actions or alternatively b a competitive advantage effect change in firmi only plus an imitation effect change in all other firms we derive conditions such that a the strategic effect more than outweighs the direct effect and conditions such that b the imitation effect more than outweighs the competitive advantage effect bertrand supertraps for example an increase in the degree of economies of scope would increase profits if prices were fixed or if the change were limited to firmi s cost function however if all firms increase the degree of economies of scope then all firms receive lower profits a variety of other applications is considered including learning curves core competencies demand synergies systems competition compatibility bundling network effects switching costs durable goods long term contracts

voluntary quality disclosure and market interaction marketers disclose quality information directly to potential consumers using a variety of communication channels this study investigates how competition may influence duopoly firms incentive to voluntarily reveal quality information we show that firms in competitive markets reveal less information than a monopoly firm in addition sequential disclosure leads to asymmetric equilibrium disclosure behavior the disclosure leader reveals unambiguously less information than in the simultaneous disclosure case whereas the follower ex ante reveals less more private information than that released by the leader or by the firms in the simultaneous case when the disclosure cost is sufficiently low high we also examine the equilibrium firm profits and social welfare we demonstrate that there may be a u shaped relationship between equilibrium monopoly profits or social welfare under both monopoly and duopoly and the disclosure cost moreover in comparison to the simultaneous disclosure case sequential disclosure can lead to increasingly softened competition improving both firm profitability and social welfare

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

upsetting national priorities the reagan administration s budgetary strategy we use simulations based on a multiequation model of federal budgetary outcomes to assess the reagan administrations impact on the federal budget during fiscal years 1982 86 reagan s aggregate budget priorities represent a significant departure from the priorities of prior postwar administrations the bulk of this shift in priorities had occurred by fiscal 1984 defense spending and uncontrollable domestic spending were higher and spending on domestic controllable programs lower under reagan than they would otherwise have been the distinctiveness of reagan s budgetary priorities can be attributed to his tax cuts and far from a strategy of starving the budget by reducing revenues to a failure to allow fiscal pressures to restrain spending the model projects that without tax cuts reagan s predecessors would have spent no less on defense than reagan cutting taxes increased the deficit by about 400 billion cumulatively during fiscal years 1982 86 and reduced expenditures by roughly 30 billion

when and how is the internet likely to decrease price competition conventional wisdom seems to claim that by lowering the cost of distribution and by making search easier for consumer the introduction of the internet is likely to intensify price competition this paper intends to challenge this view by asking when and how is the internet likely to decrease the level of price competition between firms to answer this question we develop an analytic model with the following characteristics on the demand side consumers need to gather information on two types of product attributes digital attributes which can be communicated on the web at very low cost and nondigital attributes for which physical inspection of the product is necessary consumers choose between two brands but are familiar with the nondigital attributes of only the brand purchased on the last purchase occasion on the supply side firms use traditional stores and the internet to inform consumers about their products attributes and to sell their products in this setup we show that the impact of the internet on competition will be radically different depending on the relative importance of parameters describing the relevant shopping and distribution context specifically we find that the introduction of the internet might lead to monopoly pricing when 1 the proportion of internet users is high enough 2 when nondigital attributes are relevant but not overwhelming 3 when consumers have a more favorable prior about the brand they currently own and 4 when the purchase situation can be characterized by destination shopping more surprising we also show that in such cases the use of the internet not only leads to higher prices but can also discourage consumers from engaging in search as such an important message of the paper is that under some conditions the internet might represent an opportunity for firms to leverage their brand loyalty and increase their profits the intuition behind our results is the following the internet allows consumers to evaluate digital attributes easily i e without visiting the stores however nondigital attributes can only be evaluated through physical presence as such for goods where both types of attributes are important the introduction of the net changes the effective cost of search for consumers without the internet the cost of search is the cost of visiting more than one store with the introduction of the net however nonsearching consumers do not have to undertake the shopping trip at all because they can order products on the net thus in the presence of the internet the cost of search is related to the cost of undertaking the entire shopping trip in the case of destination shopping i e when the fixed cost of undertaking the shopping trip is higher than the cost of visiting an additional store the presence of the internet creates higher effective search costs for consumers given this shift of paradigm in search costs due to the internet consumers may not take the risk of searching for products with better nondigital attributes but instead remain with the product they are familiar with this results in increased consumer loyalty which induces firms to increase their prices our results have important managerial implications first they provide guidelines for firms on when i e for which product categories they should consider expanding their distribution network to the internet in this respect an important additional insight of the paper is that the internet can lower price competition and lead to reduced consumer search even if it is more expensive than the traditional distribution channel this can easily be the case if distribution through the internet represents additional costs such as the costs associated with shipping and handling and return policies second the paper also provides guidelines on how to plan the firm s internet strategy interestingly the results suggest that with the general availability of the internet the role of stores might actually become more important while we do not explicitly model a dynamic market our findings together with klemperer s 1987 results suggest that stores might have a key role in consumer acquisition while the internet can help leverage the acquired customer base through demand fulfillment this might imply that for certain product categories firms should actually allocate additional resources to improve their in store environment when considering the internet as a complementary distribution channel

influences on executive and congressional budgetary priorities 1955 1981 a reduced form equation system is used to analyze the influence of economic political and institutional influences on the budgetary priorities of the executive branch and congress during fiscal 1955 81 three related issues are considered the extent to which political and macroeconomic factors affect priorities the degree of interdependence among the components of the federal budget and between spending and revenues and differences between the executive branch and congress with respect to these issues both types of interdependence are present within both executive branch and congressional budgeting although this interdependence is stronger within the executive branch the influence of economic conditions on budgetary outcomes is strong but varies considerably across spending categories there is no evidence of apolitical business cycle political variables exert a modest influence on the budgetary outcomes examined differences between democratic and republican budgetary policies as well as differences in the budgetary priorities of different presidential administrations are small by comparison with the differences between executive and congressional policies

scale and transfers in international emissions offset programs abstract voluntary emissions offset programs between developing and industrialized countries suffer from adverse selection because participants will self select into the program in contrast pure subsidies for mitigation lead to full participation and hence efficiency but require large financial transfers which make them unattractive to industrialized countries we present a simple model to demonstrate the impact of three policy options on the performance of offset programs 1 baseline scale increases 2 offset discounting and 3 setting stringent baselines with baseline scale increases entire political jurisdictions such as regions or nations are assigned a single aggregate baseline and must choose whether to participate as one entity we find that increasing scale both improves efficiency and reduces transfers from offset buyers to sellers offset discounting means paying less than the value of abatement and can be paired with trading ratios between offsets and allowances in a cap and trade system we show that discounting is inefficient but can make offsets more attractive to industrialized countries setting stringent baselines also involves a tradeoff between efficiency and transfers we finally show that pareto efficient policies that are individually rational for buyers and sellers entail some combination of discounting and or stringent baselines offset policies are never first best but can be efficiency improving especially with increased scale

consideration set formation with multiproduct firms the case of within firm and across firm evaluation costs we consider a theoretical setting in which firms carry multiple products and consumers incur evaluation costs not only across firms but also within firms consumers judiciously decide the number of firms to include in their consideration sets as well as how many products from those firms this decision depends on the relative trade offs of evaluating an additional product and whether it is from a firm already included in the consideration set or from an entirely new firm the composition of consumers consideration set affects how firms compete in prices and in the number of products to offer contrary to previous literature we find that firm differentiation can reduce firms product lines and within firm evaluation costs have either a positive or a negative effect on firms prices interestingly we show that within firm evaluation costs and across firm evaluation costs are different constructs the number of products firms offer in equilibrium can exceed the socially optimal level if within firm evalua

supplying information to facilitate price discrimination the authors examine the incentive of a seller to allow potential buyers to acquire private information about their tastes for the seller s product improved private information for buyers enables the seller to segment the market and charge higher prices to high value buyers however improved information can also provide rents to buyers in a variety of settings this tradeoff is optimally resolved at one of two extremes either buyers are supplied with the best available knowledge of their tastes or no information is supplied by the seller copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

research note on the profitability of firms in a differentiated industry in a model of vertical differentiation the principal concern of this paper is to identify sufficient conditions for producing a higher or lower quality good to be more profitable in terms of profits and profit margin our basic model considers a short run scenario where the firms quality levels are fixed and they engage in price competition here our results are three first we develop the notion of relative cost efficiency and show that its increasing or decreasing monotonicity in product quality implies that of firm profitability in equilibrium a firm s relative cost efficiency refers to its quality adjusted cost dis advantage relative to its immediate competitors for a given distribution of consumer tastes second selling a higher quality good is more profitable when absolute cost efficiency defined as the ratio between a firm s quality and unit cost is increasing in quality third we also establish a set of lower and upper bounds on each firm s profitability the basic model is then extended in two directions we examine unit cost functions that demonstrate monotone profitability even when both quality and price are endogenous variables we also show that the spirit of relative cost efficiency and its associated sufficient condition hold valid for a logconcave consumer distribution

when showrooming increases retailer profit abstractshowrooming the phenomenon of consumers visiting a brick and mortar b m store to learn about products but then buying online to obtain lower prices is attracting increased attention both in business practice and in academic literature it is considered a major threat to the b m retailers and determining how to fight it seems to be the only consideration however the manufacturer s need for retail informational services has always been one of the essential reasons for retailers to exist and is a means for retailers to achieve profitability the popular arguments about the threat of showrooming ignore the strategic role of the manufacturer in the distribution channel this article analytically shows that when the manufacturer s decisions are considered i e when the manufacturer retailer contract is endogenous consumers ability to engage in showrooming may lead to increased rather than decreased profitability for b m retailer s thus retail efforts to restrict showrooming behavior m

incentives and prices in an emissions trading scheme with updating abstract emissions trading schemes where allocations are based on updated baseline emissions give firms less incentive to reduce emissions for a given quota or allowance price nevertheless according to bohringer and lange on the design of optimal grandfathering schemes for emission allowances europ econ rev 49 2005 2041 2055 such allocation schemes are cost effective if the system is closed and allocation rules are identical across firms in this paper we show that the cost effective solution may be infeasible if marginal abatement costs grow too fast moreover if a price cap or banking borrowing is introduced the abatement profile is no longer the same as in the case with an auction or lump sum allocation in addition we show that with allocation based on updated emissions the quota price will always exceed marginal abatement costs possibly misguiding policy makers and investors about abatement costs numerical simulations indicate that the quota price most likely will be several times higher than marginal abatement costs unless a significant share of allowances is auctioned

design and marketing of financial products marketing costs are introduced into the security design environment outlined in allen and gale 1988 it is shown that splitting the firm s cash flow between products enhances their investor appeal and reduces marketing costs we also explain how the extremal product design in allen and gale is thereby avoided and how in simple cases debt equity or warrants can be optimal furthermore we illustrate in general terms how the optimal solution employs portfolios of option type products and we give an example of two optimal products that share profits in seven of eight states article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

mitigation incentives with climate finance and treaty options abstract future greenhouse gas ghg mitigation action of current non climate policy np countries is considered to take two alternative forms 1 climate finance payments received in return for future reductions in its ghg emissions below a defined baseline and 2 join a climate treaty whereby the required emissions reductions are formally binding it is assumed that baselines defining climate finance payments and required emissions reductions under a treaty depend positively on current emissions it is then shown that making such future options available reduces current ghg mitigation in np countries leading to higher emissions in the short run this effect is stronger when future climate finance payments are higher the required relative emissions reductions under a treaty are greater when commitments under a treaty are longer lasting and mitigation targets depend more on current emissions such short run increases in emissions can sometimes more than fully eliminate the effect of the subsequent policy when climate finance and treaties are both future alternatives more generous climate finance can make it harder and more expensive to induce the country to join a climate treaty

politics institutions and welfare spending in industrialized democracies 1960 82 electoral turnout as well as left and center governments increase welfare effort that the welfare efforts of governments led by particular types of parties show significant differences and vary notably with the strength of oppositional and junior coalitional parties and that relatively neocorporatist centralized and traditionalistic polities are high on welfare effort overall our findings suggest that contrary to many claims both partisan and nonpartisan facets of democratic politics and political institutions shape contemporary social welfare effort

product variety and endogenous pricing with evaluation costs one important decision firms must make is to select the product line characteristics and number of products to offer consumers this paper explores the effect of the interaction between consumer evaluation costs and pricing on the optimal product line length to offer consumers before deciding to buy a product among all products offered a consumer learns the product line length given the product line length a consumer decides whether to evaluate the products available and their prices this decision to evaluate depends on the expected consumer surplus after the evaluation being greater than the evaluation costs when the firm offers few products the firm may not attract many consumers because of lack of product fit and may be forced to offer low prices when the firm offers many products all consumers will find a great product fit that is the variance of consumer valuations per product chosen is lower this allows the firm to charge high prices to extract ex post consumer surplus resulting in lower ex ante expected consumer surplus which may lead consumers not to evaluate the products in the first place that is by offering fewer products a firm can commit not to extract all possible consumer surplus these two forces may then lead to the existence of an interior optimal number of products to offer the optimal number of products offered is decreasing in the evaluation costs

consumer deliberation and product line design this paper studies optimal product line design when consumers need to incur costly deliberation to uncover their valuations for quality to induce deliberation a firm must maintain quality dispersion and cut the price of the high end product so that consumers are motivated to deliberate in the hope that high end consumption fits their needs to prevent deliberation the firm may have to offer downgraded quality at a low price so that an impulsive purchase will not appear too wasteful whether the firm should induce deliberation depends on how much surplus it creates by aligning the supply of quality with heterogeneous demand for quality and how much surplus it captures during this process interestingly equilibrium firm profit consumer surplus and social welfare can all increase with the cost of deliberation we extend the model to accommodate consumers heterogeneous prior beliefs of their valuations for quality we also discuss how market research could benefit from taking into account the endogeneity of consumer deliberation

the impact of discounting emission credits on the competitiveness of different cdm host countries discounting the value of emission credits has been proposed as a possible approach for addressing some of the shortcomings of the clean development mechanism cdm it could be used to compensate for non additional cdm projects to increase the incentive for advanced developing countries to move from the cdm to own mitigation commitments and to improve the competitiveness of less developed countries as hosts for cdm projects we assess the impact of discounting on the distribution of cdm projects in host countries with a special focus on least developed countries ldcs cdm specific abatement cost curves are built for 4 regions china india other advanced asian countries and ldcs abatement costs are estimated using the information provided in the project documentation of 108 projects from 17 subtypes in 16 host countries abatement potentials are derived from the current cdm pipeline for each region for ldcs we additionally include an optimistic potential estimation by adding to the current pipeline the potential found by a world bank study for ldcs in sub saharan africa we then assess the effect of two emission credit discounting schemes on these abatement cost curves credit discounting is differentiated by host countries based on an index composed of per capita gdp and per capita emissions in the first scheme it only affects the most advanced cdm host countries in the second one it also affects china we find that discounting has an impact on the competitiveness of individual cdm host countries in the carbon market as it affects their abatement cost curves it could become an instrument for incentivising advanced developing countries to leave the cdm and engage in other farther reaching climate related commitments as a result of the resulting emission credit cost increases however even with discounting ldcs remain unimportant in terms of abatement potential if the financial technical and institutional barriers to cdm development in these countries are not overcome

competitive promotional strategies this article analyzes the equilibrium pricing strategies of brands engaged in a pricing game each brand has a monopoly market loyal consumers and competes with others in a common market called brand switchers in the case of a duopoly it is shown that the behavior of the brand switchers characterizes the equilibrium behavior of the duopolists this article focuses on two key comparative statics namely the depth of discounts away from a regular high price and the probability of giving a deal or the frequency of deals how these properties vary with the size of the loyal markets and the behavior of the brand switching population is discussed copyright 1988 by the university of chicago

exogenous learning seller induced learning and marketing of durable goods when learning of product characteristics takes some time a firm introducing a new durable faces the trade off between releasing early to an uninformed market and deferring release to a better informed market in a two period monopoly we examine the strategic interaction between exogenous learning el and seller induced learning sil and the firm s product release and pricing strategies the familiar direct effect of strong learning is to facilitate a higher price for informed customers we point out its indirect effect of inducing a higher period 1 price for uninformed customers by lowering their expected utility from learning these two effects underlie three major results first a strong learning intensity does not always imply deferred release surprisingly for medium unit costs the firm releases late early when learning intensity is weak strong second sil facilitates different product release strategies depending on the unit cost level potential sil investment facilitates early release for low or medium unit costs but may facilitate deferred release for high unit costs lastly when customers have heterogeneous prior valuation the high end customers may buy early at a lower price and the low end customers may buy later at a higher price contrary to the usual skim pricing with informed customers this paper was accepted by preyas desai marketing

emissions trading with offset markets and free quota allocations we study optimal climate policy for a policy bloc of countries facing a market where emissions offsets can be purchased from a non policy fringe of countries such as with the cdm policy bloc firms benefit from free quota allocations which are updated according to either firms past emissions or outputs we show that the resulting abatement and its allocation between policy bloc and fringe are both inefficient when all quotas are traded freely at a single price the policy bloc chooses to either not constrain the offset market leading to suboptimal policy bloc mitigation or ban offsets completely the former latter case occurs when free allocation of quotas is not very generous and the offset market is large small it is preferable for policy bloc countries governments to instead buy offsets directly from the fringe at a quota price below marginal damage cost of emissions while the policy bloc quota price will be above this cost with maximization of global welfare and a unified quota price this price is higher and offsets constrained in fewer cases but the solution still inefficient full efficiency then requires a higher quota price in the policy bloc than in the fringe

price matching guarantees as a direct signal of low prices if consumers believe that stores offering price matching guarantees pmgs charge low prices high search cost consumers will purchase from pmg stores this leads pmg stores demand to be less pric

pricing product diversity and search costs a bertrand chamberlin diamond model we study price competition in the presence of search costs and product differentiation the limit cases of the model are the bertrand paradox the diamond paradox and chamberlinian monopolistic competition market prices rise with search costs and decrease with the number of firms prices may initially fall with the degree of product differentiation because more diversity leads to more search and more competition equilibrium diversity rises with search costs while the optimum level falls so entry is excessive the market failure is most pronounced for low preference for variety and high search costs

partial repeat bidding in the name your own price channel this paper presents an initial examination of an emerging business model the name your own price nyop channel as popularized by priceline com focusing on how to optimally structure such market interactions i ask whether it is more profitable to restrict individuals to a single bid as is currently done by priceline or conversely to allow consumers to continue bidding if the previous offer was rejected i find that both market structures yield the same expected profit in practice a single bid policy may not be perfectly enforceable especially in the internet environment because a sophisticated user can circumvent such a policy by camouflaging one s identity or otherwise manipulating the bidding procedure thus priceline s single bid restriction is likely to result in partial repeat bidding the case in which some consumers are limited to a single bid while other sophisticated users may rebid i ask whether such surreptitious bidding is detrimental to the nyop firm and find that profits are lower than if such opportunistic behavior were absent surprisingly i find that the impact of the number of repeat bidders on profits is not monotonic thus if it is prohibitively costly or logistically infeasible for the nyop firm to eliminate surreptitious rebidding behavior the firm may in fact benefit from encouraging rather than discouraging users to rebid the direction that increases profits depends on the percentage of sophisticated bidders

strategic climate policy with offsets and incomplete abatement carbon taxes versus cap and trade abstract this paper provides a first analysis of a policy bloc of fossil fuel importers which implements an optimal climate policy faces a non policy fringe of other fuel importers and an exporter bloc and purchases offset from the fringe we compare a carbon tax and a cap and trade scheme for the policy bloc in either case accompanied by an efficient offset mechanism for reducing emissions in the fringe the policy bloc is shown to prefer a tax over a cap since only a tax reduces the fuel export price and by more when the policy bloc is larger offsets are also more favorable to the policy bloc under a tax than under a cap the optimal offset price under a carbon tax is below the tax rate while under a cap and free quota trading the offset price must equal the quota price the domestic carbon and offset prices are both higher under a tax than under a cap when the policy bloc is small when the policy bloc is larger the offset price can be higher under a cap fringe countries gain by mitigation in the policy bloc more under a carbon tax since the fuel import price is lower

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

search design and market structure the internet has made consumer search easier with consequences for prices industry structure and the kinds of products oered we explore these conse quences in a rich but tractable model that allows for strategic design choices a polarized market structure results where some rms choose designs aimed at broad based audiences while others target narrow niches such an industry structure can arise even when all rms and consumers are ex ante identical we analyze the eect of reduced search costs and nd results consistent with the reported prevalence of niche goods and the long tail and superstar phe nomena in particular the model suggests that long tail eects arise when there is a wide range of potential designs relative to vertical heterogeneity among rms

the congress and fiscal policy although the common belief is that the congress has paid little attention to fiscal policy the same kinds of political economic models which have been used to explain presidential budgetary policy may be used equally well to explain congressional budgetary behavior the congress fiscal policy appears to be systematically sensitive to both economic and political factors changes in the unemployment rate have a major impact on congressional budgetary policy as for political factors the president s lead is followed most closely on revenue proposals and not at all on the expenditure side the electoral cycle in particular the off year congressional election year is also important inducing larger deficits and smaller increases in revenues

u s defense spending and the soviet estimate there is a glaring and potentially important discontinuity surrounding discussions of u s defense expenditure policy making on the one hand a growing body of empirically based research questions whether the u s reacts in any significant fashion to the military expenditures of the soviet union on the other hand defense policy makers routinely justify defense increases as a response to similar increases by the soviet union the discontinuity is resolved in the context of a multistep model of the defense expenditure policy making process that incorporates a new estimate of soviet defense spending and mass public opinion once formulated the model provides answers to the following two questions 1 does the u s insofar as defense spending is concerned react to the military expenditures of the soviet union 2 if so what is the magnitude of the reaction the answers indicate that not only does the u s react to estimated soviet defense spending but that the reaction is directly responsible for a very substantial portion of the post 1978 increases in u s military expenditures

implications of reduced search cost and free riding in e commerce this paper examines a market where the provision of information service is costly but information service has the characteristics of a public good consumers on the other hand can use the information service to make an informed purchase decision and derive higher utility from consuming their ideal product however after receiving the information service from an information service provider consumers can easily free ride by purchasing at low price sellers who do not provide any information service the paper examines the competition where sellers compete by providing information service for horizontally differentiated products and where technology reduces consumers search cost it is found that in this market a seller needs to establish itself as an information service provider in order to make positive profits even when there is free riding a seller however cannot make positive profits by free riding all the time also with an increase in competition in the information service market sellers have reduced incentives to provide information service it is also found that in this market a decrease in search cost may increase or decrease social welfare

price dispersion and differentiation in online travel an empirical investigation previous research has examined whether price dispersion exists in theoretically highly efficient internet markets however much of the previous work has been focused on industries with low cost and undifferentiated products in this paper we examine the presence of price dispersion and product differentiation using data on the airline ticket offerings of online travel agents otas we find that different otas offer tickets with substantially different prices and characteristics when given the same customer request some of this variation appears to be due to product differentiation different otas specialize by systematically offering different trade offs between ticket price and ticket quality minimizing the number of connections matching requested departure and return time however even after accounting for differences in ticket quality ticket prices vary by as much as 18 across otas in addition otas return tickets that are strictly inferior to the ticket offered by another ota for the same request between 2 2 and 28 of the time overall this suggests the presence of both price dispersion and product differentiation in the online travel market

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

comparative advertising disclosing horizontal match information improved consumer information about horizontal aspects of products of similar quality leads to better consumer matching but also to higher prices so consumer surplus can go up or down while profits rise with enough quality asymmetry though the higher quality and hence larger firm s price falls with more information so both effects benefit consumers this occurs when comparative advertising is used against a large firm by a small one comparative advertising as it imparts more information therefore helps consumers although it also improves the profitability of the small firm overall welfare goes down because of the large loss to the attacked firm

price uncertainty and consumer search a structural model of consideration set formation we offer an econometric framework that models consumer s consideration set formation as an outcome of her costly information search behavior because frequently purchased products are characterized by frequent price promotions of varying depths of discounts a consumer faces significant uncertainty about the prices of the brands the consumers engage in a fixed sample search strategy that results in their discovering the posted prices of a subset of the available brands this subset is referred to as the consumer s consideration set the proposed model is estimated using the scanner data set for liquid detergents our key empirical results are i consumers zincur significant search costs to discover the posted prices of the brands ii whereas in store displays and feature ads do not influence consumers quality perceptions of the brands they significantly reduce search costs for observing the prices of the brands iii per capita income of consumer s household significantly increases her search costs and iv the consumers price sensitivity is seriously underestimated if we were to assume that consumers get to know all the posted prices at zero cost the proposed model is also estimated for the ketchup category to enable us to do cross category comparisons of consumers price search behavior

modeling u s budgetary and fiscal policy outcomes a disaggregated systemwide perspective this paper develops and estimates a model of u s federal budgetary outcomes that allows for considerable disaggregation across spending categories while providing through cross equation coefficient restrictions substantially more statistical power than traditional approaches we identify significant top down fiscal policy effects on budgetary allocations primarily within the defense budget budgetary responses to macroeconomic conditions are generally countercyclical although middle class entitlements appear to react procyclically to inflation political control of congress influences budgetary outcomes with democrats giving higher priority to domestic spending programs the relative rate of public sector inflation affects spending growth consistent with baumol s disease public opinion affects defense and low income entitlement spending defense spending has also been influenced by perceived soviet threat as well as the level of armed conflict there appear to be small election year effects although not of the sort predicted by political business cycle models with a few exceptions administration specific impacts are relatively small and not systematically related to the party of the president

the illusion of choice defense and welfare in advanced industrial democracies 1948 1978 research on the tendency of governments to trade off welfare spending for defense has generated diverse and often contradictory findings this study attempts to clarify the issue of trade offs by examining expenditure patterns since 1948 for the four major na to allies united states united kingdom federal republic of germany and france when viewed from the perspective of long term trends in shares of outlays trade offs are evident when short term changes in expenditure which are more germane to the potential for one spending category to benefit at the expense of the other are studied no pattern of trade off can be detected a three equation model is estimated to control for the variety of possible determining factors of public resource allocation in none of the four nations does a pattern of trade off emerge except in periods of wartime or postwar reconstruction these findings are consistent with the ability of governments to finance new spending through either increased taxes or larger budget deficits the growing disinclination to use these methods however suggests that the potential for trade offs has perhaps reappeared in the 1980s

on the effects of consumer search and firm entry in a multiproduct competitive market this paper studies a model in which consumers search among multiple competing firms for products that match their preferences at a reasonable price we focus on how easier search possibly due to the adoption of search facilitating technologies such as the internet influences equilibrium prices assortments firm profits and consumer welfare conventional wisdom suggests that easier search creates a competition intensifying effect that puts pressure on firms to lower their prices and reduce assortments however in our model we demonstrate that search also exhibits a market expansion effect that encourages firms to expand their assortment easier search means that each firm is searched by more consumers because of broader assortments consumers are more likely to find products that better match their ideal preferences improving the efficiency of the market in fact we demonstrate that the market expansion effect can even dominate the competition intensifying effect potentially leading to higher prices broader assortments more profits and expanded welfare

true monopolistic competition as a result of imperfect information the paper restates hart s 1985a 1985b definition of large group monopolistic competition distinguishes it from oligopolistic competition and raises the question of whether there are reasonable circumstances that give rise to true monopolistic competition as defined the purpose is to show that consumers imperfect information may create conditions that will turn an otherwise oligopolistic market into a truly monopolistically competitive one