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

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

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

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

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

trade policy in a super size me world abstract when a foreign monopolist sets a single market clearing price for its product the sign of the optimal tariff is determined by the extent of pass through also known as the terms of trade effect however when a foreign monopolist employs a second degree price discrimination mechanism in the domestic market the calculus of welfare maximization is very different while there are still terms of trade effects from the imposition of a tariff the existence of such effects are neither necessary nor sufficient to determine the sign of the optimal tariff instead the distribution of valuations within the population is the key determinant of the nature of policy intervention this result differs significantly from the uniform price case and is driven by the incentive compatibility constraint which places the distribution of types at the center of the analysis if there is a relatively large fraction of high valuation types in the population then domestic information rents may be increased by subsidizing imports thereby increasing the consumption of the low valuation types and moving the incentive constraint in favor of the high valuation types however if the share of high types in the population is relatively small then the increase in information rents will also be small but the fiscal implications of a subsidy will be large consequently the optimal policy will be to impose a trade tax

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

export industry policy and reputational comparative advantage abstract country of origin reputations are endogenized in this paper and it is shown that otherwise identical countries can be correctly perceived as differing in their percentage of high quality producers these self fulfilling reputations determine not only the average quality of a country s exports but also the type of products in which a country specializes hence the pattern of international trade can be determined by this reputational comparative advantage an inferior country of origin reputation leads to lower national welfare therefore several trade and industrial policies that can improve country of origin reputation are examined

price signaling and the strategic benefits of price rigidities we analyze trade between a perfectly informed price setting party seller and an imperfectly informed price taker buyer differently from most of the literature we focus on the case in which under full information it would be inefficient to trade goods of sufficiently poor quality we show that the unique equilibrium surviving d1 is characterized by market breakdown although trade would be mutually beneficial in some state of nature this occurs independently of the precision of the information available to the buyer the model thus implies that signaling through prices may exacerbate the effect of adverse selection rather than mitigate it under d1 the seller would always benefit from committing to prices that do not reveal her information we develop this intuition by analyzing the strategic advantages of price rigidities we show that price rigidities help restore trade and could even enhance effectiveness of prices as signals of quality

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

the boundaries of loss aversion abstract in this article the authors propose some psychological principles to describe the boundaries of loss aversion a key idea is that exchange goods that are given up as intended do not exhibit loss aversion for example the authors propose that money given up in purchases is not generally subject to loss aversion the results of several experiments provide preliminary support for the hypotheses the authors find that consistent with prospect theory loss aversion provides a complete account of risk aversion for risks with equal probability to win or lose the authors propose boundaries for this result and suggest further tests of the model

quantitative restrictions in the presence of cost based informational asymmetries this study introduces a cost based informational asymmetry into a two period model where a domestic incumbent firm s behavior in the first period affects the entry decision of a foreign firm in the second period the effects of import quota policy within this environment are examined and compared to the standard full information effects when quota quantities are set exogenously the standard effects of quota policy may be significantly altered depending on whether or not policy induces the domestic firm to signal cost structure for example higher quotas may discourage foreign entry because of the induced signaling effects of quota policy recognition that incomplete information is the rule rather than the exception when decisionmakers interact in an international setting has stimulated an emerging literature on the effects of trade policy in the presence of informational failures particularly germane to the present study are those papers that introduce an informational asymmetry into an international model of imperfect competition the majority of this literature examines the sensitivity of optimal strategic trade policy to information failures within a brander spencer 1985 model where the domestic and foreign firms compete for export sales to a third market and either the domestic or foreign government employs export subsidies collie and hviid 1993 qiu 1994 maggi 1995 brainard and martimort 1997 wright 1998 collie and hviid 1994 on the other hand allow for domestic consumption and consider optimal import policy in the presence of a foreign monopolist analysis that focuses on the positive effects of trade policy in the presence of informational failures is more limited one such example is a study by hartigan 1994 which considers the effects of antidumping duties to date however there has been no analysis of how and whether the introduction of an informational failure alters the effects of quantitative restrictions to trade the aim of the present study is to extend the existing literature by examining the effects of a quantitative restriction to trade in the presence of a cost based informational asymmetry within a standard two period entry model 2 during the initial time period a domestic firm supplies the home market and

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

a probabilistic choice model for market segmentation and elasticity structure marketing scholars commonly characterize market structure by studying the patterns of substitution implied by brand switching though the approach is useful it typically ignores the destabilizing

the response of worker effort to piece rates we measure the elasticity of worker effort with respect to changes in the piece rate using panel data collected from the payroll records of a british columbia tree planting firm our data contain information on daily worker productivity and the piece rate received over a five month period using a structural model to control for the endogeneity of the piece rate we estimate this elasticity to be approximately 2 14 we also calculate a nonstructural lower bound to this elasticity equal to 0 77 structural estimation also allows us to perform policy experiments and to compare firm profits under alternative compensation systems our results suggest that profits would increase by at least 17 percent were the firm to implement the optimal static contract as predicted by principal agent theory this increase in profits would be due to capturing worker rents after the revelation of private information over ability yet only a negligible proportion of these rents could be captured while inducing workers to reveal ability truthfully suggesting that dynamic considerations were important in determining the firm s actual choice of contract

the behavioralist visits the factory increasing productivity using simple framing manipulations recent discoveries in behavioral economics have led to important new insights concerning what can happen in markets such gains in knowledge have come primarily via laboratory experiments a missing piece of the puzzle in many cases is parallel evidence drawn from naturally occurring field counterparts we provide a small movement in this direction by taking advantage of a unique opportunity to work with a chinese high tech manufacturing facility our study revolves around using insights gained from one of the most influential lines of behavioral research framing manipulations in an attempt to increase worker productivity in the facility using a natural field experiment we report several insights for example conditional incentives framed as both losses and gains increase productivity for both individuals and teams in addition teams more acutely respond to bonuses posed as losses than as comparable bonuses posed as gains the magnitude of this framing effect is roughly 1 that is total team productivity is enhanced by 1 purely due to the framing manipulation importantly we find that neither the framing nor the incentive effect lose their significance over time rather the effects are observed over the entire sample period moreover we learn that repeated interaction with workers and conditionality of the bonus contract are substitutes for sustenance of incentive effects in the long run this paper was accepted by gerard p cachon decision analysis

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

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

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

a simple stochastic adjustment process in this note we present a stochastic adjustment process which has nice optimality and probablistic dynamic stability properties for a large class of economic environments in addition the process relies on a strikingly simple information exchange procedure at each iteration it can also be termed as strongly locally individually incentive compatible 2 in that each consumer agent has no incentive to lie about his preferences provided he is concerned only with maximization of one step expected utility gain at each iteration the obvious source of inspiration for this process is the stochastic decentralized resource allocation mechanism the b process by hurwicz radner and reiter 2 indeed it should be regarded as the latter s informationally simplified descendent for general background information on resource allocation mechanisms and motivations for designing such mechanisms see hurwicz radner and reiter 2 and hahn 1 in order to simplify the exposition we present the process only for the case of pure exchange economies with possible consumption externalities for more general cases see mitsui 4 mitsui 4 also constructs a core convergent version of the process

incentives versus reciprocity insights from a field experiment abstractthe authors conduct a field experiment in which they vary the sales force compensation scheme at an asian enterprise that sells consumer durable goods with variation generated by the experimental treatments the authors model sales force performance to identify the effectiveness of various forms of conditional and unconditional compensation they account for salesperson heterogeneity using a hierarchical bayesian framework to estimate the model they find conditional compensation in the form of quota bonus incentives to improve performance however such compensation may lead to lower future performance the authors find little difference in effectiveness between a quota bonus plan and punitive bonus plans framed as a penalty for not achieving quota they find that unconditional compensation in the form of reciprocity is effective at improving sales force performance only when it is given as a delayed reward however the effectiveness of this plan decreases with repeated exposure the authors

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

infant industry protection reconsidered the case of informational barriers to entry in industries with imperfect consumer information the lack of a reputation puts latecomers at a competitive disadvantage vis a vis established firms we consider whether the existence of such informational barriers to entry provides a valid reason for temporarily protecting infant producers of experience goods and services our model incorporates both moral hazard in an individual firm s choice of quality and adverse selection among potential entrants into the industry we find that infant industry protection often exacerbates the welfare loss associated with these market imperfections

incentives in the generalized mdp procedure for the provision of public goods malinvaud 1970 1971 and dreze and de la vallee poussin 1971 have independently proposed a well defined planning procedure for an economy with public goods this procedure which has come to be called the mdp procedure has several desirable properties given correct revelation of each participant s preference if each individual truthfully announces his marginal rates of substitution between public goods and a private good every trajectory of the process lies entirely in the space of feasible allocations and monotonically converges to an individually rational pareto optimum moreover as is shown in champsaur 1976 given correct revelation this procedure is neutral to any kind of distributional value judgements in the sense that every individually rational pareto optimum can be attained as a limit of some trajectory defined by the process in connection with the problem of whether the participants in the mdp procedure reveal their correct preferences little literature has so far been written there are now results available which have been derived by dreze and de la vallee poussin 1971 and roberts 1979 that i at every iterative stage telling the truth is a maximin strategy for each individual and at an equilibrium of the process is a nash equilibrium strategy and that ii correct revelation produces a dominant strategy equilibrium at every instant if a society consists of just two individuals nevertheless maximin strategies are played only because of the rather restricted assumption on each participant s behaviour while confinement to the case of a two person society is too severe to give meaningful implications for reality in either case one might be fully justified in believing that truthful revelation will hardly appear in the mdp procedure fortunately almost all the properties of the mdp procedure can be preserved under circumstances where the agents misrepresent their marginal rates of substitution henry 1979 and roberts 1979 have shown that as long as each individual chooses a nash type strategy at each instant the process maintains the same properties as in the case of correct revelation except that the adjustment speeds of public goods are significantly reduced this result implies the mdp procedure is implementable under game theoretic circumstances but at the same time it exposes serious problems in several respects in the first place since the nash equilibrium strategy of each agent is not necessarily the truthful announcement the virtue of honesty is no longer of positive significance in the mdp procedure secondly for the validity of its solution concept if each agent plays a nash equilibrium strategy at all he must have complete knowledge relating to the possible strategies chosen by all the other agents clearly this supposition

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

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

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

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

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

an empirical analysis of sales force compensation plans among the array of direct and indirect methods of motivation and control available to the sales manager is sales force compensation in this article the authors summarize theoretical predictions from the economics marketing finance and accounting literatures on the structure of optimal sales force compensation plans guided by these insights they then construct empirical models to quantify the effect of various sales force factors firm and product factors and market factors on compensation using data from 286 firms in 39 industries the authors examine determinants of incentive components and total pay and the optimal horizon for incentive pay copyright 1992 by university of chicago press

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

saving dolphins boycotts trade sanctions and unobservable technology consumers boycott some goods because they do not approve the ways they are manufactured i examine the efficacy of boycotts and the role of trade policy in influencing the foreign exporter s technology choice even when its technology choice is unobservable boycott threats can prompt the foreign firm to adopt the technology consumers prefer import policy can augment this effect but when boycotts can have a substantial impact on demand a use of ad valorem tariffs yields the unintended result specific tariffs and quotas are free of this defect but specific tariffs are more effective than quotas in addressing consumers concern

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

a characterization of strongly locally incentive compatible planning procedures with public goods this paper provides a systematic study of planning procedures with public goods in which local truthful revelation of preferences is a dominant strategy these procedures are said to be strongly locally individually incentive compatible sliic we first characterize the time invariant continuously differentiable planning procedures that are sliic then we study properties such as balancedness cheatproofness with respect to coalitions neutrality individual rationality and we point out the connection with the mdp procedures

investigating consumer purchase behavior in related technology product categories we present a framework of durable goods purchasing behavior in related technology product categories that incorporates the following aspects unique to technology product purchases first it accounts for consumers anticipation of declining prices or increasing quality over time second the durable nature of technology products implies that even if two categories are related as complements consumers may stagger their purchases over several periods third the forward looking consumer decision process as well as the durable nature of technology products implies that a consumer s purchase in one category will depend on the anticipated price and quality trajectories of all categories as a potential aid to future researchers we also lay out the data requirements for empirically estimating the parameters of our model and the consequences of not having various elements of these data on our ability to estimate the parameters the data available for our empirical analysis are household level information on category level first time adoption decisions in three categories personal computers digital cameras and printers our results reveal a strong complementary relationship between the three categories policy simulations based on a temporary price decrease in any one category provide interesting insights into how consumers would modify their adoption behavior over time and also across categories as a consequence of the price decrease

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

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

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

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

optimal export policy in the presence of informational barriers to entry and imperfect competition abstract this paper examines government intervention to help exporters overcome informational barriers to entry into foreign markets foreign consumers know the quality of a local good but not that of the imported substitute an exporter who chooses high quality needs to signal this choice to foreign consumers via a high introductory price export policy affects both the signaling distortion and competition between exporter and incumbent the signaling distortion may call for an export subsidy competition for an export tax which policy is adopted in equilibrium depends on industry characteristics over time the export tax tends to rise as the signaling distortion disappears

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

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

piece rates fixed wages and incentive effects statistical evidence from payroll records we develop and estimate an agency model of worker behavior under piece rates and fixed wages the model implies optimal decision rules for the firm s choice of a compensation system as a function of working conditions our model also implies an upper and lower bound to the incentive effect the productivity gain realized by paying workers piece rates rather than fixed wages that can be estimated using regression methods using daily productivity data collected from the payroll records of a british columbia tree planting firm we estimate these bounds to be an 8 8 and a 60 4 percent increase in productivity structural estimation which accounts for the firm s optimal choice of a compensation system suggests that incentives caused a 22 6 percent increase in productivity however only part of this increase represents valuable output because workers respond to incentives in part by reducing quality

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

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

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

strategic behavior in decentralized planning procedures noncooperative strategic behaviors are studied in the malinvaud dreze de la vallee poussin decentralized planning procedure we depart from the assumption of myopic behavior by assuming that every agent takes into account the effect over a given period of time 0 t of his answers to the center one shows that for t large every nash equilibrium of the ensuing game in intertemporal strategies approaches i a competitive equilibrium in an exchange economy and ii a lindahl equilibrium in an economy with public goods thus the center loses any significant influence on the income distribution

trade policy with risky investment in quality consider a new export market in which firms can invest in quality but may fail to achieve quality quality of the export good then varies across firms having endogenous whether to invest and exogenous determined by nature aspects previous works suggest that the market outcome and socially optimal policy depend on whether quality is exogenous or endogenous it is shown that the previous differences are driven by the demand and cost parameterizations not by the endogeneity of quality previous works also suggest subsidies to raise welfare subsidies are found to lower welfare while a tax may raise welfare

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

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

designing multiperson tournaments with asymmetric contestants an experimental study is the right amount of effort exerted in multiperson tournaments where contestants have two different levels of initial endowments termed favorites and underdogs we develop theoretical predictions for the level of effort and the effect of varying the prize structure we test these predictions for three person tournaments using an economic experiment in a social environment where contest outcomes are publicly announced we find that both favorites and underdogs overexert effort relative to the theoretical point predictions moreover in the treatment with two favorites and one underdog favorites increase their effort when the number of prizes is increased from one to two contrary to the theory prediction we show that a generalized model that allows for psychological losses from losing for favorites and psychological gains from winning for underdogs because of social comparisons tracks the experimental results better than the standard theoretical model this paper was accepted by peter wakker decision analysis

structuring a multiproduct sales quota bonus plan for a heterogeneous sales force a practical model based approach this paper presents an agency theoretic model based approach that assists sales managers in determining the profit maximizing structure of a common multiproduct sales quota bonus plan for a geographically specialized heterogeneous sales force operating in a repetitive buying environment this approach involves estimating each salesperson s utility function for income and effort and using these models to predict individual sales achievements and the associated aggregate profit for the firm under a specified plan the utility function estimation is based on the salesperson s own preference rank ordering of alternative sales quota bonus plans once these functions have been estimated they are incorporated in a mathematical programming model that the sales manager can use to determine the best plan the authors demonstrate the approach in the context of a case involving the design of a two product sales quota bonus plan for a set of salespeople at a pharmaceutical products firm

anonymous market and group ties in international trade abstract history provides many examples of cohesive groups dispersed over several countries who exploit the ties between their members to gain entry into foreign markets the phenomenon is well established empirically and noteworthy because it suggests the importance of informational barriers in international transactions we present a simple model where output is produced through a joint venture and agents have complete information domestically but are unable to judge the quality of their match abroad a minority of individuals otherwise identical to all others can exploit complete information in international matches between group members if they so choose group ties increase aggregate trade and income but hurt the anonymous market because they deprive it disproportionately of the group s more productive members

dynamic procedures and incentives in public good economies in this paper we consider economies involving one public good one private good and convex technology and propose an informationally decentralized dynamic nontatonnement procedure that converges in general from the initial endowments to an allocation in the core of the economy we then consider a general class of procedures and show that there exists none in the class that is locally incentive compatible and individually rational these results show that there exists a trade off between the requirements of local incentive compatibility and equitable cost sharing

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

binary payment schemes moral hazard and loss aversion we modify the principal agent model with moral hazard by assuming that the agent is expectation based loss averse according to k o szegi and rabin 2006 2007 the optimal contract is a binary payment scheme even for a rich performance measure where standard preferences predict a fully contingent contract the logic is that due to the stochastic reference point increasing the number of different wages reduces the agent s expected utility without providing strong additional incentives moreover for diminutive occurrence probabilities for all signals the agent is rewarded with the fixed bonus if his performance exceeds a certain threshold

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

reputational comparative advantage and multinational enterprise 1 introduction when cultivating a new export market or attempting to expand its share of an existing market an exporter is likely to find that it has been preceded by its reputation minus a readily identifiable brand name quality reputation may solely reflect the country of origin for example when consumers are presented with a large amount of complex product information they may use the country of origin as a heuristic in forming product impressions without considering other product attributes 1 in this article i show that this heuristic decision making process can affect a firm s quality decision and can therefore become self fulfilling hence any bias that consumers have may be well founded however it is only correct because firms respond rationally to it colombia s garment industry provides an interesting example of a self fulfilling unfavorable quality reputation in international trade as described by morawetz 1981 a single colombian garment firm took a contract for 50 000 men s suits that was beyond its capability the poor quality result so tarnished the american importer s name that other high quality importers become wary of colombian sewn garments with the payoff to high quality production reduced colombian garment firms then concentrated on low quality markets and the newly found unfavorable reputation was justified in the model constructed here consumers see only a noisy signal of the product s quality at the time of purchase therefore their posterior beliefs are based on this noisy signal and the country of origin reputations as will be made clear higher quality firms benefit more from an increase in their country s reputation so that a better reputation generates an increase in the percentage of high quality firms in this way the reputation becomes self fulfilling and ex ante identical countries can be correctly perceived as differing in their percentage of high quality producers i next introduce an economy with two sectors one sector produces more complex goods where high quality is not easily verified and is more essential to the product s performance these may be technology intensive products or they may consist of the design and marketing of the goods produced in the other sector in particular high quality production costs and the consumer s value for high quality goods is greater in this sector i show that this sector becomes more profitable as the country of origin reputation increases hence if one country s equilibrium reputation is low and the other country s equilibrium reputation is high then the pattern of specialization and international trade can be determined solely by reputational comparative advantage 2 finally i show that reputational comparative advantage can overshadow a small technological comparative disadvantage in determining the pattern of international trade given this pattern of trade and specialization based on reputational comparative advantage a high reputation firm may expend resources to establish a multinational enterprise mne in the low reputation country for example many mne products require the differing specializations of both the high and low reputation countries although differing in motivation this result accords well with more traditional models of vertical mne 3 however this impetus for mne as well as its more traditional counterparts does not explain why the mne would choose foreign direct investment fdi over a less costly licensing arrangement 4 the quality uncertainty in this model along with the difference in equilibrium reputations allows us to address this question in particular appropriable reputational rents are generated by fdi when the high reputation parent firm procures and internalizes production with a low reputation host firm this fdi breaks the low reputation equilibrium of the host firm and generates reputational rents

brand extension as informational leverage the marketing literature refers to the concept of brand capital and provides empirical evidence that firms with a large stock of well established brands have an advantage in introducing new products this paper develops a theory of brand extension as a mechanism for informational leverage in which a firm leverages off a good s reputation in one market to alleviate the problem of informational asymmetry encountered in other markets it is shown that brand extension helps a multi product monopolist introduce a new experience good with less price distortion thus the paper provides a theoretical foundation for the concept of brand capital

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

theory and practice of decentralized planning procedures the paper surveys the theory of decentralized planning procedures dealing with price guided quantity guided and mixed procedures informational and incentive properties of the various procedures are dealt with as is the problem of public goods the practice of planning in the u s s r hungary and india is also discussed copyright 1990 by blackwell publishers ltd

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

rationalizing agricultural export subsidies export subsidies are an important form of agricultural policy especially for large traders such as the united states and the european community a number of small countries also use export subsidies in effect e g saudi arabian wheat or canadian dairy products in that the domestic price is set well above world levels and surplus production is dumped onto the world market a number of recent contributions to trade theory have argued that export subsidies can be welfare enhancing for the subsidizing country and by implication that the policy choice is consistent with the hypothesis that a benevolent government is pursuing pareto efficiency in the present paper we examine these arguments and present an alternative explanation of export subsidies utilizing the concept of efficient redistribution becker gardner 1983 in standard trade models arguments in favor of global export subsidies arise from failure to exploit market power in another good itoh and kiyono feenstra itoh and kiyono use a threegood model to show that subsidies on marginal goods defined as goods not exported at all or exported in small quantities can increase welfare in the subsidizing country a subsidy on marginal goods causes their production to increase and the supply of nonmarginal goods to decrease thereby raising the price of the nonmarginal goods and increasing the exporter s terms of trade feenstra also employs a threegood model and demonstrates that it is possible for the pattern of substitutability and complementarity across goods to allow subsidies to increase welfare the necessary condition is that the subsidized export be a stronger substitute for another exported good or a stronger complement for an imported good in the subsidizing country than abroad the export subsidy increases welfare by improving the terms of trade in the other imported or exported good the distortion in feenstra s model is the failure to exploit market power in the second or third market as an alternative to global export subsidies abbott paarlberg and sharples aps have examined targeted export subsidies and found that in some circumstances they can be welfare improving dutton later showed the aps result arises because they first constrain the export tax to the rest of the world to be zero so that it becomes theoretically possible for the best export tax to the targeted country to be negative the aps result hinges on differences in import demand elasticities and the exporting country s use of market power in order to price discrim

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

price signals quality the case of perfectly inelastic demand abstract this paper considers the pricing decision by a seller who has private information about quality demand is perfectly inelastic rectangular for example there may be a single buyer who wants exactly one unit and whose valuation is known by the seller it is noted that contrary to widespread belief separating equilibria do exist in this model allowing some trade of high quality products even when the average quality is low moreover by slightly perturbing demand we can use standard equilibrium refinements to uniquely select the best separating equilibrium outcome since the chosen outcome has a very simple structure regardless of the number of quality levels this model could be a useful workhorse in applications

salesforce compensation theory and managerial implications this paper discusses recent advances in the study of salesforce motivation and compensation special emphasis is given to quantitative approaches from the economics finance and marketing literatures the paper summarizes the findings in this analytical work in the context of some examples of compensation practice in order to illustrate the usefulness of the paradigm for the evaluation and setting of compensation systems we consider some major issues in setting compensation such as the firm s own objective the salesperson s objective and the nature of the sales response function variations in these factors imply significant variation in optimal compensation policy where optimal takes into account the components in the plan the parameter levels of the components and whether or not a menu of such plans should be made available to the salesforce by highlighting the results in the literature in light of some relevant compensation examples we show the applicability of theory to the practical concerns of salesforce management we close with a summary of these insights and directions for future research in the area

incentive compatibility without compensation abstract standard public good mechanisms rely on a transferable medium of compensation to overcome incentive compatibility constraints groves laffont if no such medium exists and information is incomplete the available rules with satisfactory welfare and incentice compatibility properties require a unidimensional set of alternatives we define a dynamic procedure for two dimensional economies that is pareto optimal and individually rational with incentives as those of rules exploiting compensatory transfers

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

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

offshoring with endogenous ngo activism the process of globalization is characterized by an impressive growth of global value chains as well as the proliferation of non governmental organizations ngos interacting with multinational firms this paper presents a model of offshoring and ngo firm interactions in which offshoring to a low regulation country allows a monopolist to implement a dirty technology undesired by consumers consumers can reduce the incentive for dirty production by financing an ngo monitoring the firm ngo emergence and offshoring can arise as joint and interacting outcomes for a range of trade costs ngo emergence allows firms to capture gains from globalization which would otherwise be unattainable somewhat paradoxically ngo emergence can be at the expense of consumers possibly leading to welfare losses through offshoring

tariff policy and entry with cost based informational asymmetries i introduction how does the presence of incomplete information alter the usual effects of trade policy recognition that incomplete information characterizes most decision making processes that take place within an international setting has stimulated an emerging body of literature which addresses this question particularly germane to the present study are those papers which introduce an informational asymmetry into an international model of imperfect competition the majority of this literature examines the sensitivity of optimal strategic trade policies to information failures within a brander spencer 1985 model where the domestic and foreign firm compete for export sales to a third market and either the domestic or foreign government employs export subsidies examples include works by brainard and martimort 1997 collie and hviid 1993 maggi 1995 and qiu 1994 another study collie and hviid 1994 allows for domestic consumption and considers optimal import tariff policy in the presence of a foreign monopolist in general optimal trade policy in the presence of informational failures is found to differ from that under complete information the emphasis of the present study is not on the conduct of optimal trade policy but rather on how the introduction of an informational asymmetry alters the realized impact of trade policy on quantities and welfare 1 specifically we examine the effects of import tariff policy within a standard two period model of entry where the costs of the domestic firm are proprietary information the incumbent domestic firm recognizes the threat of a potential foreign rival entering exporting to the domestic market where the latter is uninformed of the cost structure of the domestic firm as is well known from the industrial organization literature the incumbent domestic firm may have an incentive to change its time period one behavior so as to signal information on costs to the foreign firm in an effort to deter entry see milgrom and roberts 1982 in specifying the degree of knowledge possessed by domestic policymakers we adopt the premise that informational deficiencies on the part of policymakers are likely to be quite acute in trade policy formation indeed as brander 1995 notes it is reasonable to suppose that governments are less informed on market conditions and firm characteristics than firms themselves in contrast to previous studies however we also assume that policymakers either cannot acquire information or if they are able to cannot respond by altering policy here the formation of trade policy does not reflect or incorporate full information and thus cannot provide signals to the other uninformed party the foreign firm moreover because policymakers cannot alter policy the foreign firm perceives the tariff rate as credibly fixed the inability to incorporate information into trade policy is especially relevant for situations where policymakers are subject to previously negotiated trade agreements here even should uninformed policymakers subsequently acquire information on domestic cost structure they will be unable to respond our emphasis on the realized effects of tariff policy reflects this information structure to conduct optimal policy government must hold complete information on markets and firm characteristics at the time policy is set as in collie and hviid 1993 1994 or be able to acquire it through signaling or a screening mechanism as in qiu 1994 and brainard and martimort 1997 2 when policymakers lack the ability to acquire or respond to such information optimal policy is not a consideration what is of interest to policymakers in this situation is the response of domestic output and imports to a given tariff rate at the outset of the game then there is a tariff rate set previously by domestic policymakers who were uninformed of domestic costs since the foreign firm cannot infer domestic cost structure by merely observing the tariff rate set by uninformed policymakers any signaling that takes place is on the part of the domestic firm

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

social loss aversion and optimal contest design when managers are designing a contest to motivate effort by salespeople service employees franchisees or product development teams a key question is what should the optimal proportion of winne

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

export subsidies and oligopoly with switching costs abstract i examine export policy using a two period model of oligopolistic competition with switching costs a switching costs model captures the idea that market share in one period affects profits and welfare in future periods if consumers are impatient firms and governments are patient and switching costs are significant then governments subsidize first period exports and tax second period exports otherwise governments tax exports in both periods although governments may subsidize first period exports each country is made worse off when both countries subsidize in addition firms dump p mc under conditions similar to those required for export subsidies

compensation plans for single and multi product salesforces an application of the holmstrom milgrom model the agency theory approach to understanding salesforce compensation plans is modified to incorporate the intratemporal nature of the salesperson s effort rate decision i e the decision about the effort rate at any given point in time potentially depends upon the sales performance up to that point in time in the accounting period under the assumptions considered in this paper holmstrom and milgrom 1987 have shown that the optimal compensation plan is linear in total sales over the accounting period the comparative statics results obtained here corroborate most of the corresponding results in the salesforce compensation literature moreover we derive many additional results not available in the literature it is demonstrated that the commission income as a fraction of total compensation goes up with an increase in the effectiveness of the sales effort or an increase in base sales on the other hand the salary component of the total compensation goes up with increases in uncertainty absolute risk