consumer exploitation and notice periods firms often set long notice periods when consumers cancel a contract and sometimes do so even when the costs of changing or canceling the contract are small we investigate a model in which a firm offers a contract to consumers who may procrastinate canceling it due to naive present bias we show that the firm may set a long notice period to exploit naive consumers

a two person game of information transmission we consider a statistical decision problem faced by a two player organization whose members may not agree on outcome evaluations and prior probabilities one player is specialized in gathering information and transmitting it to the other who takes the decision this process is modeled as a game qualitative properties of the equilibria are analyzed the impact of improving the quality of available information on the equilibrium welfares of the two individuals is studied better information generally may not improve welfare we give conditions under which it will

money back warranties vs replacement warranties a simple comparaison product warranties are one of the most common time honored and visible contractual relationships entered into by consumers moreover under the uniform commercial code consumers are covered by an implied warranty of merchantability even without a written warranty in this paper we compare the outcomes of two contrasting types of consumer product warranties money back warranties and replacement warranties both these types of warranties are ubiquitous in fact a best and a r andreasen 1977 find that returning an item is the most common action taken by dissatisfied consumers c l kendall and f a russ 1975 in a study of the consumer packaged goods industry find that money back and new merchandise are the two most common responses made by firms to consumer complaints yet as our analysis shows there are significant differences in the incentives they provide firms and in their welfare properties in particular we find that the comparison depends crucially on the observability of quality and on the cost of servicing warranties although there are certainly more complicated explanations for warranties we rely on a simple model of imperfect consumer information in which to embed our comparison of the relative performance of these two forms of warranty consumers are confronted by seller moral hazard that is either they are unable to discern the quality of a product before purchase or alternatively this information is extremely costly for consumers to obtain or for firms to publicly demonstrate we abstract from issues such as differing degrees of risk aversion consumer moral hazard and screening each of which is frequently the rationale behind warranty provision our model is perhaps closest to the model presented in michael spence s 1977 article in which he analyzes the provision of warranties in an environment with biased consumer information

on the simple economics of advertising marketing and product design we propose a framework for analyzing transformations of demand such transformations frequently stem from changes in the dispersion of consumers valuations which lead to rotations of the demand curve in many settings profits are a u shaped function of dispersion high dispersion is complemented by niche production and low dispersion is complemented by mass market supply we investigate numerous applications including product design advertising marketing and sales advice and the construction of quality differentiated product lines we also suggest a new taxonomy of advertising distinguishing between hype which shifts demand and real information which rotates demand

credence goods markets with conscientious and selfish experts i study credence goods markets when there are both selfish and conscientious experts the selfish expert is a profit maximizer the conscientious expert wants to maximize profit and repair the consumer s problem there are two classes of equilibria uniform price equilibria and nonuniform price equilibria a consumer cannot infer the expert s type from his price list in a uniform price equilibrium but can do that in a nonuniform price equilibrium when the fraction of the conscientious expert is small the selfish expert will be honest about the severity of the consumer s problem when the fraction of the conscientious expert is large the selfish expert will cheat the consumer overcharging the consumer whenever he offers to repair the problem finally more conscientious experts may result in a larger social loss when the fraction of the conscientious expert is close to one of the two extremes 0 and 1 more conscientious experts will result in smaller social loss when the fraction of the conscientious expert is in a middle range more conscientious experts may result in a larger social loss

evaluation of salesforce size and productivity through efficient frontier benchmarking the efficient operation of a salesforce is a critical element in the profitability of many firms three factors play key roles the salesforce s size its allocation and its productivity this gives rise to the following questions can salesforce performance be improved by 1 hiring more salespeople 2 allocating them more effectively to the various sales districts and or 3 improving salesperson productivity through better calling patterns in terms of consumers and product line items the practice of most firms and the methodology used in most of the academic literature to address salesforce design and productivity questions is a bottom up approach this approach starts with assessments by each salesperson of the sales and effort corresponding to each customer and prospect in their territory these assessments are then aggregated to the territory district and national levels this paper takes an alternative top down approach it is based on an estimated relationship between district level sales and salesforce size effort and other variables this more macro level decision tool can be used by management in parallel to and as an objective check of the more conventional and more subjective bottom up approach we develop an efficient frontier methodology which allows us to estimate how total district sales respond to salesforce size district potential and competitive activity in the firm s best performing districts the methodology utilized is based on data envelopment analysis dea and yields a benchmark measure of each district s efficient frontier sales sales assuming the district s salesforce allocates its effort as done in the best performing districts based on the estimated response function we discuss the three potential sources of increased profitability closing the inefficiency gap of each of the lower performing districts optimally reallocating the current salesforce to the various districts and changing the current size of the salesforce to its optimal level the inefficiency gap issue is addressed through comparison of the parameter estimates for the best districts obtained through our methodology with those of an average district sales response function obtained using regression analysis this comparison points to an important methodological finding the use of multiple estimation results may lead to an improved understanding of the phenomenon being studied in our case the identification of the likely causes of district productivity inefficiencies the latter two sources of increased profitability salesforce reallocation and changes in the current salesforce size are addressed analytically given the district level efficient frontier sales response function the proposed top down procedure using the efficient frontier methodology and the insights it provides are examined by evaluating the operations of two different salesforces one selling manufacturing equipment and the other business equipment in both cases regression based analysis would have resulted in a declaration that the status quo was close to optimal while the frontier based analysis pointed out that strong gains were possible in certain districts in particular for both firms the greatest increases in profit are obtained through improved salesforce efficiency in the lower performing districts not through salesforce size or district allocation adjustments at the more micro level a comparison of the frontier and regression parameters made it possible to identify which specific changes in the daily operations of the salesforces would allow the realization of these potential productivity gains in our two cases this could be obtained through more emphasis on pursuing prospective accounts

leasing lemons and buybacks in his seminal article of 1970 akerlof argued that the used car market is not efficient because adverse selection causes too little trade we construct a competitive model of the new and used car markets and investigate the relationship between new car leasing and adverse selection our analysis yields a number of interesting results including that new car leasing reduces the adverse selection problem and that buybacks also increase efficiency in the secondhand market we also discuss alternative explanations for new car leasing and an explanation for the growth in new car leasing during the last fifteen years copyright 2003 by the rand corporation

refunds and returns in a vertically differentiated industry abstract firms frequently offer refunds both when physical products are returned and when service contracts are terminated prematurely we show how refunds act as a metering device when consumers learn about their personal valuation while experimenting with the product or service our theory predicts that low quality firms offer inefficiently strict terms for refunds while high quality firms offer inefficiently generous terms this may help to explain the observed variety in contractual terms

managing channel profits a channel of distribution consists of different channel members each having his own decision variables however each channel member s decisions do affect the other channel members profits and as a consequence actions a lack of coordination of these decisions can lead to undesirable consequences for example in the simple manufacturer retailer consumer channel uncoordinated and independent channel members decisions over margins result in a higher price paid by the consumer than if those decisions were coordinated in addition the ensuing suboptimal volume leads to lower profits for both the manufacturer and the retailer this paper explores the problems inherent in channel coordination we address the following questions what is the effect of channel coordination what causes a lack of coordination in the channel how difficult is it to achieve channel coordination what mechanisms exist which can achieve channel coordination what are the strengths and weaknesses of these mechanism what is the role of nonprice variables e g manufacturer advertising retailer shelf space in coordination does the lack of coordination affect normative implications from in store experimentation can quantity discounts be a coordination mechanism are some marketing practices actually disguised quantity discounts we review the literature and present a simple formulation illustrating the roots of the coordination problem we then derive the form of the quantity discount schedule that results in optimum channel profits this article was originally published in marketing science volume 2 issue 3 pages 239 272 in 1983

misselling through agents this paper analyzes the implications of the inherent conflict between two tasks performed by direct marketing agents prospecting for customers and advis ing on the product s suitability for the specific needs of customers when structuring salesforce compensation firms trade off the expected losses from misselling unsuitable products with the agency costs of providing market ing incentives we characterize how the equilibrium amount of misselling and thus the scope of policy intervention depends on features of the agency problem including the internal organization of a firm s sales process the transparency of its commission structure and the steepness of its agents sales incentives jel m31 m37 m52 when purchasing unfamiliar products consumers often rely on information and advice pro vided by representatives of the seller this creates the possibility of misselling the question able practice of a salesperson selling a product that may not match a customer s specific needs 1 this problem is particularly severe in markets for technically complex products such as con sumer electronics auto repairs medical care and retail financial services including securities pensions insurance policies and mortgages an important feature of these markets is that the seller often deals with the customer through an agent rather than directly for example financial brokers typically recommend purchase of a specific product after inquiring about their customers particular circumstances and needs the possibility of abuse has led to regulation in some of these markets most notably for securities transactions the financial industry regulatory authority finra the major self regulatory organization for securities firms operating in the united states mandates that broker dealers make a reasonable effort to obtain information about the individual characteristics of their noninstitutional cus tomers and to ensure that their recommendations are suitable to customers financial situations

selling to advised buyers in many cases agents that make purchase decisions are uninformed and rely on the advice of biased experts for example when contemplating an acquisition the board of the bidder relies on the advice of the managerial team when deciding what oer to make for the target in this paper we study how to sell assets to such advised buyers if the goal is i to maximize revenues ii to maximize allocative eciency in static mechanisms such as rst and second price auctions advisors communicate a coarsening of information and a version of the revenue equivalence theorem holds in contrast dynamic mechanisms such as multiple round auctions result in more informative communication between buyers and their advisors which leads to more ecient allocations and may lead to higher revenues when advisors are biased toward overpaying an ascending price auction dominates any static mechanism in terms of both eciency and revenues when advisors are biased towards underpaying a descendingprice auction dominates static mechanisms in terms of eciency but often results in

innovation technological regimes and organizational selection in industry evolution a history friendly model of the dram industry the paper explores the complex relationship among innovation technological regimes and selection of the firms of different organizational forms in the evolution of an industry for this purpose this paper develops a history friendly model for the dynamic random access memory industry that replicates the history of the industry by simulation the shift of industry dominance by small specialized ss firms to large diversified ld firms is explained by the technological regimes of the industry characterized by low cumulativeness and strong impact of innovation on productivity increase the simulation analysis also found the following causal relationship underlying the evolution of the industry first the stronger innovation impact in terms of productivity jump tends to enlarge the productivity difference among the incumbent firms and increase the speed of productivity catch up by the ld firms second the possibility of entry and eventual dominance by the ld firms increase when the innovation productivity linkage is stronger and there is less cumulativeness in productivity determination copyright 2003 oxford university press

the price of advice we develop a model of consulting advising where the role of the consultant is to reveal signals to her client that refine the client s original private estimate of the profitability of a project although the client can perfectly observe and evaluate these signals the consultant may only be able to do the same imperfectly or not at all this captures the idea that the expert may not fully understand the impact of her advice on the client we characterize the optimal contract between the consultant and her client it is a menu consisting of pairs of transfers specifying payments between the two parties in case the project is undertaken by the client and in case it is not the main result of the article is that in the optimal mechanism the consultant obtains the same profit as though she could perfectly observe and evaluate the impact of the signals whose release she controls on the client s profit estimate

second opinions and price competition inefficiency in the market for expert advice we consider a market in which an expert must exert costly but unobservable effort to identify the service that meets the consumer s need in our model experts offer competing contracts and the consumer may gather multiple opinions we explore the incentives that a competitive sampling of prices and opinions provides for experts to exert effort and find that there is a tension between price competition and the equilibrium effort in particular the equilibrium fails to realize the second best welfare optimum an intervention that limits price competition via price control increases welfare

a search model of costly product returns abstract this paper analyses a market in which consumers buy horizontally differentiated products without knowing their exact valuations by paying return costs the consumers may return less preferred items and obtain refunds the consumers shop sequentially and their shopping strategy is similar to the search strategy of a consumer in a sequential costly search model thus the pricing strategies of firms are identical to those in a price directed sequential search model price competition is more intense and the symmetric equilibrium price is lower when returns are costlier as a result consumer surplus is increasing in the return cost

customer return policies for experience goods this paper studies the economic rationale for customer return policies by focusing on the experience goods aspect of many products return policies allow consumers to defer their purchasing decisions until after they gain some experience with goods in so doing they insure consumers against ex post loss which allows a monopoly seller to charge more than otherwise it is shown that the seller adopts the return policy when consumers are highly risk averse or retail costs are high consumers are strictly better off under the return policy but there is too little adoption of the policy in equilibrium copyright 1996 by blackwell publishing ltd

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

the option value of returns theory and empirical evidence when a firm allows the return of previously purchased merchandise it provides customers with an option that has measurable value whereas the option to return merchandise leads to an increase in gross revenue it also creates additional costs selecting an optimal return policy requires balancing both demand and cost implications in this paper we develop a structural model of a consumer s decision to purchase and return an item that nests extant choice models as a special case the model enables a firm to both measure the value to consumers of the return option and balance the costs and benefits of different return policies we apply the model to a sample of data provided by a mail order catalog company we find considerable variation in the value of returns across customers and categories when the option value is large there are large increases in demand for example the option to return women s footwear is worth an average of more than 15 per purchase to customers and increases average purchase rates by more than 50 we illustrate how the model can be used by a retailer to optimize his return policies across categories and customers

the economics of breakdowns checkups and cures a market in which the owner of a durable good x contracts with an expert for diagnostic and treatment services is studied good x may be in one of three states health disease or failure only experts can determine whether x is healthy or diseased and perform treatment the owner cannot tell whether recommended treatment is really needed this creates an information based demand for health insurance by risk neutral consumers imperfections in the market for spot insurance may give rise to free diagnostic checks strategic procrastination and long term health maintenance agreements

sales talk cancellation terms and the role of consumer protection this paper analyses contract cancellation and product return policies in mar kets in which sellers advise customers about the suitability of their oering when customers are fully rational it is optimal for sellers to oer the right to cancel or return on favorable terms a generous return policy makes the seller s cheap talk at the point of sale credible this observation provides a possible explanation for the excess refund puzzle and also has implications for the management of customer reviews when customers are credulous instead sellers have an incentive to set unfavorable terms to exploit the in ated beliefs they induce in their customers the imposition of a minimum statutory standard even if it is not binding can improve welfare and consumer surplus when at least some customers are credulous in con trast competition policy reduces contractual ine ciencies with rational customers but it is not eective with credulous customers

prices versus nudges what matters for search versus purchase of energy investments abstract we report the results of a field experiment where we exogenously vary the use of social comparison nudges and subsidies for participation in an in home energy audit program we follow subjects through to subsequent purchase of durable goods we therefore can compare the causal effect of financial incentives and nudges along two margins audits which we liken to search and purchase of durables using data on nearly 100 000 households we document that both prices and nudges cause a statistically significant increase in audits comparing point estimates effective nudges are worth roughly 50 70 however we find that neither nudges nor subsidies do not significantly impact installations

price theory and the role of marketing science professor rao provides a comprehensive review of pricing research in marketing science i will not repeat the details here save to say that the review indicates a diversity of pricing research within the developing field of marketing science professor rao s review and the other papers in this issue from the second rochester conference on the interface of economics and marketing science provide us with the opportunity to reflect on the continuing joint evolution of our two disciplines as a marketing scientist who has found economic models and concepts useful in addressing marketing issues let me comment on these evolutions from a marketing science perspective however as i portray these evolutions in the extreme i note that the boundaries are fluid with much overlap and merging of ideas and issues differences are in degree not in fundamental philosophy in the extreme price theory in economics deals with how markets behave while price theory in marketing science deals with how managers should act it is true that one must understand how managers behave in order to model market behavior and that one must understand how markets behave in order to advise managers the difference is not in the comprehensiveness of the analyses but in the emphasis a typical economic analysis will simplify the model of the manager s task in order to study the essential forces of the market in contrast the typical marketing science analysis will simplify the model of the market mechanism in order to study the essential profit impacts of the actions by the marketing manager i will comment more on these simplifications later economics is a mature science with roots in the eighteenth century when adam smith 1776 observed the english marketplace and formulated his famous invisible hand theory since then the field has evolved in many rich and varied ways a myriad of researchers has

honesty in a model of strategic information transmission we consider the following simple model of consumer fraud consumers need one of two possible repairs an expensive repair denoted e or an inexpensive repair denoted i the exogenous probability that a consumer needs the more costly remedy is r each consumer is assumed to know r an expert can observe with certainty which of the two repairs is needed and can offer to sell either to the consumer in a simple extension we allow for uncertainty with respect to the expert s observation we assume that selling the expensive remedy to a consumer who needs only the inexpensive one is more profitable than selling the inexpensive one thus h eii h1 iji where h denotes profit and i denotes conditional on needing the profit functions are increasing in the price of the respective repairs for convenience we suppress the dependence of h on prices in our notation we also assume that a consumer prefers to obtain the appropriate repair to the inappropriate one thus u eie u ije and u iii u eii where u is the consumer s payoff lastly we assume that the functions u eje and u e i are decreasing in the price of the expensive repair and that u iie and u iii are decreasing in the price of the inexpensive repair we also assume that u iie is decreasing in the price of the expensive repair since the consumer ultimately buys the expensive repair in this case see below for further assumptions regarding the repairs we are interested in the equilibrium levels of honesty in this model how honest is the expert at the equilibrium do consumers always follow the expert s advice does the level of honesty increase as the interests of the agents become more similar in a sense to be defined below our assumptions are similar to those in the abstract strategic information transmission models of vincent crawford and joel sobel 1982 and jerry green and nancy stokey 1980 we follow the former paper which asks whether the signals sent become less noisy as the agents preferences become more similar despite the similarity of our model to crawford sobel s we arrive at some different conclusions with respect to the expert s honesty vis a vis the agents closeness of interests we explain this in detail in section iii in addition we allow that the expert may be uncertain about the true state of the world we also explicitly model the level of expert honesty which extends crawford sobel the outline of the paper is as follows in section i we provide the details of the model and show that a unique equilibrium exists comparative static results and a simple extension incorporating the assumption of the incompetent expert are given in section ii we draw comparisons with crawfordsobel in section iii in section iv we conclude with a brief summary

consumer information in a market for expert services abstract we present a model of credence goods in which the consumers are heterogenous in terms of the valuation they place for getting a serious problem fixed we introduce consumer information into this framework by assuming that prior to visiting an expert some consumers receive an information signal about whether they have a serious or a minor problem we show that when the fraction of consumers with low willingness to pay is sufficiently high the expert does not cheat any low valuation consumer regardless of their information status but cheats the high valuation consumers those high valuation consumers with bad signals are the most frequent victims of cheating whereas those with good signals are the least likely victims when the fraction of consumers with low willingness to pay is below a certain threshold however the unique equilibrium involves no cheating

when consumers do not make an active decision dynamic default rules and their equilibrium effects abstract dynamic defaults for recurring purchases determine what happens to consumers enrolled in a product or service who take no action at a decision point consumers may face automatic renewal automatic switching or non purchase defaults privately optimal dynamic defaults depend on the contributions of adjustment costs versus costless opt out frictions both produce inertia under renewal defaults but differ under non renewal defaults defaults have equilibrium effects on pricing by changing the elasticity of repeat demand socially optimal defaults depend on firms pricing responses as well more elastic repeat demand restrains price increases on repeat customers and can reduce inefficient switching

on the role of verifiability and commitment in credence goods markets a client has a problem but does not know whether it is serious or minor she consults an expert who can correctly diagnose and fix her problem this paper characterizes the equilibrium pricing and recommendation strategies of an expert under the assumptions that i the type of treatment is verifiable by the client ii the client has the option of rejecting any treatment recommendation and iii the expert is not liable for the outcome of the treatment it is found for any parameter configuration that there exist equilibria in which the expert makes fraudulent recommendations resulting in inefficient treatment the market outcome is compared with that under an alternative market environment in which the expert is liable for treatment outcome but the type of treatment performed is non verifiable it is shown that for some parameter configurations the equilibrium is more efficient when liability is in place than when the treatment is verifiable these findings stand in sharp contrast to the received wisdom that the market outcome under verifiability of treatment is efficient while the market outcome under liability for outcome is not finally this paper shows that the existence of some honest experts may induce more fraudulent behavior by opportunistic experts

credence goods costly diagnosis and subjective evaluation we study contracting between a consumer and an expert the expert can invest in diagnosis to obtain a noisy signal about whether a low cost service is sufficient or whether a high cost treatment is required to solve the consumer s problem this involves moral hazard because diagnosis effort and signals are not observable treatments are contractible but success or failure of the low cost treatment is observed only by the consumer payments can therefore not depend on the objective outcome but only the consumer s report or subjective evaluation a failure of the low cost treatment delays the solution of the consumer s problem by the high cost treatment to a second period we show that the first best solution can always be implemented if the parties discount rate is zero an increase in the discount rate reduces the range of parameter combinations for which the first best can be obtained in an extension we show that the first best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents

an investigation of the equal commission rate policy for a multi product salesforce for a multi product sales force the policy of paying commissions as an equal percentage of realized gross margins is shown to be in general nonoptimal from the firm s profit maximization point of view for a homogeneous salesforce the nonoptimality results from the fact that earlier research while taking into account the effect of commission rates on a salesperson s allocations of total time to the multiple products has not incorporated the effect of commission rates on salesperson s total selling time resulting from his her trading off income vs total time to maximize utility the equal commission rate policy is however optimal for the cases of i salesperson with a fixed total selling time and a minimum income requirement and ii fair income salesperson whose total selling time is merely a function of income and not based on rate of change of income as in the utility maximization case if the salesforce is heterogeneous e g different salespersons have differing sales responses to selling time this makes the equal commission rate policy to be in general nonoptimal even for the restrictive cases i and ii it is suggested that the commission rates be set higher for products with greater elasticities relating quantities sold to selling times the common practice of paying commissions as a percentage of total dollar sales rather than gross margins is shown to be optimal under certain assumptions

when do experts cheat and whom do they target a credence good is a product or service whose usefulness or necessity is better known to the seller than to the buyer this information asymmetry often persists even after the credence good is consumed i propose two new theories of expert cheating suggesting that identifiable heterogeneities among customers can cause expert sellers to defraud their customers according to these theories cheating arises as a substitute for price discrimination and experts cheat selectively for instance experts target high valuation and high cost customers finally selective cheating may damage the communication of useful information from customers to experts and result in inferior services

competition through commissions and kickbacks in markets for retail financial products and health services consumers often rely on the advice of intermediaries to decide which specialized offering best fits their needs product providers in turn compete to influence the intermediaries advice through hidden kickbacks or disclosed commissions motivated by the controversial role of these widespread practices we formulate a model to analyze competition through commissions from a positive and normative standpoint the model highlights the role of commissions in making the advisor responsive to supply side incentives we characterize situations when commonly adopted policies such as mandatory disclosure and caps on commissions have unintended welfare consequences jel d21 d82 d83 g21 l15 l25

how not to pay for advice a framework for consumer financial protection abstract this paper investigates the determinants of the compensation structure for brokers who advise customers regarding the suitability of financial products our model explains why brokers are commonly compensated indirectly through contingent commissions paid by product providers even though this compensation structure could lead to biased advice when customers are wary of the adviser s incentives contingent commissions can be an effective incentive tool to induce the adviser to learn which specialized product is most suitable for the specific needs of customers if instead customers naively believe they receive unbiased advice high product prices and correspondingly high commissions become a tool of exploitation policy intervention that mandates disclosure of commissions can protect naive consumers and increase welfare however prohibiting or capping commissions could have the unintended consequence of stifling the adviser s incentive to acquire information more vigorous competition benefits consumers and reduces exploitation but firms have limited incentives to educate naive customers

optimization models for salesforce compensation abstract this paper reviews models which address the design of optimal salesforce compensation schemes the discussion starts with agency theoretic models that are able to derive the optimal form for a compensation scheme under assumptions regarding the degree of information asymmetry and heterogeneity within the salesforce for the four resulting extreme cases models are presented that allow for the determination of optimal parameter values for specific compensation schemes such as fixed salary plus commission bonus for quota achievement and menus of plans finally there follows an examination of approaches through which commission rates or bonuses can be optimally differentiated such that the salespersons allocate their selling time in their own and at the same time in the firm s best interest all of these models are reviewed in particular with respect to their applicability in practice

information transmission in regulated markets the seminal papers of vincent p crawford and joel sobel 1982 and jerry green and nancy stokey 1980 study models in which a signal about the state of the world is transmitted from a perfectly informed sender to an uninformed receiver the authors study a model in which multiple signalers compete for consumers the authors ask how much information is revealed how consumers shopping around affects this information and how each is affected by incentives an implication of the model is that in a price regulated market for health care patients should not be prohibited from gathering more than one opinion

consumer inattention and bill shock regulation for many goods and services such as electricity health care cellular phone service debit card transactions or those sold with loyalty discounts the price of the next unit of service depends on past usage as a result consumers who are inattentive to their past usage but are aware of contract terms may remain uncertain about the price of the next unit i develop a model of inattentive consumption derive equilibrium pricing when consumers are inattentive and evaluate bill shock regulation requiring firms to disclose information that substitutes for attention when inattentive consumers are sophisticated but heterogeneous in their expected demand bill shock regulation reduces social welfare in fairly competitive markets which may be the effect of the federal communication commission s recent bill shock agreement if some consumers are attentive while others naively fail to anticipate their own inattention however then bill shock regulation increases social welfare and can benefit consumers hence requiring zero balance alerts in addition to the federal reserve s new opt in rule for debit card overdraft protection may benefit consumers

on the equivalence of general and specific control in organizations most principal agent relationships in firms are multidimensional in the presence of multiple tasks and multiple performance signals the contract between principal and agent not only has to motivate the agent but also has to direct the agent to allocate effort among different tasks the value of efforts for a specific task accrues not only through the principal s expected returns but also through its contribution to overall risk and therefore to the risk diversification of the task portfolio hence if the agent is risk averse multitask relationships can be considered as a portfolio problem coupled with incentive constraints we examine the relationship between specific control sc and general control gc for multitask principal agent problems under sc the principal observes the outcome of each individual task and uses this set of information for compensation under gc contracts are based only on the aggregate signal such as cumulative profits of all tasks we describe two sets of multitask problems for which gc and sc are equivalent that is contracts based only on aggregate performance signals impose the same incentives for the agent as a contract that is based on the outcome of each task the first multitask problem is characterized by homogeneous tasks in the second multitask problem all activities are perfect substitutes in the cost function of the agent the equivalence of sc and gc arises since gc provides insurance to the agent and yields the same overall risk premium as specific control moreover gc allows the principal to set the same incentives as sc since the marginal returns from gc are equal to the sum of the marginal returns for each task under sc the results described in this paper can serve as benchmarks where gc and sc are equivalent we show how the equivalence can be relevant for a variety of business situations such as the compensation of sales persons or managers at all hierarchy levels we also discuss the reasons when gc and sc differ suppose for instance that tasks are technologically separable and the precision of the performance of one task is low then the principal is forced under gc to adopt an incentive scheme that implements only a low effort across all tasks since the average precision matters under sc however the principal can tailor the optimal efforts to each task

on manufacturing marketing incentives stereotypically marketing is mainly concerned about satisfying customers and manufacturing is mainly interested in factory efficiency using the principal agent agency paradigm which assumes that the marketing and manufacturing managers of the firm will act in their self interest we seek incentive plans that will induce those managers to act so that the owner of the firm can attain as much as possible of the residual returns one optimal incentive plan can be interpreted as follows the owner subcontracts to pay the manufacturing manager a fixed rate for all capacity he delivers each marketing manager receives all of the returns from his product in turn all managers pay a fixed fee to the owner under this plan the marketing managers will often complain about the stock level decisions even though these levels are announced in advance under a revised plan the owner can eliminate such complaints by delegating the stocking decisions to the respective marketing managers without any loss this plan is interpreted as requiring the owner to make a futures market for manufacturing capacity paying the manufacturing manager the expected marginal value for each unit of capacity delivered receiving the realized marginal value from the marketing managers and losing money on average in the process

conflicts of interest information provision and competition in the financial services industry abstract in some markets sellers have better information than buyers over which products best serve a buyer s needs depending on the market structure this may lead to conflicts of interest in the provision of information by sellers this paper studies this issue in the market for financial services the analysis presents a new model of competition between banks where price competition influences the ensuing incentives for truthful information revelation we also compare conflicts of interest in two different firm structures specialized banking and one stop banking

ethics welfare and markets an economic analysis the present article examines society s welfare when goods with identical physical attributes can be produced using two alternative technologies one of them less ethically desirable but less expensive for at least some producers for the scenario where identification costs must be borne by producers and consumers of the high quality good the outcome under unregulated markets is identical to the optimal solution of a central planner constrained to neither ban the undesirable technology nor segregate the low quality good however under certain circumstances the unregulated market equilibrium may be improved upon by government intervention that shifts the burden of identification costs to the producers of the low quality good or which bans the production of the low quality good the optimal intervention needs to be determined case by case and depends on consumer preferences relative production costs and relative costs of identification and fraud prevention

credence goods monopolists abstract with a credence good consumers never discover how much of the good they actually need therefore the seller acts as the expert determining the customers requirements this information asymmetry creates strong incentives for the seller to cheat on services we analyze whether the market mechanism may induce non fraudulent seller behavior we consider four scenarios differing in the amount of information consumers have at hand to infer the seller s incentives to be honest in three constellations the profit maximizing credence goods monopolist provides honest services only in one scenario there is no trade

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

market regulation of voluntary add on contracts abstract this paper analyzes contract choices and the effectiveness of consumer protection policies when firms can offer voluntary add on insurance for their products we develop a model in which a base product can be sold together with a voluntary extended warranty contract that insures consumers against the risk of product breakdown some consumers do not pay attention to extended warranties before making base product choices but overestimate the value of such warranties at the point of sale under retail competition the consumers option to buy multiple base products can endogenously create a base price floor that may prevent firms from redistributing the full warranty profits via loss leadership inducing competition in the warranty market weakly increases consumer welfare and weakly outperforms a minimum warranty standard which can even reduce consumer surplus the results are consistent with the effects of recent changes regarding extended warranty regulation by uk legislators

optimal sales contracts with withdrawal rights we introduce ex post participation constraints in the standard sequential screening model this captures the presence of consumer withdrawal rights as for instance mandated by european union regulation of distance sales contracts with such additional constraints the optimal contract is static and unlike with only ex ante participation constraints does not elicit the agent s information sequentially this holds whenever differences in ex ante and ex post outside options are below a positive upper bound welfare effects of mandatory withdrawal rights are ambiguous since it is insufficient in our setting to consider only local incentive constraints we develop a novel technique to identify the relevant global constraints

new like new or very good reputation and credibility we show that sellers may earn reputation for their ability to deliver high quality goods on average by honestly announcing the realised quality of items for sale every period as the expected revenue stream from continuing with honest communication increases with their ability high ability sellers remain honest while low ability sellers find it too costly and sometimes lie about quality for short term gain thus cheap talk communication facilitates the market s learning of a seller s ability and strengthens reputation effects we study this new reputation mechanism and the induced market dynamics first when sellers cannot restart with a new identity and then when they can we extend the analysis to various other situations such as voluntary refund and moral hazard

a game theoretic explanation of the administrative lattice in institutions of higher learning abstract we provide a game theoretic model of academic organizations focusing on the strategic interaction of prototypical overseers administrators and professors by identifying key principal agent games routinely played in colleges and universities we begin to unpack the black box typically used to conceptualize these institutions our approach suggests an explanation for the seemingly inevitable drift of institutions of higher education into such well documented phenomena as academic ratchet and administrative lattice and builds an understanding of the organizational conditions in which drift would be restrained

relying on the information of interested parties we investigate the conventional wisdom that competition among interested parties attempting to influence a decisionmaker by providing verifiable information elicits all relevant information we find that if the decisionmaker is strategically sophisticated and well informed about the relevant variables and about the preferences of the interested party or parties competition may be unnecessary to achieve this result if the decisionmaker is unsophisticated or not well informed competition is not generally sufficient if the interested parties interests are sufficiently opposed however or if the decisionmaker is seeking to advance the parties welfare then competition can reduce or even eliminate the decisionmaker s need for prior knowledge about the relevant variables and for strategic sophistication in other settings only the combination of competition among information providers and a sophisticated skepticism is sufficient to allow effective decisionmaking

industry evolution with a sequence of technologies and heterogeneous ability abstract a model of industrial evolution with a succession of process types and the presence of heterogeneous research ability is presented first a model of schumpeter s creative destruction process is proposed revolutionary change in technology is shown to bring waves of upheaval to a stable industry order second aspects of the debate as to whether all firms in an industry benefit from concentration or whether increased profits accrue solely to firms with superior ability are assessed simulations of the model show that firm profit rates are more closely correlated with firm size than research ability

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