multiple equilibria and deterrence in airline markets we use data from the us airline industry to estimate a model of entry deterrence we model the interaction among airlines as a repeated static game where we allow for a very general form of heterogeneity we consider a menu of three alternative games that describe the strategic interaction among airlines simultaneous and sequential move games and a sequential move game with deterrence investments following bernheim 1984 deterrence investments include all investment that raises barriers to entry and for which the incumbent must incur some investment costs we show that the profits that incumbents can make in the sequential game both with and without deterrence investments are larger than those that they can make if the game is played simultaneously thus we find that on average it is profitable for all firms to deter new entrants with the exception of united airlines remarkably united airlines was under bankruptcy protection during the period of analysis suggesting that its deterrence investments were not credible overall we find that the data is explained better by a model where firms make deterrence investments thus we cannot reject the hypothesis that incumbents deter entrants in the airline industry

prices and the winner s curse we usually assume that increases in supply allocation by rationing and exclusion of potential buyers reduce prices but all these activities raise the expected price in an important set of cases when common value assets are sold furthermore when we make the assumptions needed to rule out these anomalies for symmetric buyers small asymmetries among the buyers necessarily cause the anomalies to reappear our results help explain rationing in initial public offerings and outcomes of spectrum auctions we illustrate our results in the wallet game and in another new game we introduce the maximum game

econometric models for marketing decisions ance of aggregation biases and so on franses 2005 provides an inventory of commonly used diagnostic tests franses see table 2 for 1998 2000 and table 3 for 2001 2003 also shows that there is a paucity of actual use of diagnostic tests in articles published in jmr such paucity may suggest that researchers have a disincentive to conduct all relevant tests for example it might be imagined that though researchers prefer to publish a valid model rather than one that is invalid publishing an invalid model is still preferred to not publishing one especially if it is difficult for readers to detect model deficiencies given data constraints it is virtually impossible for researchers to accommodate all possible nuances thus researchers rely on theories and experience to decide which aspects are the most critical to include in a model with accumulating empirical evidence in the literature the expectation is that future modeling efforts will be more informed and thus likely to provide increasingly useful i e valid and reliable results however i urge researchers to consult the checklist that franses provides and to conduct all diagnostic tests when appropriate in applied econometrics there are three possible reasons for specific tests not to be used first researchers may argue convincingly that a test does not apply in the model s context for example testing the null hypothesis of zero autocorrelation in the error term in a model of purely cross sectional data is irrelevant separately i note that the use of generalized least squares rather than ordinary least squares to accommodate serial correlation in time series data is a technical correction that is not convincing unless the researcher can justify how serial correction logically arises for an otherwise correctly specified model second some tests may not yet be available for cases other than linear models and normally distributed errors third researchers may argue that the violation of a particular assumption does not invalidate the substantive results for example consistency of ordinary least squares does not require normality of the error term in all other cases it is the researchers responsibility to conduct and show appropriate diagnostic tests the model cannot be assumed to be valid unless proper diagnostic tests fail to reject the assumptions because all models are incomplete representations of reality a central question is how can a model that is superior to a meaningful alternative e g judgment or a simpler representation than the proposed model be obtained if the interest of the researcher is to discover how marketing activities affect purchases or other responses as in a causal model any comparison to a model without marketing variables seems useless still it might be argued that beginning with the august 2003 issue journal of marketing research jmr has published one or more comments on the lead article followed by a rejoinder i have asked experts to provide commentary on one article in each issue that i believe has especially relevant content for researchers and managers in the current issue the lead article is an invited paper for which i also asked several experts to provide comments in all cases i provide an opportunity for the author s of the original article to prepare a rejoinder in the same issue my hope is that such related reflections and commentaries on a current topic will enhance the value of jmr to readers although i see no reason to entice authors to express strong disagreements about specific issues i expect that such collections of articles will enable readers to become more informed about differences in perspectives that researchers with substantial expertise and experience have on important issues

appropriate business strategy for leaders and laggards we develop a series of hypotheses that predict that the appropriateness of different business strategies is conditional on the firm s relative performance or distance to the industry frontier we use data on three 2 digit high tech manufacturing industries in the united states over the period 1972 1999 and apply semi parametric quantile regressions to investigate the contribution of firm behavior to market value at various points of the conditional distribution of tobin s q among our results we observe that innovative activity measured in terms of r d expenditure or patents has a strong positive association with market value at the upper quantiles corresponding to the leader firms whereas the innovative efforts of laggard firms are valued significantly less laggard firms we suggest should instead achieve productivity growth through efficient exploitation of existing technologies and imitation of industry leaders employment growth in leader firms is encouraged whereas growth of backward firms is not as well received on the stock market

entry its deterrence and its accommodation a study of the u s photographic film industry this work set in the new empirical industrial organization framework bresnahan 1987 examines firm level demand based and cost based explanations for entry and accommodation strategies in the u s photographic film industry i first estimate preentry and postentry market structures then using the estimated demand cost and market conduct parameters i show how entry by fuji photo or lack thereof by others is a function of two market structures i also show how market structure and conduct and changes in them over the pre and postentry periods are in turn functions of entry its deterrence and it accommodation

credible spatial preemption it is often argued that incumbent firms may deter entry by preemptive investment in new goods we show that these conclusions are reversed when multiproduct incumbentfirms may exit in response to entry once entrants are in an industry an incumbent will often want to withdraw some goods to prevent competition with the entrant from reducing profits on other goods such a reaction makes entry more attractive to a potential entrant the equilibrium industry structure is less likely to be monopolistic as the goods are better substitutes as exit costs are low and as the competition between producers of the same good is more intense

building technological capability for industrialization analytical frameworks and korea s experience this paper first presents five analytical frameworks technology trajectory absorptive capacity technology transfer crisis construction and dynamic learning process that may be used to examine the process of technological learning at the firm level these frameworks are interrelated to develop an integrative model the korean experience is then discussed as a case in point to illustrate how the frameworks can be used to analyze the process of building technological capability for industrialization the paper also discusses many implications for public policy and corporate management in other countries copyright 1999 by oxford university press

airport presence as product differentiation there is now widespread recognition that an airline s operation at a given airport greatly affects its competitive position on routes flown out of that airport see m levine 1987 s borenstein 1989 s morrison and c winston 1989 and myself 1989 among many others airlines typically defend any competitive advantage as stemming from the lower costs and better service that are said to be generated by hub and spoke route systems airline critics typically respond that airlines gain market power by dominating individual airports both views are at least plausible huband spoke transportation networks reduce the number of round trips necessary to carry a given number of passengers on a given set of itineraries while increasing the number of passenger miles flown if there are sufficient economies of scale in plane size then the advantages of hubbing can overcome the disadvantage in passenger miles resulting in lower total costs by pooling passengers with different ultimate destinations a hubbed system can also offer more frequent flights than would be economically feasible under a nonstop system it also appears however that airlines gain other advantages from a large presence at an airport incumbent airlines are the major source of financing for many airports and therefore gain a large degree of bureaucratic control over airport operations this control may enable them to block the entry or expansion of rivals airlines with a large presence in a given city also gain advantages from frequent flyer plans and nonlinear travel agent commission schedules see again levine and others if the bureaucratic and marketing advantages of airport presence are sufficient to prevent most attempts at entry then incumbents may gain the ability to exercise traditional market power by restricting output and driving up prices this paper argues that both simple costreducing and naive market power stories are inappropriate for the airline industry i present a model in which consumers are willing to pay a premium for the services of the dominant airline this premium may be related to a number of factors including flight frequency frequent flier miles and travel agent commission overrides this model has the advantage of treating oligopoly product differentiation in an explicit way of treating price as an endogenous variable and of allowing for airport presence to affect both costs and demand

a folk theorem for one shot bertrand games we show that bounded monopoly profits are essential for the uniqueness of the bertrand paradox zero profit outcome otherwise a folk theorem obtains for one shot homogeneous product bertrand games any positive but finite payoff vector can be achieved in a symmetric mixed strategy nash equilibrium

caps on political lobbying comment following the 1999 israeli elections the winning candidate s ehud barak s party was fined 3 2 million dollars for violating israel s campaign financing laws by exceeding the spending cap imposed and raising 1 2 million dollars illegally see time europe 2000 while adhering to the strict ncaa recruiting regulations the university of oregon spent 3 million dollars to make their football locker room the best anywhere including the nfl lexington herald leader 2003 when asked about the previous salary cap in the uk football league players said that it the cap was so artificial that clubs paid money in brown paper envelopes bbc2 newsnight 2002 in all these cases there officially existed a rigid spending cap however they show that even though a cap exists the cap might not be easily enforced when enforced the penalty may just be financial rather than a change in outcome the cap may be enforced and adhered to but there may also be alternate perhaps less effective hence more costly means of spending we also see that the flexible nature of the cap is often built into the rules by examining the salary caps of the four major us sports leagues where the caps are routinely exceeded in baseball and basketball surpassing the cap invokes a pure financial penalty called a luxury tax which is proportional to the excess in football while the cap is stated in terms of salaries many teams use signing bonuses as a way to circumvent it in ice hockey there is a dual cap system where the luxury tax is invoked on salaries falling between the two caps and signing bonuses are an allowed method to exceed the

a study of cartel stability the joint executive committee 1880 1886 this article employs weekly time series data on the joint executive committee railroad cartel from 1880 to 1886 to test empirically the proposition that observed prices reflected switches from collusive to noncooperative behavior an equilibrium model of dynamic oligopoly with asymmetric firms together with explicit functional form assumptions about costs and demand determines the estimating equations and stochastic structure of the econometric model the hypothesis that no switch took place so that price and quantity movements were solely attributable to exogenous shifts in the demand and cost functions is then tested against this alternative and rejected

asymmetric all pay auctions with incomplete information the two player case abstract we prove existence and uniqueness of bayesian equilibrium for a class of generally asymmetric all pay auctions with incomplete information due to its importance in applications some prominence is given to the first price all pay auction for which a detailed characterization of equilibrium and an approximation to equilibrium of its well studied complete information version are supplied furthermore we relate our uniqueness result to the well known multiplicity of equilibria in the war of attrition second price all pay auction which emerges as a limit point of the class of two player auction games considered journalof economic literature classification numbers d44 c62 c72

racing with uncertainty and strategic interaction between competitors as the race unfolds most of the existing literature examines one or other of these features but not the two combined our aim is to see how the efforts of competitors in a race vary with the intensity of rivalry between them in our principal model whch is of a one dimensional race it is shown that the leader in the race makes greater efforts than the follower and efforts increase as the gap between competitors decreases under certain conditions the same results hold in our second related model which is of a two dimensional race

competitive pricing behavior in the auto market a structural analysis in a competitive marketplace the effectiveness of any element of the marketing mix is determined not only by its absolute value but also by its relative value with respect to the competition for example the effectiveness of a price cut in increasing demand is critically related to competitors reaction to the price change managers therefore need to know the nature of competitive interactions among firms in this paper we take a theory driven empirical approach to gain a deeper understanding of the competitive pricing behavior in the u s auto market the ability motivation paradigm posits that a firm needs both the ability and the motivation to succeed in implementing a strategy boulding and staelin 1995 we use arguments from the game theoretic literature to understand firm motivation and abilities in different segments of the auto market we then combine these insights from the game theoretic literature and the ability motivation paradigm to develop hypotheses about competition in different segments of the u s auto market to test our hypotheses of competitive behavior we estimate a structural model that disentangles the competition effect from the demand and cost effects on prices the theory of repeated games predicts that firms with a long run profitability objective will try to sustain cooperative pricing behavior as a stable equilibrium when conditions permit for example markets with high concentration and stable market environments are favorable for sustaining cooperative behavior and therefore provide firms with the ability to cooperate the theory of switching costs suggests that in markets in which a firm s current customers tend to be loyal firms have a motivation to compete very aggressively for new customers recognizing the positive benefits of loyalty from the customer base in the long run as consumer loyalty in the market increases the gains from increasing market share by means of aggressive competitive behavior are more than offset by losses in profit margins firms therefore have the motivation to price cooperatively empirically we find aggressive behavior in the minicom pact and subcompact segments cooperative behavior in the compact and midsize segments and bertrand behavior in the full size segment these findings are consistent with our theory based hypotheses about competition in different segments in estimating a structural model of the auto market we address several methodological issues a particular difficulty is the large number of car models in the u s auto market existing studies have inferred competitive behavior only in markets with two to four products they also use relatively simple functional forms of demand to facilitate easy estimation functional forms of demand however impose structure on cross elasticities between products such structure when inappropriate can bias the estimates of competitive interaction we therefore use the random coefficients logit demand model to allow flexibility in cross elasticities we also use recent advances in new empirical industrial organization neio to extend structural estimation of competitive behavior to markets with a large number of products we use the simulation based estimation approach developed by berry et al 1995 to estimate our model a frequent criticism of the neio approach is that its focus on industry specific studies limits the generalizability of its findings in this study we retain the advantages of neio methods but partially address the issue of generalizability by analyzing competitive behavior in multiple segments within the auto industry to see whether there is a consistent pattern that can be explained by theory theoretical modelers can use our results to judge the appropriateness of their models in predicting competitive outcomes for the markets that they analyze a by product of our analysis is that we also get estimates of demand and cost apart from competitive interactions for the market managers can use these estimates to perform what if analysis they can answer questions about what prices to charge when a new product is introduced or when an existing product s characteristics are changed

the all pay auction with nonmonotonic payoff i model innovation contests as an all pay auction in which it is possible not to achieve successful innovation despite costly r d investments and as a result there is no winner in such a case the winning payoff turns out to be nonmonotonic in own bid i derive the sufficient conditions for the existence of pure strategy equilibria and fully characterize the nondegenerate mixed strategy equilibrium in the mixed strategy equilibrium the support of the low value bidder is not continuous and both the high value and the low value bidders place an atom in the distinct lower bound of their respective support under symmetric valuation both bidders place an atom at zero these results can explain why one does not observe very low quality innovation in real life or why even symmetric firms may stay out of an innovation contest

the competitive effects of a new product introduction a case study this paper analyzes the competitive effect of a new product introduction we break the overall competitive effect into two parts the effect on the prices of existing products due to increased competition and the effect of having additional product variety using data from both before and after the introduction we directly estimate the price effects and the additional variety effect then using only the estimated post introduction demand structure along with an assumed model of competition we estimate the price effects indirectly by comparing the indirect and direct estimates we assess the validity of alternative models of competition for the industry

entry in monopoly market this paper develops new empirical models of market concentration from game theoretic models of entry we construct our models from inequality conditions that describe entrants equilibrium strategies in simultaneous move and sequential move games and use them to study the effects of entry in isolated monopoly markets for new automobiles from estimates of the market size necessary to support one and two dealers we conclude that monopoly dealers do not block the entry of a second dealer we also find that entry does not cause price cost margins to fall by much

entry into regulated monopoly markets the development of a competitive fringe in the local telephone industry abstract incumbent firms operating in today s local telephone industry are beginning to face competition from new entrants using the dominant firm competitive fringe framework and a recently constructed panel data set of local telephone markets this paper provides an empirical analysis of the competitive transition underway in the u s local telephone industry of particular interest is the differential impact of economic regulation on the development of fringe competition in flocal telephone markets empirical results reveal that local telephone markets with price cap regulation have witnessed less net fringe entry and subsequently contain smaller competitive fringes during the time period studied these findings imply that the widespread adoption of price cap regulation by state public utility commissions has contributed to the slow development of local telephone competition to reconcile this surprising conclusion a political economy explanation that details how state regulators have benefited from

time varying competition normative models typically suggest that prices rise in periods of high demand and cost however in many markets prices fall when demand or costs rise this inconsistency occurs because the normative models assume that competitive intensity does not change with demand and cost conditions over time we therefore introduce the notion of time varying competition by suggesting that it is important not only to account for the direct effect of demand and cost on prices e g higher demand means higher prices but also the indirect effect of demand and cost changes on competition e g higher demand could cause more competition and hence lower prices we develop a general unified framework to empirically model the direct and indirect effects of demand and cost shifts on pricing in differentiated product markets our approach allows us to measure the indirect effect of multiple demand and cost drivers on competitive intensity and test predictions from alternative theories of repeated games the empirical application is to the u s photographic film industry where there are two main players kodak and fuji we find that the indirect effects are highly significant and comparable in magnitude to the direct effects competitive intensity is greater in periods of high demand and lower cost and is moderated by whether demand or costs are expected to grow or decline interestingly we find asymmetries in the competitive responses of kodak and fuji while kodak is sensitive to demand factors fuji is sensitive to costs our results suggest that market characteristics such as observability of competitor prices can be an important determinant of how competitive intensity is affected by demand and cost conditions

informative advertising competition or cooperation there are two main views of advertising the informative view and the persuasive view this thesis studies aspects of the informative view one aspect of interest is whether firms can benefit from collusion on advertising even though advertising is only informative if so will this enhance or lower welfare there are several reasons why firms may want to collude on adver tising first the legal field is tilted in favour of nonprice collusion second it is not at all obvious that collusion on price is more profitable than collusion on advertising and third the analyses of grossman and shapiro 1984 and others show that profits can be increased by restricting advertising in paper 1 we examine firms incentives to collude on advertising and the implications for welfare we find that collusion on advertising and competition on price is more profitable than competition on both price and advertising we also find that semicollusion on advertising is detrimental to welfare this suggests a need for monitoring especially since it is in the interest of firms to restrict price advertising we also compare semicollusion on price to semicollusion on advertising we find that in general semicollusion on price does not lead to higher profits compared to semicollusion on advertising hence we lend theoretical support to the empirical literature that consistently find evidence of semicollusion on advertising rather than on price another important issue concerns the effect on prices and profits of ad vertising only a subset of the product range many firms in particular those in the retail sector sell a wide variety of products but only advertise a few recent empirical evidence suggests that prices of unadvertised products are higher milyo and waldfogel 1999 theoretically little is known in paper 2 we study the effects of advertising only a subset of products we allow for both low and high differentiation and at the same time we explicitly model the advertising decision we find that the extend of differentiation between competing firms plays an important role in the analysis of loss leader pricing when firms sell products with the same reservation price loss leader pric ing obtains only when differentiation is low when products are less similar however price competition is less intense and as a result firms advertise prices above marginal cost our loss leader pricing results enable us to shed some light on the seemingly paradoxical empirical findings in the marketing literature that loss leader pricing fails to increase store traffic loss leader sales and hence to increase profits we also consider a different subject price discrimination although it is well understood that movements in the exchange rate have a bearing on firm profitability and hence affect firm behaviour the role of exchange rate variability in the firm s choice of the number of varieties to produce has to my knowledge not been explored this despite the fact that the product mix is an important aspect of firm strategy by tinkering with the number of varieties a firm can bolster its ability to extract consumer surplus in paper 3 we explore this issue we show that variability in the exchange rate induces the firm to vertically segment markets i e offer two varieties in each market this happens because exchange rate variability affects income dispersion and hence the firm s incentives to extract consumer surplus to better extract surplus the firm offers two price quality menus high quality variant priced high for top end surplus extraction and a low quality variety priced low to address market coverage concerns

innovation and industry evolution the theoretical literature on innovation has been concerned with a single innovation produced by a number of identical agents by contrast we consider a market in which one firm is the current incumbent while the remaining firms are challengers moreover we consider a sequence of innovations so that success does not imply that the successful firm reaps monopoly profits forever after but only until the next better innovation is developed we begin with a fully optimizing behavioral model and derive the equivalent of the schumpeterian process of creative destruction that is a firm enjoys temporary monopoly power but is soon overthrown by a more inventive challenger the essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers goods the new methods of production or transportation the new markets the new forms of industrial organization that capitalist enterprise creates schumpeter 1942 pp 82 83

first movers non movers and social gains from subsidising entry in markets for nature based recreational goods abstract the importance of ecosystem services for mankind stresses the issue of identifying different institutional solutions to effectively secure their adequate provision much focus has been on services of the public good type and instruments like payments for environmental services we extend this work to consider the possible social gains from supporting development of new markets for nature based recreational goods which may alleviate negative externalities caused by congestion problems our three main questions are i why is there a lack of market development ii can there be social gains from intervention and supporting the development of such markets and iii if so then how could such intervention be best performed we use a two stage non cooperative bayesian simultaneous move game model and show that in spite of apparent potential first mover advantages in a developing market demand uncertainty and sunk costs may equally well result in widespread presence of non movers on the supplier side we show that social gains can be made from offering a subsidy towards the sunk costs analysing three possible subsidy schemes we show a that fixed costs may make rationing optimal b that sequential rationing does not necessarily dominate strict rationing because c the more subsidies are offered the larger each subsidy must be to induce participation and that d the longer a single agent on the market may keep market information to himself the better a non rationing scheme will perform relative to rationing schemes finally e subsidies for second mover entry may be optimal in some cases

discrimination in a model of contests with incomplete information about ability we study contests with private information and identical contestants where contestants efforts and innate abilities generate output of varying qualities the designer s revenue depends on the quality of the output and she offers a reward to the contestant achieving the highest quality we characterize the equilibrium behavior outcomes and payoffs for both nondiscriminatory and discriminatory where the reward is contestant dependent contests we derive conditions under which the designer obtains a larger payoff when using a discriminatory contest and describe settings where these conditions are satisfied

paying is believing the effect of costly information on bayesian updating the supposed irrelevance of historical costs for rational decision making has been the subject of much interest in the economic literature in this paper we explore whether individual decision making under risk is affected by the cost of information to do so one must distinguish the effect of cost from self selection by individuals who value information the most outside of the laboratory it is difficult to disentangle these two effects we thus create an experimental environment where subjects are o ered additional useful and identical information on the state of the world across treatments we find a systematic effect of sunk costs on the manner in which subjects update their beliefs subjects over weigh costly information relatively to free information which results in a push of beliefs towards the extremes this shift does not necessarily lead to behavior more attuned with bayesian updating we find that an intensification of representativeness bias due to cost is the most likely explanation of our results

the max min group contest weakest link group all pay auction we investigate a group all pay auction in which each group s effort is represented by the minimum among the effort levels exerted by the group members and the prize is a group specific public good we fully characterize the symmetric equilibria for two groups there are four types of equilibria the pure strategy equilibria in which all active players exert the same effort the semi pure strategy equilibria in which the players in a group play the same pure strategy whereas those in the other group play the same mixed strategy the nondegenerate mixed strategy equilibria with continuous support and the nondegenerate mixed strategy equilibria with discontinuous support we then analyze a general contest with n groups

the impact of deregulation on the employment and wages of airline mechanics this paper describes the effects of deregulation on negotiated wage rates and employment levels of aircraft mechanics in the scheduled airline industry between 1978 and 1984 a firm by firm analysi

an examination of the conservative information processing bias in an accounting framework as early as 1973 dickhaut found that subjects in accounting settings did not process information according to normative e g bayes theorems similar results have been obtained by wright 1978 swieringa et al 1976 and more recently joyce and biddle 1981 while these studies on human information processing have focused on individual performance work in related accounting areas such as capital market research in accounting and the principal agent area of accounting has employed models of the individual which rest on assumptions inconsistent with the results cited above commenting on the apparent divergence between the capital market research and human information processing research einhorn 1976 p 98 noted of course the fascinating but unanswered question remains as to how sub optimal individual behavior can lead to rational behavior at the aggregate level if indeed this exists

further tests of static oligopoly models whiskey 1882 1898 using data from the turn of the century whiskey industry we conduct tests of the neio methodology similar to those conducted by genesove and mullin 1998 like genesove and mullin we find that the neio methodology appears to perform reasonably well for low levels of market power conduct is somewhat overestimated with estimates ranging from 0 17 to 0 35 as compared to direct estimates of 0 09 cost parameters are generally underestimated estimates of conduct and remaining cost parameters improve significantly however with additional information on cost estimates improve further if conduct is allowed to have two regimes which are identified based on historical evidence

innovative activity and sunk cost abstract we analyze innovative activity in a general framework with time dependent rewards and sunk costs when firms are identical innovation is delayed by an increase in the number of firms or a decrease in the size of the reward when one firm has higher profit potential it is more likely to innovate first our framework generalizes an all pay auction however we show that under certain conditions there is qualitatively different equilibrium behavior

the multifaceted nature of exploration and exploitation value of supply demand and spatial search for innovation in this paper exploration and exploitation are conceptualized in terms of a nonlocal local search continuum in three dimensional supply demand and geographic space using cross sectional data from a wide range of manufacturing industries we develop and validate an operational measure of the exploration exploitation concept in line with theory based arguments our analysis suggests that the value of supply side demand side and spatial exploration and exploitation is contingent on the environment while boundary spanning supply side search is found to be positively associated with innovation in more dynamic environments typical of the entrepreneurial regime phase of technology evolution such exploration appears to hurt innovation in less dynamic environments in a reverse fashion while boundary spanning demand side search is found to be favorably associated with innovation in less dynamic environments it appears to harm innovation in a more dynamic context interestingly spatial boundary spanning search seems to contribute to innovation in more as well as less dynamic environments with the caveat that the substantive findings of this study are based on cross sectional data we discuss the implications of our work and future research directions

price competition in a capacity constrained duopoly abstract this paper characterizes the set of nash equilibria in a model of price setting duopoly in which each firm has limited capacity and demand is continuous and decreasing in general there is a unique equilibrium so that comparative static exercises are meaningful the properties of the equilibrium conform with a number of stylized facts the equilibrium prices are lower the smaller is demand relative to capacity when demand is in an intermediate range the firms use mixed strategies they randomly hold sales if capacities are chosen simultaneously before prices the set of equilibrium capacities coincides with the set of cournot quantities

the evolution of market structure when there is a sequence of innovations the paper explores the question of how market structure evolves when there is a sequence of opportunities to innovate does one firm extend its technological superiority to become increasingly dominant or does technological leadership constantly change hands in a process of actionreaction a simple duopoly model is proposed in which the answer to this question depends upon the nature of product market behaviour in that model highly competitive product market behaviour leads to increasing dominance whereas cournot behaviour may lead to action reaction

testing for fairness in regulation application to the delhi transportation market i report a remarkable finding that regulatory authorities who have no a priori knowledge of rabin s 1993 fairness axioms associated with a very specific utility function have always proposed legal fares in the auto rickshaw three wheeler market in new delhi that satisfy them regulated fares are ignored by auto rickshaw drivers and customers they bargain on prices among themselves newly announced fare hikes are effective enough to ensure the prevalence of legal uniform non negotiated prices for a considerable amount of time i suggest that the two of the most recent hikes have satisfied rabin s fairness axioms the results i report are robust to different cooperative games of bargaining

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

an empirical model of optimal dynamic product launch and exit under demand uncertainty this paper considers the decision problem of a firm that is uncertain about the demand and hence profitability of a new product we develop a model of a decision maker who sequentially learns about the true product profitability from observed product sales based on the current information the decision maker decides whether to scrap the product central to this decision problem are sequential information gathering and the option value of scrapping the product at any point in time the model predicts the optimal demand for information e g in the form of test marketing and it predicts how the launch or exit policy depends on the firm s demand uncertainty furthermore it predicts what fraction of newly developed products should be launched on average and what fraction of these products will fail i e exit the model is solved using numerical dynamic programming techniques we present an application of the model to the case of the u s ready to eat breakfast cereal industry simulations show that the value of reducing uncertainty can be large and that under higher uncertainty firms should strongly increase the fraction of all new product opportunities launched even if their point estimate of profits is negative alternative simpler decision rules are shown to lead to large profit losses compared to our method finally we find that the high observed exit rate in the u s ready to eat cereal industry is optimal and to be expected based on our model

estimation of a model of entry in the airline industry this paper considers the effect of an airline s scale of operation at an airport on the profitability of routes flown out of that airport the empirical methodology uses the entry decisions of airlines as indicators of underlying profitability the results extend the empirical literature on airport presence by providing a new set of estimates of the determinants of city pair profitability these estimates imply that city pair profits increase in airport presence and decrease rapidly in the number of entering firms the literature on empirical models of oligopoly entry is also extended via a focus on the role of differences between firms

structural analysis of manufacturer pricing in the presence of a strategic retailer consumer goods manufacturers usually sell their brands to consumers through common independent retailers theoretical research on such channel structures has analyzed the optimal behavior of channel members under alternative assumptions of manufacturer retailer interaction vertical strategic interaction research in empirical industrial organization has focused on analyzing the competitive interactions between manufacturers horizontal strategic interaction decision support systems have made various assumptions about retailer pricing rules e g constant markup category profit maximization the appropriateness of such assumptions about strategic behavior for any specific market however is an empirical question this paper therefore empirically infers 1 the vertical strategic interaction vsi between manufacturers and retailer 2 the horizontal strategic interaction hsi between manufacturers simultaneously with the vsi and 3 the pricing rule used by a retailer the approach is particularly appealing because it can be used with widely available scanner data where there is no information on wholesale prices researchers usually have no access to wholesale prices even manufacturers who have access to their own wholesale prices usually have limited information on competitors wholesale prices in the absence of wholesale prices we derive formulae for wholesale prices using game theoretic solution techniques under the specific assumptions of vertical and horizontal strategic interaction and retailer pricing rules we then embed the formulae for wholesale prices into the estimation equations while our empirical illustration is using scanner data without wholesale prices the model itself can be applied when wholesale prices are available early research on the inference of hsi among manufacturers in setting wholesale prices using scanner data e g kadiyali et al 1996 1999 made the simplifying assumption that retailers charge a constant margin this assumption enabled them to infer wholesale prices and analyze competitive interactions between manufacturers in this paper we show that this model is econometrically identical to a model that measures retail price coordination across brands hence the inferred cooperation among manufacturers could be exaggerated by the coordinated pricing category management done by the retailer we find empirical support for this argument this highlights the need to properly model and infer vsi simultaneously to accurately estimate the hsi when using data at the retail level functional forms of demand have been evaluated in terms of the fit of the model to sales data but recent theoretical research on channels lee and staelin 1997 tyagi 1999 has shown that the functional form has serious implications for strategic behavior such as retail passthrough while the logit and linear model implies equilibrium passthrough of less than 100 lee and staelin call this vertical strategic substitute vss the multiplicative model implies optimal passthrough of greater than 100 vertical strategic complement vsc because passthrough rates on promotions have been found to be below or above 100 chevalier and curhan 1976 armstrong 1991 we empirically test the appropriateness of the logit vss and the multiplicative vsc functional form for the data we perform our analysis in the yogurt and peanut butter categories for the two biggest stores in a local market we found that the vss implications of the logit fit the data better than the multiplicative model we also find that for both categories the best fitting model is one in which 1 the retailer maximizes category profits 2 the vsi is manufacturer stackelberg and 3 manufacturer pricing hsi is tacitly collusive the fact that the retailer maximizes category profits is consistent with theoretical expectations the inference that the vsi is manufacturer stackelberg reflects the institutional reality of the timing of the game retailers set their retail prices after manufacturers set their wholesale prices note that in the stores and product categories that we analyze the two manufacturers own the dominant brands with combined market shares of about 82 in the yogurt market and 65 in the peanut butter market the result is also consistent with a balance of power argument in the literature the finding that manufacturer pricing is tacitly collusive is consistent with the argument that firms involved in long term competition in concentrated markets can achieve tacit collusion managers use decision support systems for promotion planning that routinely make assumptions about vsi hsi and the functional form the results from our analysis are of substantive import in judging the appropriateness of assumptions made in such decision support systems

investigating dynamic multifirm market interactions in price and advertising diagnosing the nature and magnitu de of competitive interactions among firms is important for developing effective marketing strategies in this paper we formulate a game theoretic model of firm interaction to analyze the dynamic price and advertising competition among firms in a given p roduct market firm or brand level demand functions account for the contemporaneous and carry over effects of these marketing activities and also allow for the effects of competitor actions firms take into consideration the actions of their rivals as well as their own demand and cost functions both production and advertising when determining the profit maximizing price and advertising levels our formulation enables us to quantify not only the direction and magnitude of competitive reactions but also to identify the underlying form of market conduct that generates the particular pattern of interaction we specify and estimate a fully structural econometric model for three firms constituting a distinct sub market within a personal care product category we estimate the demand and competitive interaction parameters as well as the production and advertising cost functions for each firm we then derive implications for competitive interactions and market structure interestingly we find that while firms seem to compete on advertising they price cooperatively thereby enhancing their price cost margins

market information and firm performance the value of new information depends on how accurate the information is but it may also depend on the characteristics of the firm and the nature of the industry it operates in we develop a game theoretic model to understand how firm and industry characteristics moderate the effect of market information on firm profits our results suggest that information is more valuable when product substitutability is higher suggesting that information is of greater value in more competitive industries our results also suggest that although industry size does not affect the value of information information is more valuable for larger firms we find that except under some conditions more precise market information has a greater impact on profits in a stackelberg mode of conduct than in a bertrand nash mode

universities in emerging economies bridging local industry with international science evidence from chile and south africa emerging economies are now becoming more central in global competition to achieve this many countries have invested to develop into knowledge economies universities have a role to play in this transformation both as generators of new knowledge as well as actors that can interact with the local industry and contribute to its innovativeness this paper explores using two case studies in the chilean and south african wine industry how universities connect international science to domestic industry it finds that this connection occurs through a few bridging researchers who display particular characteristics compared with their colleagues bridging researchers are more talented than average researchers both because they publish more in international journals and or because they have received awards for their academic work this finding may have significant policy implications as policies aimed at strengthening the skills of these researchers should be welcomed in catching up industries copyright the author 2012 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

catching up and academic institutions a comparative study of past national experiences abstract the universities role in economic development is again today an important focus of debate while policy in developing countries often aims at reproducing advanced economies institutions recent research on national systems of innovation frames the hypothesis that the catching up process is marked by changes in the contribution of academic institutions to the development of firm level capabilities this paper argues in favour of this hypothesis drawing from the history of successful national catching up processes it identifies important similarities across countries despite variations in historical context and local conditions each country struggled to achieve an effective integration of academic institutions into the industrial development process this task was particularly difficult when industry needs were poorly articulated or neglected by the evolution of educational curricula

the role of sunk costs in the decision to invest in r d we present a dynamic empirical model of a firm s r d decisions that is consistent with the existence of sunk r d costs taking into account that these costs may differ between small and large firms and among different technological regimes we estimate a multivariate dynamic discrete choice model using firm level data of spanish manufacturing for 1990 2000 conditional on firm heterogeneity and serially correlated unobservable factors we find that r d history matters this true state dependence allows inferring the existence of sunk r d costs associated with performing r d sunk r d costs are found to be higher for large high tech firms

comparison of accounting systems and heuristics in selecting economic optima in this paper we demonstrate how certain institutional characteristics of real accounting settings namely incomplete information on costs biases in accounting measurements of costs and information processing limitations of accounting users can be rigorously combined to contrast different accounting techniques variable versus absorption costing given an economic setting in which an optimal output exists our analysis involves determining the extent to which a reasonable informationprocessing rule when employed in conjunction with different accounting conventions yields an output level that approximates that optimal output

signalling and adaptive learning in an entry limit pricing game in an experimental investigation of milgrom and roberts 1992 model play consistently converges to a unique equilibrium providing evidence of sophisticated strategic behavior that the theory predicts play starts with monopolists at their myopic maxima followed by an attempt to pool and then if no pooling equilibrium exists separation suggesting myopia rather than a forward looking process when both pure strategy equilibria and separating equilibria exist equilibrium selection is a function of the past history of play an adaptive learning model characterizes the major features of the data and provides predictions of intermediate term behavior that is otherwise lacking in the theory

bounded rationality in pricing under state dependent demand do firms look ahead and if so how far the authors propose an empirical procedure to investigate the pricing behavior of manufacturers and retailers in the presence of state dependent demand rather than assuming that firms are perfectl

r d rivalry with licensing or imitation the authors study the rivalry between two firms to develop an innovation in a dynamic setting that allows for post development dissemination of the innovation such as licensing or imitation this dissemination may cause the noninnovating firm to benefit from the discovery when this occurs conventional results in the economics of r d no longer need apply they find that industry leaders will tend to develop minor innovations but will develop major innovations only if imitation is difficult copyright 1987 by american economic association

preemptive patenting and the persistence of monopoly this article takes a different tack and inquires whether institutions such as the patent system create opportunities for firms with monopoly power to maintain their monopoly power the results apply to other situations such as brand identification spatial location and capacity expansion which share the characteristic that early or preemptive actions may lower the returns to potential competitors

advertising and limit pricing we enrich milgrom and roberts 1982 limit pricing model to allow an incumbent to signal his costs with both price and advertisements our fundamental result is that a cost reducing distortion occurs in that the incumbent behaves as if there were complete information but his costs were lower than they are preentry price is therefore distorted downward and demand enhancing advertising is distorted upward as a consequence of signalling if advertising is a purely dissipative signal it is not used nor therefore distorted recent refinements of the sequential equilibrium concept are featured

learning through the international joint venture lessons from the experience of china s automotive sector this study explores why international joint ventures ijvs based on the global south may meet with only partial success in nurturing local technological capability the experience of china s passenger vehicle sector demonstrates that in the existence of a substantial technological capability gap between alliance partners the ijv arrangement is likely to create a passive learning mode and learners using this ijv arrangement may be able to strengthen their production capability but leaving their project execution and innovation capabilities largely undeveloped

pressure and performance in accounting decision settings paradoxical effects of incentives feedback and justification this paper shows that the positive effects on decision making of financial incentives performance feedback and the requirement to justify one s decisions to others can be undermined or even reversed by the availability of a decision aid more specifically in the absence of a decision aid subjects achieved greater classification accuracy in a repetitive decision task when a monetary incentive was offered or when feedback about past performance was provided or when they were required to justify their choices relative to the absence of these three variables in contrast when a statistically valid decision aid was available the same incentive feedback and justification requirements resulted in lower classification accuracy again relative to the absence of these three variables these results are interpreted within a framework having two basic tenets first financial incentives performance feedback and a justifi

exchange rate pass through for strategic pricing and advertising abstract this paper builds a model in the new empirical industrial organization framework bresnahan t 1989 industries and market power in schmalensee r willig r eds handbook of industrial organization north holland amsterdam to estimate exchange rate pass through in price and advertising price cost margins market structure and firm conduct are estimated endogenously allowing for precise estimation of the degree of and reasons for incomplete pass through i demonstrate that price and advertising pass through are functions of demand cost and market conduct in the short run in the long run the market conduct and cost technologies are in turn determined by the exchange rate movements 1997 elsevier science b v

on the diffusion of new technology a game theoretic approach this paper is an attempt at a rigorous albeit not exceedingly general analysis of the diffusion of new technology in particular consider an industry composed of two firms each using the current best practice technology the firms are assumed to be operating at nash equilibrium output levels generating a market price given demand and profit allocations when a cost reducing innovation is announced each firm must determine when if ever to adopt it based in part upon the discounted cost of implementing the new technology and in part upon the behavior of the rival firm if either firm adopts before the other it can expect to make substantial profits at the expense of the other firm on the other hand the discounted sum of purchase price and adjustment costs may decline with the lengthening of the adjustment period as various quasi fixed factors become more easily variable therefore although waiting costs the firm more in terms of foregone profits it may save money on the cost of purchasing the new technology thus the firm must weigh the costs and benefits of delaying adoption as well as take account of its rival s strategic behavior

hubs and high fares dominance and market power in the u s airline industry this article estimates the importance of route and airport dominance in determining the degree of market power exercised by an airline the results indicate that an airline s share of passengers on a route and at the endpoint airports significantly influences its ability to mark up price above cost the high markups of a dominant airline however do not create much of an umbrella effect from which carriers with smaller operations in the same markets can benefit the article suggests a number of possible explanations for this asymmetry

patents as options some estimates of the value of holding european patent stocks in many countries holders of patents must pay an annual renewal fee in order to keep their patents in force this paper uses data on the proportion of patents renewed and the renewal fees faced by post world war ii cohorts of patents in france the united kingdom and germany in conjunction with a model of patent holders renewal decisions to estimate the returns earned from holding patents in these countries since patents are often applied for at a nearly stage in the innovation process the model allows agents to be uncertain about the sequence of returns that will be earned if the patent is kept inforce formally then the paper presents and solves a discrete choice optimal stochastic control model derives the implications of the model on aggregate behaviour and then estimates the parameters of the model from aggregate data the estimates enable a detailed description of the evolution of the distribution of returns earned from holding patents over their life spans and calculations of both the annual returns earned from holding the patents still in force or the patent stocks in the alternative countries and the distribution of the discounted value of returns earned from holding the patents in a cohort this abstract was borrowed from another version of this item

technology policy for industrialization an integrative framework and korea s experience abstract first this article reviews three policy perspectives 1 the market mechanism perspective includes the demand for and supply of technology and the linkage between the two 2 the technology flow perspective consists of technology transfer diffusion and r d 3 the dynamic perspective refers to technological trajectory it then integrates these three perspectives to develop a new three dimensional framework that may be useful to analyze technology policy for industrialization second this article applies the framework to analyze korea s technology policy as a case in point conclusions are 1 technology policies on foreign technology transfer technology diffusion and r d should change over time in response to changing external environment 2 technology policies become effective only when three major components policies to promote the demand side of technology policies to promote the supply side of technology and policies to provide effective links between demand and supply sides are well balanced finally it discusses implications for other developing countries

markov perfect equilibrium in the us digital camera market abstract this paper examines the model launch and withdrawal decisions of the major digital camera makers for the period 1996 1999 these manufacturers produce differentiated products and some have the experience of participating in a similar market the film camera market this paper investigates to what extent the following four factors affect firms decisions to launch a new model of digital camera the effects of competition with within brand models the effects of competition with cross brand models the level of experience in the film camera market and market conditions the empirical findings suggest that good market conditions can accommodate more products which has a positive effect on product launches on the other hand existing cross brand models have a negative effect on product launches while within brand models and experience in similar markets have an ambiguous effect on product launches

endogeneity and heterogeneity in a probit demand model estimation using aggregate data two issues that have become increasingly important while estimating the parameters of aggregate demand functions to study firm behavior are theendogeneity of marketing activities typically price andheterogeneity across consumers in the market under consideration ignoring these issues in the estimation of the demand function parameters can lead to biased and inconsistent estimates for the effects of marketing activities endogeneity and heterogeneity have achieved prominence in large measure because of the increasing popularity of logit models to characterize demand functions usingaggregate data the logit model accounts for purchase incidence and brand choice by including a no purchase alternative in the consumer s choice set this allows for category sales to change as a function of the marketing activities of brands in the category there are three issues with using the logit model with the no purchase option to characterize demand when studying competitive interactions among firms 1 the marketing literature dealing with brand choice behavior at the consumer level has found that the iia restriction is not appropriate as each brand in the choice set is more similar to some brands than it is to others 2 studies have found that the purchase incidence decision is distinct from the brand choice decision hence it may not be appropriate to model the no purchase decision as just another alternative in the choice set with the iia restriction holding across all brands and the no purchase option 3 even if the distinction between the purchase incidence and brand choice decisions is accounted for via for example a nested logit specification accounting for the purchase incidence decision with aggregate data requires assumptions for computing the share of the no purchase alternative which is otherwise unobserved in this paper we propose a probit model as an alternative to the logit model to specify the aggregate demand functions of firms competing in oligopoly markets the probit model avoids the iia property that affects the logit model at the individual consumer level furthermore the probit model can naturally account for the distinction between the purchase incidence and brand choice decisions due to the general covariance structure assumed for the utilities of the alternatives we demonstrate how the parameters of the proposed model can be estimated using aggregate time series data from a product market in the estimation we account for the endogeneity of marketing variables as well as for heterogeneity across consumers our results indicate that both endogeneity as well as heterogeneity need to be accounted for even after allowing for a non iia specification at the individual consumer level specific to our data we also find that ignoring endogeneity has a bigger impact on the estimated price elasticities than ignoring the effects of heterogeneity a comparison of the elasticities obtained from the probit model with those from the corresponding logit specification indicates that therange of elasticities obtained from the probit model across brands is larger than that obtained from the logit the results have implications for issues such as firm level pricing in addition to specifying a probit model and providing comparisons with the logit model the paper also addresses the third issue raised above we propose a simple alternative to the purchase incidence brand choice specification by decomposing the demand for a brand into a category demand equation and a conditional brand choice share equation we provide a comparison of results from this specification to those from the specification that includes the no purchase alternative and find that estimated elasticities are sensitive to the specification used we also estimate the demand function parameters using a traditional specification such as the double logarithmic model here we find that the estimated elasticities could be signed in such a manner as to be not useful for firm level pricing decisions one of the key limitations of the proposed model is that while it accounts for the purchase incidence and brand choice decisions of households it does not account for differences across consumers in their purchase quantities the model and analysis are best suited for product categories in which consumers typically make single unit purchases another limitation is more practical in nature while recent advances have been made in computing probit probabilities it could nevertheless be a challenge to do so when the number of alternatives is large

soft money and campaign finance reform we analyze special interest influence on policy when political contributions are capped but the regulation contains soft money loopholes the politician chooses between two policy options we define special interest influence as the probability the politician chooses the policy he would not have chosen in the absence of contributions any binding cap reduces special interest influence but the effect may be nonmonotonic a ban on contributions can result in greater special interest influence than a binding but nonzero cap the results may also have implications for the policy response to the 2010 supreme court ruling on citizens united v fec