understanding dynamic mean variance asset allocation abstract we provide a new portfolio decomposition formula that sheds light on the economics of portfolio choice for investors following the mean variance mv criterion we show that the number of components of a dynamic portfolio strategy can be reduced to two the first is preference free and hedges the risk of a discount bond maturing at the investor s horizon while the second hedges the time variation in pseudo relative risk tolerance both components entail strong horizon effects in the dynamic asset allocation as a result of time varying risk tolerance and investment opportunity sets we also provide closed form solutions for the optimal portfolio strategy in the presence of market return predictability the model parameters are estimated over the period 1963 to 2012 for the u s market we show that i intertemporal hedging can be very large ii the mv criterion hugely understates the true extent of risk aversion for high values of the risk aversion parameter and the more so the shorter the investment horizon and iii the efficient frontiers seem problematic for investment horizons shorter than one year but satisfactory for large horizons overall adopting the mv model leads to acceptable results for medium and long term investors endowed with medium or high risk tolerance but to very problematic ones otherwise

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 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

standard risk aversion this paper introduces the concept of standard risk aversion a von neumann morgenstern utility function has standard risk aversion if any risk makes a small reduction in wealth more painful in the sense of an increased reduction in expected utility also makes any undesirable independent risk more painful it is shown that given monotonicity and concavity the combination of decreasing absolute risk aversion and decreasing absolute prudence is necessary and sufficient for standard risk aversion standard risk aversion is shown to imply not only pratt and zeckhauser s proper risk aversion individually undesirable independent risks always being jointly undesirable but also that being forced to face an undesirable risk reduces the optimal investment in a risky security with and independent return similar results are established for the effect of broad class of increases in one risk on the desirability of or optimal investment in a second independent risk

market performance with multiproduct firms we revisit the fundamental issue of market provision of variety associated with chamberlin spence and dixit stiglitz when firms sell multiple products both products and firms are horizontally differentiated we propose a general nested demand framework where consumers first decide upon a firm then which variant to buy and how much the nested ces is a special case we use it to determine the market s biases when firms compete in product ranges and prices the market system attracts too many firms with too few products per firm firms restrain product ranges to relax price competition but this exacerbates over entry

optimal insurance design with random initial wealth abstract an optimal insurance policy is designed when the policyholder faces both insurable and uninsurable risks under a realistic behavioral assumption it may display a disappearing deductible if the uninsurable loss becomes riskier according to any degree of stochastic dominance as the insurable loss increases

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

optimal insurance in incomplete markets this paper examines the theory of optimal insurance purchasing in the presence of uninsurable background risk existing theorems concerning the optimal level of insurance and the optimal form of an insurance contract are shown to hold only under restricted market and risk assumptions in particular conditions sufficient for the optimality of full coverage or sufficient for the optimality of deductible policies depend on the correlation between insurable and uninsurable risks these results may provide a partial explanation why existing theory is often contradicted by observable behavior

on strategic community development this paper examines strategic behavior of developers who through offering different congested public good packages and revenue fiscal schemes compete for residents who are differentiated by income there is an endogenous determination of numbers and sizes of communities developers have an incentive to strongly differentiate their public good offerings in terms of pricing strategies developers exhibit sharply contrasting behaviors in low income communities housing consumption is subsidized once lots are priced in high income communities housing consumption is generally taxed

gift giving and the evolution of cooperation gift giving is a practice common to many societies in an evolutionary model the social custom of giving gifts at the beginning of a relationship can lead to trust and cooperation the evolutionary approach makes predictions about the character of the goods that can be used as gifts for example gift goods may have little use value even at low levels of consumption although the gifts themselves are useless the institution is not

on expected utility for financial insurance portfolios with stochastic dependencies abstract the effect of background risks as human capital market risks and catastrophic events has been considered in the literature in different contexts in this note we consider financial insurance portfolios with insurable risks and one background risk uninsurable financial asset such that the random losses and the background risk depend on environmental parameters we study how dependencies between the risks influence the expected utility of the portfolio s wealth distribution under risk aversion when the environmental parameters are random stochastic bounds for the expected wealth are given from modeling the dependence between the parameters by different notions similar results are given for multivariate portfolios with n groups and multivariate risk aversion besides an expected utility comparison result for the minimum and the total portfolio s wealth

bidimensional vertical differentiation in markets where product quality is important more than one characteristic is usually necessary for producers to define product quality standard theory maintains that i in a duopoly there will be a quality leader no matter whether the product can incorporate one or two vertical attributes ii differentiation pertains only to one attribute by contrast in our set up there are also equilibria where the quality leader is better in two attributes and others where there is cross leadership namely a situation where each firm designs a product to dominate the other in one characteristic applications to minimum quality standards and tax subsidy on quality products are sketched showing spill over effects from one to the other quality dimension

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

optimal risk sharing with background risk this paper examines qualitative properties of efficient insurance contracts in the presence of background risk in order to get results for all strictly risk averse expected utility maximizers the concept of stochastic increasingness is used different assumptions on the stochastic dependence between the insurable and uninsurable risk lead to different qualitative properties of the efficient contracts the new results obtained under hypotheses of dependent risks are compared to classical results in the absence of background risk or to the case of independent risks the theory is further generalized to nonexpected utility maximizers

multiplicative background risk although there has been much attention in recent years on the effects of additive background risks the same is not true for its multiplicative counterpart we consider random wealth of the multiplicative form xy where x and y are statistically independent random variables we assume that x is endogenous to the economic agent but that y is an exogenous and nontradable background risk that represents a type of market incompleteness our main focus is on how the presence of the multiplicative background risk y affects risk taking behavior for decisions on the choice of x we extend the results of gollier and pratt 1996 to characterize conditions on preferences that lead to more cautious behavior

a gift is not always a gift heterogeneity and long term effects in a gift exchange experiment we study gift exchange in a field experiment where a random subsample of participants in the swiss labour force survey received vouchers to be used in adult training actual voucher redemption can be traced giving us the unique opportunity to study whether gift exchange in the form of participation in future rounds of the survey depends on the perceived usefulness of the gift the group of voucher recipients as a whole has significantly higher response rates there is considerable heterogeneity however our results point to a long lasting gift exchange relationship only for the subgroup that redeemed their vouchers

defensive marketing strategies this paper analyzes how a firm should adjust its marketing expenditures and its price to defend its position in an existing market from attack by a competitive new product our focus is to provide usable managerial recommendations on the strategy of response in particular we show that if products can be represented by their position in a multiattribute space consumers are heterogeneous and maximize utility and awareness advertising and distribution can be summarized by response functions then for the profit maximizing firm it is optimal to decrease awareness advertising it is optimal to decrease the distribution budget unless the new product can be kept out of the market a price increase may be optimal and even under the optimal strategy profits decrease as a result of the competitive new product furthermore if the consumer tastes are uniformly distributed across the spectrum a price decrease increases defensive profits it is optimal at the margin to improve product quality in the direction of the defending product s strength and it is optimal at the margin to reposition by advertising in the same direction in addition we provide practical procedures to estimate 1 the distribution of consumer tastes and 2 the position of the new product in perceptual space from sales data and knowledge of the percent of consumers who are aware of the new product and find it available competitive diagnostics such as the angle of attack are introduced to help the defending manager this article was originally published in marketing science volume 2 issue 4 pages 319 360 in 1983

the interdependence of individual portfolio decisions and the demand for insurance we analyze the individual s demand for insurance as a special case of general portfolio hedging activity the demand for insurance contracts is determined simultaneously with the demands for other assets in the portfolio we demonstrate that when the payoffs of the policy are correlated with the payoffs to the individual s other assets the demand for insurance contracts is generally not a separable portfolio decision we argue that this separability condition is not generally met because of significant interdependence of claims across different insurance policies furthermore our generalizations can reverse the standard prediction that wealthier individuals will demand less insurance

deconstructing the pioneer s advantage examining vintage effects and consumer valuations of quality and variety several studies have demonstrated an order of entry effect on market share suggesting that pioneers outperform later entrants however other research has pointed out the limitations of these studies and found evidence that many pioneers fail or have low market share given this background the purpose of this research is to understand the conditions under which pioneers are more likely and also less likely to have an advantage we propose a game theoretic model that includes important sources of pioneer advantages as well as disadvantages specifically we incorporate a pioneer advantage due to preemption in markets with heterogeneous tastes in addition we incorporate a potential pioneer disadvantage due to technology vintage effects where later entrants utilizing improved technology can have lower costs and higher quality the model allows us to evaluate the extent of vintage effects necessary to overcome a pioneer s advantage key relationships are found between the magnitude of the pioneer advantage or disadvantage and consumer valuations of product attributes e g variety and quality we empirically validate the model with vintage effect data in 36 product categories and measures of consumer valuations of product variety and quality for 12 of these 36 categories the results show that pioneers do better in product categories wherevariety is more important and worse in categories where productquality is more important pioneers in categories with high vintage effects are shown to have lower market shares and higher failure rates similar results appear when analyzing persistence of market leadership over time further validating our model s major implications we also present two case studies that illustrate key elements of the model

on the theory of rational insurance purchasing a note the authors consider the optimal amount of insurance purchased by an individual who behaves according to the hurwicz criterion of choice under uncertainty their results are compared with earlier results obtained in alternative frameworks expected utility maximization and savage s regret criterion it is shown that a positive amount deductible is often suboptimal

an equilibrium analysis of defensive response to entry using a coupled response function model we determine the optimal response to competitive entry in a market characterized by a market share attraction model the response of an incumbent is limited to changes in prices advertising and distribution expenditures brand positions are assumed to be fixed we also assume that the entrant s position is chosen exogenously and that the sales potential of the market is constant after proving the existence of a unique nash equilibrium we show that the optimal response depends on the relative market share of the incumbents the response by nondominant brands with market shares less than 50 mirrors the prediction by decoupled response function models reduce price advertising and distribution spending for the dominant brand having a market share of 50 the response is to reduce price and increase marketing spending this finding explains previous empirical results that could not be addressed by the decoupled models

asset integration and attitudes to risk theory and evidence measures of risk attitudes derived from experiments are often questioned because they are based on small stakes bets and do not account for the extent to which the decision maker integrates the prizes of the experimental tasks with personal wealth we exploit the existence of detailed information on individual wealth of experimental subjects in denmark and directly estimate risk attitudes and the degree of asset integration consistent with observed behavior the behavior of the adult danes in our experiments is consistent with partial asset integration they behave as if some small fraction of personal wealth is combined with experimental prizes in a utility function and that this combination entails less than perfect substitution our subjects do not perfectly asset integrate the implied risk attitudes from estimating these specifications imply risk premia and certainty equivalents that are a priori plausible under expected utility theory or rank dependent utility models these are reassuring and constructive solutions to payoff calibration paradoxes in addition the rigorous structural modeling of partial asset integration points to a rich array of neglected questions in risk management and policy evaluation in important field settings

gift giving and worker productivity evidence from a firm level experiment abstract we present results from a field experiment designed to measure worker response to a monetary gift from their employer the experiment took place inside a tree planting firm paying its workforce incentive contracts firm managers told a crew of tree planters they would receive a pay raise for one day as a result of a surplus not attributable to past planting productivity we compare planter productivity the number of trees planted per day on the day the gift was handed out with productivity on previous and subsequent days of planting on the same block and thus under similar planting conditions we find direct evidence that the gift had a significant and positive effect on daily planter productivity controlling for planter fixed effects weather conditions and other random daily shocks

who buys and who sells options the role of options in an economy with background risk abstract in this paper we derive an equilibrium in which some investors buy call put options on the market portfolio while others sell them since investors are assumed to have similar risk averse preferences the demand for these contracts is not explained by differences in the shape of utility functions rather it is the degree to which agents face other non hedgeable background risks that determines their risk taking behavior in the model we show that investors with low or no background risk have a concave sharing rule i e they sell options on the market portfolio whereas investors with high background risk have a convex sharing rule and buy these options journal of economic literature classification numbers d52 d81 g11 g13

implicit contracts incentive compatibility and involuntary unemployment this paper considers the enforceability of employment contracts when employees performance cannot be verified in court so that piece rate contracts are not legally enforceable part i shows that there exists a variety of self enforcing implicit contracts modelled as perfect equilibria in a repeated game and characterizes all the wage and performance outcomes that can be implemented implementation requires a strictly positive surplus from employment the form of the contract depending on how this surplus is divided between firm and employee piece rate contracts and contracts with an informally agreed bonus can be made self enforcing but the use of severance pay and bonding does not extend the set of implementable allocations the resulting contracts resemble actual labor contracts more than do the contracts in standard principal agent models part ii analyses market equilibrium with these contracts also modelled as perfect equilibria in a repeated game and shows that many such equilibria exist unfilled vacancies and unemployed workers can co exist despite the existence of contracts that are potentially mutually beneficial for those jobs that are filled any division of the potential surplus is possible so that the market can have at the same time involuntary unemployment and vacancies that are unfilled despite filled jobs earning positive profits as a criterion for selecting equilibria a notion of renegotiation proofness is applied then either all workers are employed or all jobs filled but any division of the potential surplus is still possible the paper explores what further restrictions on beliefs give rise to a walrasian outcome in which all the potential surplus goes to the short side of the market and to an efficiency wage type outcome in which the potential surplus goes to the long side

comorbidities and the willingness to pay for health improvements we show that the willingness to pay for health improvements increases with the severity and probability of occurrence of comorbidities this result which is obtained under mild restrictions on the shape of the utility function has important implications for cost benefit studies applied to health care in particular it implies that the discrimination of the elderly believed to be implicit in cost benefit analysis is less of a problem than commonly thought

product line rivalry and market segmentation with an application to automobile optional engine pricing this paper addresses the questions whether and when the pricing practices on base products may differ from those of premium products sold with options or add ons various alternative models are considered a monopoly model a model of brand rivalry with full consumer information and a model of rivalry in which consumers are only well informed about base product prices only the brand rivalry model with limited consumer information predicts that premium products have larger percentage markups than base products provided that brand rivalry is sufficiently intense empirical evidence on base and premium product pricing in the automobile market is consistent with the limited information model and inconsistent with the other two models

the differentiation triangle the paper formalizes the observation that submarkets for high quality and low quality variants are markedly different from each other we study a simple model where variants of low quality cannot be horizontally differentiated whereas customers disagree about the value of variants in the high quality range we determine the outcome under price competition in the differentiation triangle with sequential entry when each firm can develop the vertical product line or decide to follow a niche strategy i e to develop only one variant

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

complementarity and substituability in multiple risk insurance markets we study imperfect competition between insurers in a multiple risk environment in the absence of asymmetric information equilibria are efficient and we determine the degrees of specialization under which the specialized insurers are able or unable to capture the surplus we show in contrast that under adverse selection specialization systematically prevents second best efficiency concluding on the role of our notions of strategic complementarity substituability on the tradeoff between efficiency and fairness of the allocation we give indications on the desirable structure of the insurance industry

a meta analysis of multibrand multioutlet channel systems in today s multibrand multichannel marketplace optimal channel design involves issues such as distribution intensity channel exclusivity vertical and horizontal coordination and online offline mixed structures we investigate how a firm s choice in these design issues affects its profitability under varying levels of brand and outlet differentiation our spatial model explicitly captures heterogeneous consumer preference for brand position store location and outlet type under various consumer behavior assumptions we apply this same underlying model to 10 different channel structures deriving associated demand functions and equilibrium solutions we perform a meta analysis over the entire set of results to estimate a general model that summarizes the linkages among the factors shaping optimal channel structure decisions in a multibrand multioutlet market this general model efficiently describes the complex interactions of channel characteristics with industry structure and consumer characteristics providing new findings as well as greater clarity to some results in the literature a predictive analysis applied to additional channel structures exhibits strong generalizability in qualitative findings

note competitive price and positioning strategies brand positioning and brand pricing are important strategic decisions for marketing managers such decisions are interrelated and depend upon competitive brand positions and prices however any unilateral decisions may encourage repositioning and price adjustment by competitors thus leading to either new market equilibria or a price positioning war this paper examines such price and positioning decisions in a competitive environment by extending the defender consumer model to more complex equilibria we assume that the brands are already in the market and that positions are sticky in the sense that brands cannot leapfrog one another among the insights for such incumbent brands are if prices are symmetric and held constant firms seek to reposition toward the center of the market but price advantages by central firms can mediate that central tendency such that an equilibrium exists with positive profits if brand positions are held constant the nash equilibria for prices exist and are unique and category profits the sum of brand profits are maximized for maximum brand differentiation for two and three brand markets the subgame perfect nash equilibrium where positioning decisions are made with foresight on the price equilibria causes firms to unilaterally seek maximum brand differentiation but for four or more brands greater foresight and or cooperation appears necessary to reach the point of maximum brand differentiation these results apply where the defender consumer model is an exact description of consumer response and where the competitive reaction assumptions hold in any empirical situation such forces might be softened resulting in differentiated but not maximally differentiated brands

preserving preference rankings under background risk abstract for any random vector of wealth payoffs x 1 x 2 let the random variable z be mutually independent of x 1 and x 2 with e z 0 the basic question we address in this paper is the following when can we say that x 1 z is preferred by an expected utility maximizer to x 2 z whenever x 1 is preferred to x 2 in other words when can we guarantee that the addition of an arbitrary independent background noise z will not affect the preference ranking between other risks

product and price competition in a two dimensional vertical differentiation model in this paper the one dimensional vertical differentiation model shaked and sutton shaked a j sutton 1982 relaxing price competition through product differentiation rev econom stud 49 3 13 moorthy moorthy k s 1988 product and price competition in a duopoly marketing sci 7spring 141 168 is extended to two dimensions and an analysis of product and price competition is presented a two stage game theoretic analysis in which two firms compete first on product positions and then on price is conducted closed form equilibrium solutions are obtained for each stage in which competitors are unrestricted in their choices of price or product positions a significant finding of this research is that unlike the one dimensional vertical differentiation model firms do not tend towards maximum differentiation although this solution is possible under certain conditions when the range of positioning options on each of the dimensions is equal maxmin product differentiation occurs that is in equilibrium the two firms tend to choose positions which will represent maximum differentiation on one dimension and minimum differentiation on the other dimension

in search of workers real effort reciprocity a field and a laboratory experiment we present a field experiment to assess the effect of own and peer wage variations on actual work effort of employees with hourly wages work effort neither reacts to an increase of the own wage nor to a positive or negative peer comparison this result seems at odds with numerous laboratory experiments that show a clear own wage sensitivity on effort in an additional real effort laboratory experiment we show that explicit cost and surplus information that enables an exact calculation of an employer s surplus from the work contract is a crucial prerequisite for a positive wage effort relation this demonstrates that an employee s reciprocity requires a clear assessment of the surplus at stake jel c91 c92 j41

strategic risk taking when there is a public good to be provided privately abstract we describe a situation where a risk averse individual has a preference for risk taking in the literature we find this strategic risk behaviour in an altruistic framework where the individual actually benefits from his noninsurance only in the loss outcome in our model all agents are perfectly selfish when a public good is to be provided privately after the insurance decision the player facing greater uncertainty can expect an income transfer from the other individuals through the commitments to the public good this ex ante income transfer is not conditional on the loss

two moment decision models and expected utility maximization two moment decision models are consistent with expected utility maximization only if the choice set or the agent s preferences are restricted this paper identifies a restriction which is sufficient to ensure this consistency and confirms that it holds in many economic models the implications for economic analysis are then derived two different approaches to representing an agent s preferences over strategies yielding random payoffs are in wide use under the mean standard deviation ms approach the agent is assumed to rank the alternatives according to the value of some function defined over the first two moments of the random payoff while the expected utility eu criterion assumes that the expected value of some utility function defined over payoffs is used instead the fact that there are these two competing approaches has generated a considerable literature some authors are concerned with the advantages and disadvantages of each while others deal with conditions under which the potentially different approaches would yield the same results or at least approximately so space does not

background risk and self protection abstract the presence of background risk increases self protection effort or caution as long as an agent is prudent in addition the result extends to monetary self protection investment if wealth and consumption are complements

worker reciprocity and employer investment in training standard economic theory predicts that firms will not invest in general training and will underinvest in specific training empirical evidence however indicates that firms do invest in general training of their workers evidence from laboratory experiments points to less underinvestment in specific training than theory predicts we propose a simple model in which a firm invests the socially optimal amounts in general and specific training if the worker is sufficiently motivated by reciprocity a reciprocal worker may be willing to give the firm a full return on its investment we present empirical evidence that supports the proposed mechanism workers with a high sensitivity to reciprocity have 15 higher training rates than workers with a low sensitivity to reciprocity

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

comparative statics under uncertainty the case of mean variance preferences we analyze the comparative statics of optimal decisions under uncertainty when preferences are represented by twomoment mean variance utility functions we relate our findings to concepts for risk attitudes that are familiar from the expected utility approach in the two parameter approach a number of plausible comparative static effects already emerges under the assumption of decreasing absolute risk aversion to determine comparative static effects of changes in background risks stronger concepts are needed risk vulnerability temperance and standardness imply appropriately transferred to the mean variance framework the plausible effect that risk taking will be reduced if background risks increase 2002 elsevier b v all rights reserved

pioneers marketing mix reactions to entry in different competitive game structures theoretical analysis and empirical illustration pioneers marketing mix reactions to new entries are recognized as important determinants of the outcome of pioneerlate mover competition particularly in price inelastic markets such as those for pharmaceuticals cigarettes and luxury goods managers in such markets are interested in better understanding when to accommodate i e decrease marketing spending or retaliate i e increase spending in nonprice marketing variables such as advertising and salesforce in addition the reallocation of marketing resources toward advertising indicated by a pull strategy or salesforce indicated by a push strategy upon entry is strategically important to managers previous theoretical research shows that pioneers should retaliate in both static and growing markets results from empirical research are mixed in that they support both accommodation and retaliation in growing markets empirical research also shows that a pioneer accommodates retaliates with its low high elasticity marketing mix variable contrary to prior research however some pioneers have successfully accommodated late movers in growing markets and in some cases have accommodated with their stronger marketing mix variables and also retaliated with their weaker marketing mix variables for example bristol myers squibb s capoten accommodated the entry of merck s vasotec in the growing ace inhibitors market with its more powerful variable salesforce but also retaliated with its less potent variable advertising moreover not much is known about how the pioneer s marketing mix allocation should change i e toward pull vs push strategies in response to new entries we seek to better explain the pioneer s reactions and predict its shift in marketing mix allocation upon new entry we note that prior research s predictions on the pioneer s reactions are based on a limited number of key factors such as product market characteristics and the pioneer s elasticities prior to a new entry in this paper we extend previous research by adding two other critical factors namely the impact of new entry on the pioneer s elasticities and margin and different competitive game structures to better predict and explain the pioneer s reactions we develop analytical results on the pioneer s reactions in price advertising and salesforce in different competitive games both nash and different leader follower games in these results we identify the conditions under which the pioneer should accommodate or retaliate or not react to a late mover s entry and shift its marketing mix allocation toward pull versus push strategies we empirically illustrate some of the analytical results using data from a pharmaceutical category we show that a pioneer who adopts a follower leader role with respect to a marketing mix variable in a static growing market and witnesses a decrease an increase in own elasticity and margin upon a new entry generally should accommodate retaliate in that variable however we are also able to show that there are cases where these general reactions don t hold thus for example it is possible for a pioneer to find it optimal to accommodate in a growing market or to retaliate even when its elasticity decreases upon entry depending on the combination of competitive game the impact of entry on elasticities and margin and market growth in this way our results point to the fact that it is necessary to look not only at one factor at a time but instead examine the combination of all the factors we explain the empirical support for both accommodation and retaliation in growing markets by showing that the pioneer should accommodate retaliate a late mover with its competitively low high elasticity marketing mix variable competitively high low elasticity variables are not are likely to be significantly reduced by a new entry in the anticipated competitive game with regard to reallocation of the pioneer s marketing mix we show that the change in the pioneer s marketing mix allocation should follow the change in the relative marketing mix effectiveness after new entry this in turn depends on the structure of competition the impact of the late mover on its elasticities and margins and the competitor s marketing mix elasticities in addition to own elasticities the results can guide managers on how factors such as competitive structure changes in elasticities and margin and market growth impact the pioneer s marketing mix decisions and on when to accommodate retaliate or not react to a late mover s entry and shift marketing mix allocation toward pull versus push strategies

a note on insurance coverage in incomplete markets in this paper full insurance coverage on average is defined as the coinsurance rate that eliminates all insurable risk when the uninsurable risk is evaluated at its mean the regressibility assumption is used to derive the conditions on the correlation between background and insurable risks and the actuarial unfairness of insurance under which full over or underinsurance on average is optimal these conditions are compared to those for the case of default risk together they explain intuitively the different results under the cases of background risk and default risk obtained in the literature

an evaluation of the swedish system of active labour market programmes in the 1990s we investigate the presence of short and long term effects from joining a swedish labor market program vis a vis more intense job search in open unemployment overall the impact of the program system is found to have been mixed joining a program has increased employment rates among participants a result robust to a misclassification problem in the data on the other hand it has also allowed participants to remain significantly longer on unemployment benefits and more generally in the unemployment system this being particularly the case for those entitled individuals entering a program around the time of their unemployment benefits exhaustion

the optimal deductible for an insurance policy when initial wealth is random individual wealth typically includes risky assets often some of these risks are insurable but other risks such as market valuation of stocks inflation and other general economic conditions are usually not insurable a series of recent papers by kihlstrom romer and williams 1981 ross 1981 nachman 1982 and pratt 1982 have shown that the introduction of background risk requires stronger definitions of risk aversion we will use some of these results to examine the choice of the optimal deductible in an insurance contract when initial wealth is random an examination of insurance purchases within a broader portfolio is considered by doherty 1981 and by mayers and smith 1983 these papers use a mean variance framework to examine the separability of the insurance decision in general portfolio relationships have nontrivial implications for insurance buying strategies in particular correlation between insurable and noninsurable risk may affect the optimal level of insurance coverage deductible insurance is considered mainly because of its widespread use by many insurers furthermore deductibles the literature concerning the choice of optimal deductibles for insurance policies assumes that wealth is nonstochastic except for the value being insured however a decision maker s asset portfolio might easily contain other sources of risk some of which might be uninsurable this paper examines the choice of a deductible insurance contract in the presence of uninsurable background risk existing theorems concerning the optimality of full coverage are shown to hold only under restricted conditions concerning the correlation of insurable risk with other risky assets more general propositions are established and the effects of risk aversion are considered

second best insurance contract design in an incomplete market the optimal form of insurance contracts for multiple risks is examined a well known result in the literature is that under fairly general conditions an insurance policy with a deductible for aggregate losses is optimal real world markets however are typically incomplete in that they require separate contracts for separate loss exposures for instance insurable damage to one s home is not generally allowed to affect the insurance indemnity for unrelated insurable damage to one s automobile we show that separate deductibles are second best optima in this setting we compare the indemnity provided in this second best setting with first best solutions the effect of second best contracts on the individual s total insurance demand is also examined

utility risk and demand for incomplete insurance lab experiments with guatemalan cooperatives we play a series of incentivized laboratory games with risk exposed cooperative based coffee farmers in guatemala to understand the demand for index based rainfall insurance we show that insurance demand goes up as increasingly severe risk makes insurance payouts more partial payouts are smaller than losses but demand is ad versely effected by more complex risk structures in which payouts are probabilistic it is possible that a shock occurs with no payout we use numerical techniques to esti mate a flexible utility function for each player and consequently can put exact dollar values on the magnitude of the behavioral response triggered by probabilistic insur ance exploiting the group structure of the cooperative we investigate the possibility of using group loss adjustment to smooth idiosyncratic risk our results suggest that consumers value probabilistic insurance using a prospect style utility function that is concave both in probabilities and in income and that group insurance mechanisms are unlikely to solve the issues of low demand that have bedeviled index insurance markets

are people risk vulnerable we report on a within subject experiment with substantial monetary incentives designed to test whether or not people are risk vulnerable in the experiment subjects face the standard portfolio choice problem in which the investor has to allocate part of his wealth between one safe asset and one risky asset we elicit risk vulnerability by observing each subject s portfolio choice in two different contexts that differ only by the presence or absence of an actuarially neutral background risk our main result is that most of the subjects are risk vulnerable 81 chose a less risky portfolio when exposed to background risk more precisely 47 invested a strictly smaller amount in the risky asset whereas 34 were indifferent furthermore contrasting the predictions provided by competing decision theoretic models we conclude that expected utility theory best fits our experimental data this paper was accepted by uri gneezy behavioral economics

the design of an optimal insurance policy almost every phase of economic behavior is affected by uncertainty the economic system has adapted to uncertainty by developing methods that facilitate the reallocation of risk among individuals and firms the most apparent and familiar form for shifting risks is the ordinary insurance policy previous insurance decision analyses can be divided into those in which the insurance policy was exogenously specified see john gould jan mossin and vernon smith and those in which it was not see karl borch 1960 and kenneth arrow 1971 1973 in this paper the pioneering work of borch and arrow the derivation of the optimal insurance contract form from the model is synthesized and extended

preservation of more risk averse under expectations abstract the preservation of risk aversion properties of utility functions under expectation operations is of interest in the study of derived utility functions in sequential decision problems and in problems with multiple contemporaneous sources of uncertainty the purpose of this note is to present sufficient conditions for the pratt relation more risk averse to be preserved under expectations

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

social learning in networks of friends versus strangers networks and the embedded relationships are critical determinants of how people communicate and form beliefs the explosion of social media has significantly increased the scope and impact of social learning among consumers this paper studies observational learning in networks of friends versus strangers a consumer decides whether to adopt a product after receiving a private signal about product quality and observing the actions of others the preference for the product has greater heterogeneity in the stranger network than in the friend network we show that when the network is small observing friends actions helps the consumer make more accurate inferences about quality as the network grows however the stranger network becomes more effective underlying these results are two competing effects of network heterogeneity on social learning these are the individual preference effect which allows one to make a better quality judgment when the preference element of past actions is more certain and the social conforming effect wherein private signals are underused in quality judgment as people follow others actions we find cascading is more likely to occur in the friend network than in the stranger network for a high quality firm the stranger network generates greater sales than the friend network when the network size is sufficiently large or the private signal is sufficiently accurate we also examine the existence of experts and firms using advertising to influence consumers finally we show how networks that are highly homogeneous or heterogeneous could impede observational learning

optimal health insurance for multiple goods and time periods we examine the efficiency based arguments for second best optimal health insurance with multiple treatment goods and multiple time periods correlated shocks across health care goods and over time interact with complementarity and substitutability to affect optimal cost sharing health care goods that are substitutes or have positively correlated demand shocks should have lower optimal patient cost sharing positive serial correlations of demand shocks and uncompensated losses that are positively correlated with covered health services also reduce optimal cost sharing our results rationalize covering pharmaceuticals and outpatient spending more fully than is implied by static one good or one period models

product differentiation with multiple qualities abstract we study subgame perfect equilibria of the classical quality price multistage game of vertical product differentiation each of two firms can choose the levels of an arbitrary number of qualities consumers valuations are drawn from independent and general distributions the unit cost of production is increasing and convex in qualities we characterize equilibrium prices and the effects of qualities on the rival s equilibrium price in the general model equilibrium qualities depend on what we call the spence and price reaction effects for any equilibrium we characterize conditions for quality differentiation

is having more channels really better a model of competition among commercial television broadcasters competitive behavior in commercial television broadcasting is modeled to examine program choice and the effects of more channels being available on firm strategy specifically broadcasters compete by selecting both the type and quality level of a program to offer but do not compete on price we obtain five major results first a comparison of monopoly and duopoly markets indicates that broadcasters in an industry with a larger number of competitors may provide programs of lower quality compared to broadcasters in an industry with a smaller number second in terms of viewer welfare having more channels available is not necessarily better third broadcasters tend to choose an intermediate level of differentiation in terms of the types of programs they provide resulting in a counterprogramming strategy in other words avoidance of price competition is not required for competitors to differentiate themselves from each other fourth if one broadcaster starts the evening with a higher quality higher rated program than its competitor its second program should also be of higher quality finally a broadcaster s first program should be of equal or higher quality than its second program put another way it always behooves a broadcaster to lead with its best

rational insurance purchasing consideration of contract nonperformance much of the analysis of rational insurance purchasing and hedging strategies has been undertaken on the basis of the expected utility hypothesis this decision framework has been used to reformulate the bernoulli principle that a risk averter rationally would fully insure at a fair premium other applications include the analysis of insurance at unfair premiums mossin 1968 and smith 1968 the effects of state dependent utility on the rational insurance purchase cook and graham 1977 the effects of risky background wealth doherty and schlesinger 1983 and mayers and smith 1983 and the design of the optimal insurance policy raviv 1979 such analyses have been conducted on the assumption that insurance policies are free of insolvency default risk this assumption stands in sharp contrast to the actuarial literature in which the insolvency risk or probability of ruin is a central focus of attention

optimal hedging in a futures market with background noise and basis risk abstract this paper examines hedging behavior in an incomplete market in which there exists an unhedgeable and uninsurable independent background risk in the case of a basis risk that satisfies the regressibility property the background risk might be partly endogenous background risk generally has an ambiguous effect on the optimal hedge ratio however if preferences exhibit standard risk aversion and the background risk is fully exogenous the qualitative effect of the added background risk is determinate and depends on the direction of any bias in the futures market in all cases the speculative component of the hedge ratio is reduced in the presence of background risk when the background risk is a basis risk and futures prices exhibit normal backwardation this qualitative effect need not hold and it depends in part on the direction of regressability for spot and futures prices

changes in background risk and risk taking behaviour economic decision making under uncertainty often takes place in the presence of multiple risks and in markets that are less than complete as a consequence choices about endogenous risks sometimes must be made while simultaneously facing one or more immutable exogenous background risks that are not under the control of the agent and that are independent of endogenous risks it is somehow natural to assume that an exogenous deterioration in background wealth will cause an individual to take more care elsewhere if we define a deterioration for example as making the individual poorer by removing a fixed amount of initial wealth we know from pratt 1964 that decreasing absolute risk aversion dara of an individual s von neumann morgenstern utility function yields this natural result if on the other hand background wealth becomes riskier due to the addition of a zero mean risk that is also statistically independent of all other risks behavior will be more risk averse if and only if preferences are risk vulnerable as defined by gollier and pratt 1996 risk vulnerability described below in section 4 is a stronger notion than dara and includes proper risk aversion pratt and zeckhauser 1987 and standard risk aversion eeckhoudt and kimball 1992 kimball 1993 as particular cases but a deterioration in background wealth may encompass more complicated distribution changes than the introduction of another statistically independent risk in this paper we examine background wealth deteriorations that take the form of both general firstand second degree stochastic dominance changes in risk fsd and ssd respectively in particular we determine conditions that are both necessary and sufficient for each of these two types of background risk changes to imply more risk averse behavior on the part of the individual for the case of fsd changes this condition turns out to be ross stronger characterization of decreasing absolute risk aversion in the case of general ssd changes in the distribution of background wealth the condition derived is a stronger version in ross sense of the conditions characterizing preferences that are locally risk vulnerable in the sense of gollier and pratt the necessary and sufficient conditions derived are fairly restrictive upon preferences however if we take as positive behavior that individuals act in a more risk averse manner whenever the distribution of background wealth deteriorates these conditions place canonical limits upon appropriate utility representations at the very least they

defensive marketing strategies an equilibrium analysis based on decoupled response function models the entry of a new product attacker into a competitive market is likely to provoke responses from some or all of the existing products defenders this paper investigates the development of optimal defensive strategies based on an understanding of the possible reactions of all the defenders to an optimal attack following lane lane w j 1980 product differentiation in a market with endogenous sequential entry bell j econom 11 1 spring 237 260 we assume that n products each enter sequentially with perfect foresight on subsequent entry then based on new technology an unanticipated attacker enters the n defenders respond in price but not position according to lane s model once this equilibrium is obtained advertising and distribution response functions scale sales we show that under these decoupled response function models of advertising and distribution uniformly distributed tastes and nonincreasing market size the optimal defense for all existing brands is to decrease their respecti

insurance consumption and saving a dynamic analysis in continuous time this paper shows how the demand for non life insurance interacts with consumption and saving the analysis is set in continuous time using the maximum principle when insurance is actuarially fair the insurance and consumption decisions are separable with loaded premiums and alternatively without insurance optimal consumption is dynamically related to the growth rate of the loss probability and a growing loss probability generates precautionary saving with loaded premiums less than full insurance is demanded at each instant and optimal cover varies over time whether or not the loss probability is constant

mean variance preferences and investor behaviour we study the comparative statics implications of mean variance preferences for optimal portfolios specifically we show that all risk averse mean variance investors raise their investment in a risky asset in response to a change in that asset s return distribution if and only if the change lowers both the mean and standard deviation of the return by the same percentage besides being of interest in its own right our results allow us to compare some comparative statics implications and the expected utility and mean variance models systematically

some stronger measures of risk aversion in the small and the large with applications the arrow pratt measures of risk aversion for von neumann morgenstern utility functions have become workhorses for analyzing problems in the microeconomics of uncertainty they have been used to characterize the qualitative properties of demand in insurance and asset markets to examine the properties of risk taking in taxation models and to study the interaction between risk and life cycle savings problems to name just a few applications equally importantly they have generated the linear risk tolerance class of utility functions which has provided canonical examples in such diverse areas as portfolio theory and the theory of teams despite these successes there have been a number of areas for which the results have been weaker than hoped it is natural to use the risk aversion measures to compare the behavior of individuals in risky choice situations for example consider the individual portfolio choice problem in a two asset world with a riskless asset and a risky asset if individual a has a uniformly higher arrow pratt coefficient of risk aversion than individual b then b will always choose a portfolio combination with more wealth invested in the risky asset but suppose that both assets are risky now there is no obvious sense in which the more risk averse individual can be said to hold a less risky portfolio but it seems strange that such a simple alteration should destroy the analytics which support the basic intuition similarly consider the basic insurance problem if one individual a is more risk averse than another b in the arrow pratt sense it follows that a will pay a larger premium to insure against a random loss than will b typically though an individual evaluates partial rather than total insurance that is only some gambles can be insured against and others must be retained in this case even when the gambles which are retained are independent from those which are insured it is no longer true that the individual whose arrow pratt measure of risk aversion is higher will pay a larger insurance premium the situation is no better when we consider comparative statics exercises for a single individual decreasing absolute risk aversion in the sense of arrow and

product positioning under price competition this paper presents a consumer based methodology for new product pricing and positioning in the face of price competition the price competition is modelled as a nash equilibrium for which two complementary approaches are employed an analytical approach of duopoly provides qualitative insights into the competitive behavior and a numerical approach of general oligopoly provides quantitative solutions under a wide variety of market scenarios the optimal product positioning is formulated as a stackelberg nash leader followers equilibrium which can be solved numerically using recent advances in the field of variational inequalities a small example concerning analgesics is used to illustrate this methodology

entropic risk measures and their comparative statics in portfolio selection coherence vs convexity abstract we conduct a decision theoretic analysis of optimal portfolio choices and in particular their comparative statics under two types of entropic risk measures the coherent entropic risk measure cerm and the convex entropic risk measure erm starting with the portfolio selection between a risky and a risk free asset framework of arrow 1965 and pratt 1964 we find a restrictive all or nothing investment decision under the cerm while the erm yields diversification we then address a portfolio problem with two risky assets and provide comparative statics with respect to the investor s risk aversion framework of ross 1981 here both the cerm and the erm exhibit closely interrelated inconsistencies with respect to the interpretation of their risk parameters as a measure of risk aversion for any two investors with different risk parameters it may happen that the investor with the higher risk parameter invests more in the riskier one of the two assets finally we analyze the portfolio problem risky vs risk free in the presence of an independent background risk and analyze the effect of changes in this background risk framework of gollier and pratt 1996 again we find questionable predictions under the cerm the optimal risky investment is always increasing instead of decreasing when a background risk is introduced while under the erm it remains unaffected

the role of life insurance in an emerging economy human capital protection assets allocation and social interaction abstract in this paper we provide micro econometric evidence on the determinants of life insurance demand in china the largest emerging market in the world we employ the china household income project chip dataset for the year 2002 in the analysis the timing is ideal because of the nature of the less well developed capital markets and social security systems in china in 2002 which sets a suitable stage to study the insurance demand behavior of emerging markets the results indicate that both the human capital protection motive and the asset allocation motive are important in explaining the purchase of life insurance in china in addition we present three empirical regularities 1 the positive correlation between the returns to human capital and the returns to market portfolio decrease the demand for life insurance 2 both the current wealth and future income of a household exert curvilinear impacts on life insurance demand 3 the breadth of a households social connections has substantial impacts on life insurance demand

variance vs downside risk is there really that much difference abstract the popularity of downside risk among investors is growing and mean return downside risk portfolio selection models seem to oppress the familiar mean variance approach the reason for the success of the former models is that they separate return fluctuations into downside risk and upside potential this is especially relevant for asymmetrical return distributions for which mean variance models punish the upside potential in the same fashion as the downside risk the paper focuses on the differences and similarities between using variance or a downside risk measure both from a theoretical and an empirical point of view we first discuss the theoretical properties of different downside risk measures and the corresponding mean downside risk models against common beliefs we show that from the large family of downside risk measures only a few possess better theoretical properties within a return risk framework than the variance on the empirical side we analyze the differences between some us asset allocation portfolios based on variances and downside risk measures among other things we find that the downside risk approach tends to produce on average slightly higher bond allocations than the mean variance approach furthermore we take a closer look at estimation risk viz the effect of sampling error in expected returns and risk measures on portfolio composition on the basis of simulation analyses we find that there are marked differences in the degree of estimation accuracy which calls for further research

insurance markets with loss prevention activity profits market structure and consumer welfare this article considers the joint production of insurance protection and loss prevention by insurers we first examine the loss distribution of consumers that is potentially the most profitable for insurers unlike in the preponderance of the insurance literature which assumes cost based pricing of insurance policies we allow the insurer to charge whatever price the market will bear we then examine the expected profit maximizing strategy of assumes cost based pricing of insurance policies we allow the insurer to charge whatever price the market will bear we then examine the expected profit maximizing strategy of the insurer in several different market settings whether the insurance protection and loss prevention services can be perfectly bundled plays a key roll in the insurer s pricing decision we consider consumer welfare under various market settings and demonstrate that a consumer may be better off when the insurance market is monopolistic rather than competitive finally we consider whether monopoly power in the loss prevention market leads to monopoly power in an otherwise perfectly contestable insurance market we also show conditions under which a loss prevention monopolist would increase expected profit by integrating into the insurance market

perceptual position and competitive brand strategy in a two dimensional two brand market brand positioning and competitive reaction are important determinants of optimal brand strategy analyses of brand strategy have focused on optimal pricing and positioning issues using either empirical models of perceptions and preferences game theory to examine competition or both however the important issues of advertising and distribution strategy have not been fully addressed this paper analyzes competition and strategy between two brands that compete in a two dimensional market with advertising and distribution spending in addition to prices and product positions in particular for a unimodal taste distribution of ideal points we show how optimal competitive nash equilibrium marketing mix levels and profits depend on the positions of both brands brands can reposition to increase profit and under what conditions these strategies imply minimum versus maximum differentiation positioning equilibria and how the intensity of advertising and distribution competition affect equilibrium brand positions

nash equilibrium in duopoly with products defined by two characteristics this article analyzes the analogue ofhotellingls duopoly model when products are dejned by two characteristics using the assumptions of the original model of hotelling we show that demand and projt functions are continuous for a wide class of utility functions when the utilityfunction is linear in the euclidean distance in the space of characteristics a noncooperative equilibrium in prices exists for all symmetric locations ofjirms this is in contrast to the result in the one characteristic model where a noncooperative equilibrium exists only when products are very diferent the noncooperative equilibria are calculated and fully characterized in contrast with the one dimensional model of hotelling where equilibrium prices were constant irrespective of distance of symmetric locations here equilibrium prices tend to zero as the distance between products approaches zero

aggregation and imperfect competition on the existence of equilibrium we present a new approach to the theory of imperfect competition and apply it to study price competition among differentiated products the central result provides general conditions under which there exists a pure strategy price equilibrium for any number of firms producing any set of products this includes products with multi dimen sional attributes in addition to the proof of existence we provide conditions for uniqueness our analysis covers location models the characteristics approach and probabilistic choice together in a unified framework to prove existence we employ aggregation theorems due to prekopa 1971 and borell 1975 our companion paper caplin and nalebuff 1991 introduces these theorems and develops the application to super majority voting rules we present a new approach to the theory of imperfect competition and apply it to study price competition among differentiated products the central result is that there exists a pure strategy price equilibrium for any number of firms producing any set of products in addition to the proof of existence we provide conditions for uniqueness our model both unites diverse strands of the earlier literature and opens up uncharted areas for future analysis in particular we expand the traditional one dimensional framework to allow for multi dimen sional product differentiation our approach involves twin restrictions on consumer preferences one on individuals preferences the other on the distribution of preferences across society these are generalizations of the restrictions supporting 64 majority rule presented in caplin and nalebuff 1988 to prove existence we apply a new technique of aggregation this technique is valuable in a variety of other problems in the companion paper we use the aggregation result to generalize our earlier work on 64 majority rule and to characterize the relationship between the distribution of human capital and the distribution of income caplin and nalebuff 1991 there are additional applications in statistics and in search theory we begin with a brief review of the early literature on imperfect competition describing in more detail the existence problem and previous solutions section 3 presents our twin assumptions and shows that they cover many standard cases in section 4 we introduce the aggregation theorem and use it in the analysis of demand functions the proof of existence of equilibrium is in section

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

new brand positioning and pricing in an oligopolistic market the positioning and pricing of a new brand requires knowledge about the relationship of both demand and cost with potential attribute locations and prices this paper addresses this problem and illustrates it in the context of the automobile market multi attribute expected utility theory which allows for consumer uncertainty about the brands is used to model individuals behavior attribute weights are estimated from market survey data on brands attributes and preferences using linmap as an estimation procedure expected utility is then updated using the multinomial logit model and choice data to account for the observation that stated preferences do not perfectly reflect the eventual choice it is hypothesized that when faced with an actual choice price may become more important to the consumer while other attributes may become more or less important than is reflected in stated preferences the resulting estimated choice probabilities are aggregated to form demand functions facing each brand which depend on all brands prices and attribute space locations assuming there is a price equilibrium in the existing market and that firms have the same variable cost function variable costs as a function of a brand s attribute levels are estimated given the demand and cost functions facing each firm including the potential new entrant the profit maximizing positioning and pricing of a new brand is analyzed using a game theoretic approach a solution is sought under the assumption that incumbents react to entry by changing their prices possible approaches to the translation of the perceptual attribute positioning of the new brand to physical and engineering attributes are reviewed improvements and future extensions of the study are discussed