black markets for currency hoarding activity and policy reforms abstract in emerging market economies under development of financial markets leads to goods hoarding and foreign currency accumulation as forms of investment in this paper an asset market model supplemented by explicit treatment of smuggling and second economy activity is used to study the paths of black market exchange rates second economy prices hoarding stocks and privately held dollar balances following policy reforms we discuss conditions for overshooting and related dynamics of exchange rates and prices following official exchange rate adjustments price reforms and altered risks of monetary confiscation or currency reforms the saddlepath trajectory of financial adjustment is simulated using data from recent russian experience 1997 elsevier science b v

measuring market power in bilateral oligopoly the wholesale market for beef econometric methods for assessing the degree of market power typically rely on a maintained hypothesis of price taking behavior on one side of the market or the other in the analysis of bilateral oligopoly however one would like to leave open the question of whether buyers or sellers or both behave competitively while allowing for the possible exercise of market power on either side in this paper we address the problem of measuring market power in bilateral oligopoly this requires that we first distinguish among three candidate equilibrium concepts bilateral price taking seller price taking and buyer price taking choosing among them comes down to a test of nonnested nonlinear simultaneous equation models our application to the u s wholesale market for beef characterized by high degrees of concentration among both sellers beef packers and buyers primarily retail grocery chains reveals seller price taking among the three candidates to be the most consistent with the data in particular the hypothesis of price taking conduct on both sides of the market can be rejected this is a conclusion that would not have been reached had we considered monopoly conduct by sellers as the only alternative to perfect competition

law enforcement and the black market exchange rate abstract this paper examines how a system of multiple exchange rates can give rise to unreported exports and imports and a black market for foreign exchange risk aversion rather than an assumed smuggling or detection technology generally guarantees the coexistence of legal and illegal trading evidence for brazil suggests that enforcement of the exchange rate and trade regime is an important fundamental of the black market exchange rate that has so far invariably been left out of empirical work

conspicuous consumption and sophisticated thinking consumers purchase conspicuous goods to satisfy not only material needs but also social needs such as prestige in an attempt to meet these social needs producers of conspicuous goods like cars perfumes and watches highlight the exclusivity of their products in this paper we propose a monopoly model of conspicuous consumption using the rational expectations framework and then examine how purchase decisions are affected by the desire for exclusivity and conformity we show that snobs can have an upward sloping demand curve but only in the presence of consumers who are weakly followers laboratory tests lend support for this model prediction and for the rational expectations framework the experimental results suggest that subjects used some degree of sophisticated thinking to arrive at their first period decisions their behavior in the subsequent trials however can be adequately captured by a purely adaptive learning mechanism we discuss the implications of consumer learning for optimal dynamic pricing policy by a monopolist

explaining fashion cycles imitators chasing innovators in product space abstract this paper considers the problem of a fashion trend setter confronting an imitator who can produce the same product at lower cost a one dimensional product space is considered which is an abstraction of the key attribute of some consumer good three broad strategies can be optimal for the fashion leader 1 never innovate which milk profits from the initially advantageous position but ultimately concede the market without a fight 2 innovate once but only once which just temporarily defers conceding the market 3 cycle infinitely around product space never letting the imitator catch up and capture the market sometimes the cycles start immediately sometimes the innovator should wait for a time before beginning the cycles the optimal solution exhibits strong state dependency with so called skiba curves separating regions in state space where various of these strategies are optimal there are even instances of intersecting skiba curves in most cases analytical expressions can be stated that characterize these skiba curves

closed loop advertising strategies in a duopoly using the lanchester model to describe the dynamics of the market where two firms compete for customers by advertising we solve the problem of determining an optimal advertising strategy for maximum discounted profits we develop both open and closed loop strategies and explain the relationship between them using a new mathematical approach we prove that our closed loop solution is a global nash equilibrium the closed loop strategy is time variant and depends linearly on the actual market share the time variant coefficient incorporates the discount factor its computation requires the solution of a backward differential equation and a set of two nonlinear differential equations for an initial value problem the closed loop advertising expenditures are proportional to the open loop advertising expenditures and to the square of the competitor s actual market share this provides a very practical adaptive control rule that allows the manager to adjust the actual advertising expenditure and to deviate f

effects of horizontal consolidation under bilateral imperfect competition between processors and retailers this article considers bilateral imperfect competition between processors and retailers to estimate the trade off between market power and cost efficiency the model is based on pricing rules from a firm s profit maximization and nests both oligopoly and oligopsony models an empirical analysis for us beef processors and retailers suggests that processors tend to exercise oligopsony market power in procuring cattle but they are unlikely to exercise market power on retailers when retailers and processors are considered as one integrated sector efficiency effects from the increased concentration in the us beef packing industry are slightly larger than market power effects when processors market power is considered separately from retailers market power the difference between cost saving and market power effects becomes greater the cost elasticity estimate 0 99 indicates that a further merger would result in little economies of scale in the future therefore although we find that efficiency effect

advertising strategies for new product diffusion in emerging markets propositions and analysis abstract we develop advertising strategies for a firm which has a new product for which demand exists in an emerging market however the primary channels for distribution of the firm s product do not exist because either the market has not been opened up or the firm has not entered the market therefore the consumers use the secondary channels in other markets the current research seeks to answer questions such as i is it beneficial to advertise for the product before the market opens ii what should be the difference in advertising before and after the market opens iii what is the effect of various parameters such as the likelihood of product adoption for the primary and secondary channels market potential and coefficient of innovation and imitation on the optimal advertising policies the above problem is relevant for the situation faced by japanese electronics goods manufacturers before they entered the indian market or a company which has regional presence in one part of a country say urban and gets access to another part later e g rural the problem is modeled as an optimal control problem relevant propositions are developed for optimal normative advertising policy numerical examples are provided to illustrate key policy results

research note trading up a strategic analysis of reference group effects reference groups influence product and brand evaluations especially when the product is a publicly consumed luxury good marketers of such luxury goods need to carefully balance two important social forces 1 the desire of leaders to distinguish themselves from followers and 2 the countervailing desire of followers to assimilate with leaders in this paper we examine the theoretical implications of these social forces for firm prices product design and target consumer selection we show that the presence of reference group effects can motivate firms to add costly features which provide limited or no functional benefit to consumers furthermore reference group effects can induce product proliferation on one hand and motivate firms to offer limited editions on the other hand we find that offering a limited edition can increase sales and profits in some cases reference group effects can even lead to a buying frenzy

on the optimality of cost plus non uniform pricing in vertical control problems abstract this paper argues that cost plus non linear contracts are the general solution of the vertical control problem where there are multiple upstream firms one downstream firm and no uncertainty two part tariffs are only optimal if upstream firms have linear costs cost plus contracts are also shown to be a solution of the bilateral monopoly problem

subsidy and tuition policies in public higher education i introduction the much discussed and widely debated recent conditions in public higher education include expanding enrollments flat if not declining public appropriations per resident student and rapid increases in tuition rates 1 to many observers tuition policy in public higher education appears be explained as an attempt to set tuition at whatever level is necessary to compensate for shortfalls between public appropriations and instructional expenditures ehrenberg 2006 asserts that public higher education has been buffeted by a perfect storm in which state appropriations to public higher education institutions have failed to keep pace with per student expenditures in private higher education because of economic recession the priorities placed on alternative uses of state tax revenues such as elementary and secondary education medicaid welfare and criminal justice and efforts to reduce income and sales tax rates a considerable empirical literature examines the relationship between tuition in public higher education and state appropriations koshal and koshal 2000 identify a negative relationship between tuition and state appropriation a study of college costs and prices which is conducted by cunningham et al 2001 identifies an inverse association between tuition rates and annual budget appropriations but finds little evidence of a link between tuition and expenditures on instruction lowry 2001 treats state appropriations as exogenous in a resident tuition equation and discovers a significant negative relationship between state funding and tuition rizzo 2005 finds that increases in tuition are linked to declines in future levels of state funding which hints at a dynamic association rizzo and ehrenberg 2004 in one of the more extensive examination of the topic treat real state appropriations per student as an exogenous variable in their resident tuition equation and find that schools that receive higher state appropriations per student charge lower tuition though the elasticity is far from unity acknowledging the economic and demographic conditions of public higher education and the empirical literature linking appropriations and tuition raises a number of questions what activities are legislatures supporting when they allocate public funds to higher education what are the implied responsibilities for subsidizing residents versus nonresidents how are resident and nonresident tuition rates determined and what are the relationships among tuition rates resident and nonresident enrollments and state appropriations to higher education in particular there appears to be the need to develop a better understanding of the decision processes that determine both the public subsidy and the setting of tuition rates a goal of this article is to develop a conceptual framework for that process there is a widely held notion that residents should pay a lower tuition than nonresidents and as a result of a resident subsidy they do so in nearly all public universities one rationale for favorable treatment is that residents and their parents pay state taxes another claim which receives some support by groen 2004 is that residents are likely to remain in the state after graduation and thus contribute future tax revenues although the public subsidy to higher education is justified for these and many other economic development reasons some argue that the higher education subsidy is simply a payoff to special interest groups who influence legislatures and governors friedman 1968 and goldin and katz 1998 provide a general discussion of the objectives of subsidized higher education for whatever reasons resident students continue to receive a substantial publicfinanced subsidy while nonresidents pay close to full cost there are two basic arrangements for determining tuition rates in higher education 1 institutions determine tuition rates under the direction of an independent governing board and 2 state legislatures who are governed by statues and budget policies make tuition decisions

bad loans to good friends money politics and the developmental state in south korea why has the literature on asian development not addressed the issue of money politics in south korea how can we reconcile the view of an efficient developmental state in south korea before 1997 with reports of massive corruption and inefficiency in that same country in 1998 and 1999 politics is central to the answer in this study i make two arguments first money politics was extensive in south korea both during and after the high growth era second political not economic considerations dominated policymaking this study explains both past and present and compares the patterns of money politics in the early post independence era with those that arose after the democratic transition in 1987 while during the park era a balance of power between businessmen and politicians kept corruption from spinning out of control the transition to democracy altered the basic business state relationship allowing business to exert greater influence over policy decisions the political hypothesis advanced in this study suggests a new direction for our research about the developmental state

on the instability of the r d portfolio in a dynamic monopoly or one cannot get two eggs in one basket abstract firms innovation portfolios include several dimensions ranging from organizational aspects to cost reduction and product characteristics all of these efforts take place during the product life cycle and interact with each other in determining the spectrum of features of the product and its performance on the market this paper contributes to the related theoretical debate focussing on the possibility of having superior product quality levels at lower marginal production cost over time to deal with this issue we investigate the optimal r d portfolio of a single product monopolist investing in cost reducing activities accompanied by efforts improving the quality of its product over an infinite time horizon it turns out that the firm s relative incentives along the two directions are conditional upon market affluence measured by consumers willingness to pay for quality and r d efforts are complements in the neighbourhood of the steady state equilibrium however the dynamics of the two r d controls depend on both quality and marginal cost at every instant consequently as the stability analysis reveals the steady state equilibrium is indeed unstable due to the dynamics of marginal cost thereby implying that one should not expect the firm to supply an increasing quality level at a decreasing production cost hence the dynamic interplay between r d controls and the resulting instability affecting production costs also imply that one may not expect to observe product quality to increase and market price to decrease over the product life cycle

interaction of pricing advertising and experience quality a dynamic analysis for certain goods or services the quality of the product can be assessed by customers only after consumption we determine the optimal time paths for pricing advertising and quality for a profit maximizing firm facing demand that is influenced both by this experience quality as well as by advertising in particular there may exist two optimal trajectories separated by an indifference threshold in which the firm has the same utility of converging to either of the two long run steady states or to put it in a nutshell the optimal mix of marketing instruments may lead to history dependence one implication is that there may be a market failure such that a government subsidy could help reach the steady state that is best for the economy in the sense of having greater sales and a higher quality product

optimal price and advertising policy for a convenience goods retailer convenience goods are bought without much consideration or effort on the part of the consumer buyers don t try to get the best bargain when purchasing individual convenience items instead they adapt their store choice habits so that they can expect on average good value for money in the long run store choice is governed by aggregate information which is received on the price levels of stores this is embodied in store price images a store price image is defined in the subsequent paper as a perceived difference between the store s price level and a reference level that consumers expect of stores about which they have no particular information store price images are learnt adaptively over time we propose a theoretical model of store price image adaptation and a two stage sales response model according to the latter a store s price image and advertising determine the number of customers attracted per period sales per visit however depend only on the prices actually observed in the store for this sales model we have studied the optimal price and advertising policy making simple assumptions of cost our main interest is the interaction between optimal advertising and price image it turns out that image improvement is achieved mainly through pricing increased advertising follows only after the price image has been improved therefore as long as the price image is poor relative to some optimal equilibrium level a larger portion of the marketing budget should be allocated to lower prices rather than to advertising in phases where the price image declines towards the equilibrium however heavier advertising is profitable

quality cycles and the strategic manipulation of value we present a two state one control model of a seller s decision about how good a deal to give customers when price and quantity are observable but the customer does not observe quality until after committing to the transaction so the quality of the bargain affects future demand only indirectly by influencing the reputation of the seller this situation describes well the markets for many illicit drugs analysis reveals two optimal strategies converging to a unique steady state with a positive sales volume or exploiting the initial customer base by selling cut rate products until the seller s reputation is so bad that sales go to zero numerical analysis with parameters based on the u s cocaine market shows that there is a so called dechert nishimura skiba dns curve in the state space where the seller is indifferent between these two strategies convergence to the steady state with positive sales is oscillatory because different sellers may be at different phases of the oscillation at any given

on modeling the advertising operations interface under asymmetric competition abstract using a market share attraction structure of advertising competition and following a supermodular game approach this article demonstrates for an asymmetric oligopoly the directional impact of changes in model parameters on the marketing controlled variables of all rivals advertising budgets and the operations controlled variables of all rivals ordered quantities importantly the various changes are examined analytically empirically and numerically in both non dominated and dominated asymmetric oligopolies in this regard the results indicate that firms in a dominated oligopoly one firm of market share larger than or equal to 50 behave differently compared to firms in a non dominated oligopoly each firm of market share less than 50 in response to changes in model parameters furthermore changes in model parameters are investigated in terms of their relative influential impact on a variety of equilibrium measures in this regard the findings indicate that for the analyzed model the marketing parameters exert much more influence on the equilibrium measures than the operations parameters additionally a change in the mode of competition from non cooperation oligopoly to cooperation joint ownership dictates that strong asymmetric firms of favorable marketing and operations parameters continue advertising but at lower levels and weak asymmetric firms of less favorable parameters cease advertising altogether

smuggling and the black market for foreign exchange this paper develops a model of the black market for foreign exchange in which black market currency is demanded and supplied by firms engaged in smuggling it is demonstrated that quotas or foreign exchange rationing are not necessary to induce the coexistence of legal and black foreign exchange markets variants of the model analyze the implications of capital flight unbalanced trade quotas foreign exchange licensing and economies with more than two goods

a duopolistic model of dynamic competitive advertising abstract this paper proposes a differential game model of competitive advertising decisions for non durable products by extending the lanchester model and the deal model of competitive advertising in the literature the proposed model is compared empirically with the lanchester model for model fitting and forecast accuracy it is shown that the model is suitable for an actual market and out performs the lanchester model in forecast accuracy the model provides a sensible modeling alternative to the lanchester model for the study of dynamic competitive advertising decisions necessary and sufficient conditions for open loop and closed loop nash equilibrium solutions to the model are discussed a numerical algorithm for open loop and closed loop nash strategies to the model is developed

supply quality management with wholesale price and revenue sharing contracts under horizontal competition abstract in a number of industries e g the airplane industry aerospace industry auto industry or computer industry certain suppliers essentially have a monopoly on the production technology for key components and inevitably manufacturers in these industries have common suppliers a key part of manufacturers work with suppliers concerns improving the quality of their respective products which gives rise to a collaborative activity usually termed as supply quality management when the manufacturers are competitors they do not wish to see a common supplier dividing his involvement in quality improvement unequally between themselves and their rivals however as the suppliers collaborate with several manufacturers it is highly questionable whether their efforts will be strictly equivalent for each manufacturer in this paper a non cooperative dynamic game is formulated in which a single supplier collaborates with two manufacturers on design quality improvements for their respective products the manufacturers compete for market demand both on price and design quality the paper analyzes how each party should allocate resources for quality improvement over time in order to take into account the potential coordinating power of the compensation scheme adopted in this type of decentralized setting we compare the possible outcomes under a wholesale price contract and a revenue sharing contract

the shape of advertising response functions revisited a model of dynamic probabilistic thresholds prior work in marketing has suggested that advertising threshold effects levels beneath which there is essentially no sales response are rarely encountered in practice because advertising policies settle into effective ranges through early trial and error thresholds cannot be observed directly and arguments for their existence must be based primarily on a statistical footprint that is on relative fits of a range of model types to detect possible threshold effects we formulate a switching regression model with two regimes in only one of which advertising is effective mediating the switch between the two regimes is a logistic function of category specific dynamic variables e g order of entry time in market number of competitors and advertising levels nesting a variety of alternative formulations among them both standard concave and s shaped responses a sequence of comparisons among parametrically related models strongly suggests that threshold effects exist that market share response to advertising is not necessarily globally concave that superior fit cannot be attributed to model flexibility alone and that dynamic environmental competitive and brand specific factors can influence advertising effectiveness these effects are evident in two evolving durables categories suvs and minivans although not in the one mature nondurable category liquid detergent studied

a pedagogical treatment of bilateral monopoly most economists are familiar with the concept of bilateral monopoly an upstream monopolist sells its output to a single downstream buyer that may also be a monopolist in its output market the theory of bilateral monopoly has a rich history that can be traced to the writings of cournot 10 and menger 31 over the 150 or so years that the problem has been under consideration however economists have offered a variety of solutions ranging from a completely determinate intermediate good price and output to a completely indeterminate solution within a specified range interestingly this historical divergence of opinion concerning the correct outcome under bilateral monopoly still persists a clear consensus has not yet emerged surprisingly this lack of unanimity exists despite the fact that bowley 5 provided the theoretically correct solution in 1928 2 even more surprising however is the apparent popularity of the incorrect solution a recent survey of the population of intermediate microeconomic texts on the authors bookshelves revealed that over 80 percent of the current treatments of this topic are in error 3 table i presents the results of that survey those authors who present a correct analysis of bilateral monopoly recognize that optimality requires joint profit maximization this leads them to the correct conclusion regarding the determinate quantity of the intermediate product exchanged of the five treatments we have classified

on the generalizability of advertising pulsation monopoly results to an oligopoly this paper introduces for the first time an analytical framework for modeling and analyzing sales response to advertising pulsation for competitive markets of mature products in continuous time for discrete piecewise policies that allow unequal cycle lengths employing a nash equilibrium solution concept this study supported with numerical analysis demonstrates that there is an oligopolistic as opposed to a monopolistic justification for advertising at a constant rate in the presence of concave response functions or advertising according to a pulsing policy in the presence of s shaped response functions the article employs a modeling framework whereby each of a set of competitors responses to advertising spending is governed mainly by lanchester type response is used to analyze the game resulting from cyclical advertising policies that are strictly adhered to by all players a non discounted averaged performance is used to assess the purported optimality of different variants of piecewise constant policies

a learning curve model with knowledge depreciation abstract empirical studies in several industries have verified that unit costs decline as organizations gain experience or knowledge in production which is referred to as the learning curve effect in the past two decades there has also been analytical work on the relationship between a firm s learning curve effects and its pricing and output decisions learning rates differ significantly across firms in the same industry and recent empirical evidence has shown that knowledge depreciation may be an important reason for these differences we propose and analyze a learning curve model with knowledge depreciation and provide several new insights first we show that there exists a steady state where knowledge level and unit cost remain constant over time and there exists an optimal path to this steady state many empirical researchers have observed this plateau phenomenon whereby unit costs decline but reach saturation after some time while this has been traditionally modeled exogenously in the learning curve literature by assuming that cost reduction stops at some level of knowledge through a convex decreasing unit cost function we provide an alternative endogenous explanation we are also able to show that unlike in the model without knowledge depreciation the production rate along the optimal path to the steady state may decrease over time also the knowledge level along the optimal path may actually decline over time finally we show that the optimal production rate decreases at higher interest rates and increases at higher knowledge depreciation rates in turn this implies that a high interest rate environment discourages firms from achieving high knowledge levels and results in higher prices on the other hand higher knowledge depreciation rates result in higher production rates and lower prices

dynamic optimal control models in advertising recent developments this paper presents a review of recent developments that have taken place in the area of dynamic optimal control models in advertising subsequent to the comprehensive survey of the literature by sethi in 1977 the basic problem underlying these models is that of determining optimal advertising expenditures and possibly other variables of interest over time for a firm or a group of competing firms under consideration this optimization is done subject to some dynamics that define how these variables translate into sales and in turn into profits the purpose of this update is twofold on the one hand new contributions in the areas already treated in the earlier survey are reviewed on the other hand new trends in the advertising literature since 1977 such as quality as an additional marketing instrument cumulative sales models pulsing advertising and advertising as a part of corporate models of the firm are discussed the models covered in this update are organized under six headings models with ca

optimal pricing of a conspicuous product during a recession that freezes capital markets abstract this paper considers the problem of how to price a conspicuous product when the economy is in a recession that disrupts capital markets a conspicuous product in this context is a luxury good for which demand is increasing in brand image brand image here means the ability of a consumer to impress observers by conspicuously displaying consumption of the good brand image is built up when the good is priced high enough to make it exclusive and eroded if the good is discounted recession is modeled as having two effects it reduces demand and it freezes capital markets so borrowing is not possible in pricing the conspicuous product the firm faces the following trade off reducing price helps maintain sales volume and cash flow in the face of reduced demand but it also damages brand image and thus long term demand the paper analyzes the firm s pricing policy facing scenarios of mild intermediate and severe recessions while taking the threat of bankruptcy into account for an intermediate recession the optimal solution is history dependent the results have implications for policy interventions in capital markets and for timing of mergers and acquisitions

a dns curve in a two state capital accumulation model a numerical analysis abstract in this paper we study a capital accumulation model in an optimal control theoretic framework where the capital stock and the investment rate are modelled as state variables and the change in the investment rate as control adjustment costs are introduced for investment rate and its change moreover we model network externalities by a convex segment in the revenue function which implies the existence of two long run optimal steady states one with a low level and the other with a high level capital stock it depends on the initial capital endowment and initial investment rate to which steady state it is optimal to converge we numerically compute a curve in the state plane for which it holds that when starting from a point on this curve the decision maker is indifferent between going to either one of these steady states and identify this curve as the dns curve the negative slope of the dns curve indicates that there is a trade off between the initial capital endowment and initial investment rate

learning and forgetting modeling optimal product sampling over time firms use samples to increase the sales of almost all consumable goods including food health and cleaning products despite its importance sampling remains one of the most under researched areas there are no theoretical quantitative models of sampling behavior other than the pioneering work of jain et al 1995 who modeled sampling as an important factor in the diffusion of new products in this paper we characterize sampling as having two effects the first is the change in the probability of a consumer purchasing a product immediately after having sampled the product the second is an increase in the consumer s cumulative goodwill formation which results from sampling the product this distinction differentiates our model from other models of goodwill in which firm sales are only a function of the existing goodwill level we determine the optimal dynamic sampling effort of a firm and examine the factors that affect the sampling decision we find that although the sampling effort will decline over a product s life cycle it may continue in mature products another finding is that when we have a positive change in the factors that increase sampling productivity steady state goodwill stock and sales will increase but equilibrium sampling can either increase or decrease the change in the sampling level is indeterminate because while increased sampling productivity means that firms have incentives to increase sampling the increase in the equilibrium goodwill level indirectly reduces the marginal productivity of sampling thus reducing the incentives to sample we discuss managerial implications and how the model can be used to address various circumstances

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

novelty preferences and fashion when goods are unsettling abstract there is a whole class of goods those semi durable and durable conveniences for which efficiency and functionality seem not to be the main characteristics of appeal but rather the variability they display in their design properties and in their connections with other goods these goods have not been much dealt with in economics yet these are the goods whose new variants households seem to consume in numbers to which consumers become addicted and in which fashions appear and disappear in this paper i offer a framework for understanding these phenomena without having to resort to one or another form of irrationality on the part of consumers the rationality i suggest however has to include also the cognitive and affective problems that arise when novelty appears

pricing of conspicuous goods a competitive analysis of social effects abstract social needs play an important role in the purchase of conspicuous goods in this article the authors extend traditional economic models to accommodate social needs such as desire for uniqueness and conformism and examine their implications for pricing conspicuous goods first in the context of a duopoly the authors identify the conditions under which the desire for uniqueness can increase demand among some consumers as the price of a product increases second the authors show that though the desire for uniqueness leads to higher prices and firm profits a desire for conformity leads to lower prices and profits third the authors find that consumers purchase high quality products not because of their desire for uniqueness but despite it finally marketers of conspicuous goods may find it beneficial not to emphasize the functional differences among their products when the need for uniqueness is high in a laboratory test the authors find support for the claim that demand for a product amo

uniform commercial policy illegal trade and the real exchange rates a theoretical analysis countries on fixed exchange rates sometimes use uniform tariff cum subsidy utcs schemes as a way of achieving a real depreciation without disturbing the nominal exchange rate a potential drawback of this policy in relation to an across the board devaluation is that a utcs scheme provides incentives for illegal trade using an optimizing model with currency convertibility and illegal trade the author finds that welfare is lower under a utcs scheme than under a corresponding across the board devaluation and that in some cases the real exchange rate actually appreciates in response to an increase in the utcs rate

differential game models of advertising competition abstract differential game methodology combines two attractive features that are critical to the study of advertising competition dynamics and multi competitor decision making a focused review of two decades of differential game modeling of advertising competition indicates that insights gained to date while valuable are of a limited nature and research in the area needs to extend beyond present limits four recent studies are offered as examples of possible directions to follow in continued research

determining market power exertion between buyers and sellers empirical techniques commonly used in industrial organization to measure market power exertion typically assume imperfectly competitive behaviour by firms on only one side of the market firms on the other side are assumed to be perfectly competitive in this paper we extend traditional neio methods by developing a method to estimate market power exertion when firms on both sides have potential market power using monte carlo simulations we find that the model correctly estimates market power exercised by firms on either or both sides of a market and also correctly estimates firms technology parameters when applied to the us leaf tobacco market findings indicate that cigarette manufacturers exert some monopsony power in purchasing leaf tobacco while producers organized as a cartel exhibit no countervailing monopoly market power copyright 2000 john wiley sons ltd

optimal pricing and advertising policies for an entertainment event abstract the paper suggests an optimal control model to determine optimal pricing and advertising policies for a one time entertainment event there are two periods an initial period of regular price sales and a terminal period of last minute sales at a possibly reduced price the price in a period is constant over time in the initial period the organizers of the event advertise the event to potential attendees if tickets are sold out by the end of the first period there will be no last minute sales we find that advertising should be decreased over time during the first period there are three different advertising scenarios it may be optimal not to advertise at all to advertise at a positive rate until the end of the first period or to stop advertising at an earlier instant of time in the last minute sales the organizers implement a feedback pricing policy such that the selected price depends on the number of tickets that have been sold in the regular sales period finally we establish optimality conditions for the time instant where to switch to last minute sales

capital stock management during a recession that freezes credit markets abstract this paper considers the problem of how to price a conspicuous product while maintaining liquidity during a recession which both reduces demand and freezes credit markets reducing price would help maintain cash flow but low prices can erode brand image and hence long term sales the paper extends earlier work of the same authors by explicitly deriving a firm s optimal cash management behavior taking into account that a too low cash level results in bankruptcy there are different sets of initial conditions for which qualitatively different solution trajectories are optimal we distinguish mild and severe recessions with mild recessions bankruptcy can be avoided for sure when the brand image is large enough in case the recession is of intermediate strength it can be optimal to throttle forward then back how aggressively one spends down cash reserves with the associated state constraint alternately being non binding binding non binding then binding in such a way that the firm ceases operation

dynamic advertising and pricing with constant demand elasticities in this paper we analyze a stochastic dynamic advertising and pricing model with isoelastic demand the state space is discrete time is continuous and the planing horizon is allowed to be finite or infinite a dynamic version of the dorfman steiner identity will be derived explicit expressions of the optimal advertising and pricing policies of the value function and of the optimal advertising expenditures will be given the general results will be used to analyze the case of impatient customers furthermore particular time inhomogeneous models and homogeneous ones with and without discounting will be examined we will study the social efficiency of a monopolist s optimal policies and the consequences of specific subsidies from a buyer s perspective our analysis reveals that waiting when looking at immediate expected prices is never profitable should two or more units be available but we will also prove that the sequence of average sales prices is monotone decreasing moreover the techniques applied to solve the discrete stochastic advertising and pricing problem will be used to solve a related deterministic control problem with continuous state space

stochastic optimal budget decision for advertising considering uncertain sales responses abstract firms are faced with uncertain sales responses even though they advertise appropriately to help marketing managers make optimal budget decisions in this situation we develop a stochastic model depicting the problem of advertising budget decision as a special markov decision process where a new objective maximizing expected market utility is proposed in the model we introduce a two dimension state variable including accumulative sales which vary randomly with advertising budget and the predicted probability that an advertising campaign obtains a full sales response we make an analysis of the model on the premise of growing infinite market potential deriving the property of optimal policies and that of optimal value function these results are successfully used to make advertising budget decisions for a private university in xi an china

the effects of itq management on fishermen s welfare when the processing sector is imperfectly competitive in this paper we use a general model of imperfect competition to predict welfare changes within an open access fishery after it transitions to individual transferable quota itq management although related research has explored the effects of market power in the harvesting sector on itq performance none has considered the implications of an imperfectly competitive processing sector addressing this question we find that although fishermen should expect to gain from itqs under perfect competition they may suffer welfare losses if the processing sector is imperfectly competitive

pricing solutions to the bilateral monopoly problem under uncertainty that uniform pricing solutions to the bilateral monopoly problem are sub optimal is well known see for example scherer 19 and waterson 22 over the years there has been considerable debate in the literature as to what constitutes a correct solution to the static bilateral monopoly problem under certainty this is usefully reviewed in machlup and taber 10 and blair kaserman and romano 3 as the latter paper points out the principal conclusion of this debate is that the solution must involve

modeling the impact of product quality on dynamic pricing and advertising policies abstract the marketing mix of price quality and advertising quality relationship is well studied less understood is the price advertising quality relationship this article fills the gap investigating the interplay between price advertising and quality in an optimal control model our results generalize the condition of dorfman steiner in a dynamic context also they point to the impact of greater product quality on the dynamic policies of pricing and advertising furthermore a phase diagram analysis shows that quality develops monotonically in time and converges to a unique steady state we also show that quality investment could either decrease or increase over time but this depends on its effectiveness our results spot the profitable opportunities of a firm managing a more complex marketing mix

currency inconvertibility trade taxes and smuggling abstract in the classic analysis of smuggling importers choose the optimal mix of legal and illegal trade given trade taxes and the technology of detection this paper introduces an inconvertible currency in the framework so that illegal trade is valued at a rate higher than the fixed official exchange rate sections 2 and 3 show how the smuggling ratio and the domestic price markup for the import and export good are simultaneously determined with balanced legal and illegal trade changes in the long run black market premium are a weighted average of changes in trade taxes whereas changes in the smuggling ratios depend on the ration of trade taxes thus an import tariff and an export subsidy rising at the same rate would keep smuggling ratios constant but imply a rising black market premium sections 4 and 5 to determine the quantity of exports and imports a model of the economy is presented in section 6 featuring the production of exports and non traded goods and the consumption of imports and non traded goods as well as a government confiscating the amounts of traded goods unsuccessfully smuggled then export production may fall and welfare may rise if trade taxes have a negative effect on the relative price of exports and imports stronger than the positive effect on smuggled exports and imports which is always welfare reducing section 7 introduces the short run determination of the black market premium via portfolio balance in this case rising trade taxes may be associated with a premium rising even faster if there is unreported capital flight and conversely

an empirical investigation of advertising strategies in a dynamic duopoly the equilibrium profit maximizing advertising policies of firms operating in a dynamic duopoly are derived by linking in a single framework the econometric estimation of the market response function and the technique of differential games that characterizes dynamic competitive behavior we use the lanchester model of combat to represent the system dynamics that capture the competitive shifts due to investments in advertising by the two market rivals we determine the equilibrium advertising levels using both closed and open loop policies we also compare these equilibrium advertising policies for each firm to those obtained using an optimal control theory formulation wherein the advertising spending levels of the rival are assumed to be known the empirical results obtained by analyzing the advertising rivalry between coke and pepsi for the period 1968 1981 under the above three alternative spending policies provide some interesting insights into the nature of competition between these two market rivals a significant contribution of this paper is to extend the existing literature on advertising competition by integrating theoretical and empirical analyses

on continuous time optimal advertising under s shaped response continuous time monopolistic models of advertising expenditure that rely on strict response concavity have been shown to prescribe eventual spending at a constant rate however analyses of discrete analogs have suggested thats shaped response convexity for low expenditure levels may allow for the periodic optima encountered in actual practice casting the dynamic between advertising and sales in a common format an autonomous first order relationship the present paper explores extensions along three dimensions an s shaped response function the value of the discount rate and the possibility of diffusion like response supplementing the treatment by mahajan and muller 1986 a flexible class of s shaped response models is formulated for which it is demonstrated that in contrast to findings in the literature on discretized advertising models continuous periodic optima cannot be supported further a set of conditions on the advertising response function are derived that contains and extends that suggested by sasieni 1971 collectively these results both suggest a set of baseline properties that reasonable models should possess and cast doubt on the ability of first order models to capture effects of known managerial relevance

empirical analysis of closed loop duopoly advertising strategies closed loop perfect equilibria in a lanchester duopoly differential game of advertising competition are used as the basis for empirical investigation two systems of simultaneous nonlinear equations are formed one from a general lanchester model and one from a constrained model two empirical applications are conducted in one involving coca cola and pepsi cola a formal statistical testing procedure is used to detect whether closed loop equilibrium advertising strategies are used by the competitors rather than open loop strategies in the second application involving anheuser busch and miller the general model is estimated results indicate that closed loop equilibria better explain dynamic advertising competition than do open loop equilibria also closed loop equilibrium advertising strategies implied by model estimates show that competitive advertising levels may or may not be monotonic in market share

profiting from product harm crises in competitive markets product harm crises force managers to implement pricing strategies that optimally balance profitability with future potential costs of a recall we propose a stochastic differential game to investigate what should be the optimal competitive pricing strategies in such contexts in the proposed model firms strategically choose prices taking into account that any player in the market can be forced to recall large volume of products at random dates the characterization of the optimal pricing strategies yields novel managerial insights we first find that prices of risk prone products should be higher than prices of risk free products due to the addition of state dependent risk premia optimal pricing strategies differ depending on whether firms play nash or stackelberg furthermore we find that despite its leadership position the value function of the leader is lower than the value function of the follower finally we discover that long term profits of competing firms can increase with intensities of the jump processes governing product harm crises this surprising result happens because anticipating a product harm crisis softens price competition

veblen effects in a theory of conspicuous consumption the authors examine conditions under which veblen effects arise from the desire to achieve social status by signaling wealth through conspicuous consumption while veblen effects cannot ordinarily arise when preferences satisfy a single crossing property they may emerge when this property fails in that case budget brands are priced at marginal cost while luxury brands though not intrinsically superior are sold at higher prices to consumers seeking to advertise wealth luxury brands earn strictly positive profits under conditions that would with standard formulations of preferences yield marginal cost pricing the authors explore factors that induce veblen effects and they investigate policy implications copyright 1996 by american economic association

markov perfect equilibrium advertising strategies of lanchester duopoly model a technical note we propose a numerical approach to compute stationary markov perfect nash equilibrium advertising strategies of the lanchester model the algorithm can be implemented using a standard mathematical package and importantly it does not require that the players discount their future earnings at a zero rate an assumption that has been made in the literature

recent developments in dynamic advertising research a variety of continuous time differential functions have been developed to investigate dynamic advertising problems in business and economics fields since major dynamic models appearing before 1995 have been reviewed by a few survey papers we provide a comprehensive review of the dynamic advertising models published after 1995 which are classified into six categories i nerlove arrow model and its extensions ii vidale wolfe model and its extensions iii lanchester model and its extensions iv the diffusion models v dynamic advertising competition models with other attributes and vi empirical studies for dynamic advertising problems for each category we first briefly summarize major relevant before 1995 models and then discuss major after 1995 models in details we find that the dynamic models reviewed in this paper have been extensively used to analyze various advertising problems in the monopoly duopoly oligopoly and supply chain systems our review reveals that the diffusion models have not been used to analyze advertising problems in supply chain operations which may be a research direction in the future moreover we learn from our review that very few publications regarding dynamic advertising problems have considered the supply chain competition we also find that very few researchers have used the diffusion model to investigate the dynamic advertising problems with product quality as a decision variable and the pricing decision has not been incorporated into any extant lanchester model the paper ends with a summary of our review and suggestions on possible research directions in the future

competition in a duopoly with sticky price and advertising abstract this paper develops a differential duopolistic game where price is sticky and firms can invest in market enlarging promotional activities which have a public good nature one finding indicates that advertising and not output as in fershtman and kamien econometrica 55 1987 1151 1164 is responsible for the higher stationary price found in the open loop equilibrium relative to the linear feedback one that is free riding is more intense when firms play linear markov feedback strategies however the collusive outcome can be approximated and opportunism eliminated if firms can engage in preplay negotiations where they select a nonlinear markov perfect strategy for output and advertising achieving the collusive outcome requires as in the folk theorem for infinitely repeated games the discount rate to be sufficiently small

risk sensitive dynamic market share attraction games we present partial results showing that risk sensitive oligopolists would spend less on advertising than would their risk neutral counterparts the model is an infinite horizon stochastic game in which each firm s goodwill is a random function of both its own and its competitors current and past advertising expenditures single period firm profits have a market share attraction form each firm seeks to maximize its expected exponential utility of the sum of discounted profits we analyze the impact that risk sensitivity and other parameters have on equilibrium advertising strategies by exploiting the special structure of the stochastic game model journal of economic literatureclassification number c73

quality improvement and goodwill accumulation in a dynamic duopoly abstract this paper analyzes optimal advertising and quality improvement decisions by duopolist firms competing in a dynamic setting an extended version of the lanchester model is formulated where conformance quality and goodwill are both involved in competition for market share each competitor s new customer attraction rate depends on its own goodwill while the disloyalty rate for current customers is influenced by the proportion of defective items the search for a non cooperative solution by qualitative as well as numerical means leads to definition of the optimal path for advertising and improvement efforts for each competitor examined under a wide range of configurations

quality effects in different advertising models an impulse control approach abstract in this paper we integrate quality as a control variable in three classical dynamic optimal control models of advertising namely nerlove arrow vidale wolfe and ozga models quality refers to design quality which may deteriorate over time we assume that decisions in quality improvement can only be made at some exogenously given instants of time and consequently we use the formalism of impulse optimal control to determine optimal advertising and quality investments we report numerical results for the three models and discuss the impact of adding quality on the results

capacity allocation for dynamic process improvement with quality and demand considerations management of process improvement activities is an essential part of the manufacturing strategy of a firm to remain globally competitive in the long run this paper considers a manufacturing environment where process improvement activities require use of the productive capacity of the firm in addition to other investments thus the firm must allocate its productive capacity between production activities and improvement activities the output of production activities is used to meet customer demand process improvement activities improve the quality of the output which in turn leads to lower quality related costs both internal and external and possibly lower per unit production cost it is assumed that the demand function is downward sloping and that revenue is a concave function of output a continuous time finite horizon profit maximization resource allocation model is developed to find an optimal time path for process improvement activities and production activities computational results are provided to study the effect of various problem parameters on the optimal decisions