market entry strategy under firm heterogeneity and asymmetric payoffs how should a firm decide whether or not to enter an untested market when a competing firm is vying for the same market should a firm always speed to the market in an effort to capitalize on pioneering advantages we address those questions by developing a simple game theoretical model that captures the most essential factors in a firm s market entry decision such as market uncertainty firm heterogeneity competition cannibalization and order of entry effects our analysis shows that in a competitive context both pioneering advantages and laggard s disadvantages can motivate a firm to speed to an untested market therefore pioneering advantages alone are not an adequate guide for a firm to formulate its market entry strategy the optimal decision may call for a firm to be a prudent laggard when pioneering advantages to the firm are substantial or to become a market pioneer when facing pioneering disadvantages we characterize different patterns of market entry as equilibrium outcomes for different configurations of the market reward structure and offer a conceptual framework for formulating market entry strategies that go beyond the conventional dichotomy speed or wait we show that the paradoxical phenomenon of disadvantaged pioneers can arise in a competitive context as the outcome of rational firms making rational choices to show that pioneering advantages alone are not the right litmus test for market entry decisions we apply our general framework to a concrete case where consumer preference or the premium that consumers are willing to pay for the pioneering brand gives rise to pioneering advantages and laggard s disadvantages we conclude that the firm with a larger pioneering premium may choose to wait while a firm with a smaller pioneering premium speeds to the market our analysis also sheds light on empirical research on pioneering advantages because firms may race into a market solely to avoid laggard s disadvantages rather than to capture pioneering advantages pioneers are not necessarily the firms best positioned to establish exploit and maintain pioneering advantages therefore it is not surprising that a significant percentage of pioneers fail as documented by recent empirical research our normative investigation further suggests that this predicament in empirical research will not disappear even if we have complete data use the right measurements and employ perfect statistical techniques therefore it is perhaps more fruitful to redirect our research effort in the search for pioneering advantages finally we extend our analysis to incorporate the effect of cannibalization on an incumbent firm s market entry strategy we conclude that cannibalization can motivate an incumbent firm to wait as the conventional wisdom suggests but it can also be an impetus for a firm to become a market pioneer we offer supporting evidence for our analysis and discuss managerial implications of our conclusions

the futures and forward price differential in the nordic electricity market abstract this note investigates price differentials between electricity forwards and portfolios of short term futures with identical delivery periods at the nordic power exchange nord pool since both contracts are traded at the same exchange there is no influence of for example different market microstructure and default risk when examining the effect of the marking to market of futures on the price differential although the prices of the futures portfolios are on average below the corresponding forward prices these price differentials are on average not statistically significant and not economically significant when taking transaction costs into account given the characteristics of the electricity contracts under observation this is consistent with the predictions of the cox et al 1981 model and indicates efficient pricing in the nord pool forward market in contrast to previous results

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

a note on taxes and the pricing of treasury bill futures contracts futures contracts in general and treasury bill futures in particular are taxed in a manner that provides individual investors with an apparent opportunity the irs currently considers all futures contracts to be capital assets unlike other capital assets however the holding period for long term gains is six months for futures contracts but only long positions qualify all gains and losses on short positions are short term regardless of the holding period the asymmetrical tax treatment of short and long positions gives individual investors the opportunity to profit at the expense of the government the investor takes a long position in a futures contract with over six months to maturity and holds the position for six months if at that time he has a loss he sells the position recording a short term loss if he has a gain he holds the position another day and records a long term gain by this strategy all gains are taxed as long term gains and all losses are short term the opportunity is even greater in the treasury bill futures market cash treasury bills are not treated as capital assets so that all gains and losses are ordinary to take advantage of this fact the investor takes a long position in a futures contract with over six months to maturity if he has a gain on the last trading day he liquidates his futures contract and records a long term gain if he has a loss he waits until the contract matures and takes delivery of the bills

r d marketing and the success of next generation products this paper studies dynamic competition in markets characterized by the introduction of technologically advanced next generation products firms invest in new product effort in an attempt to attain industry leadership thus securing high profits and benefiting from advantages relevant for the success of future product generations the analysis reveals that when the current leader possesses higher research and development r d competence it tends to investmore in r d than rivals and to retain its lead position the leader s investment exhibits an inverse u pattern as this advantage increases in contrast when the leader enjoys an advantage that originates from the persistence of reputation it investsless than its followers now followers investment exhibits an inverse u pattern as reputation advantage increases depending on the extent of leader reputation industry structure can either exhibit frequent leadership shifts or prolonged incumbent dominance the basic framework is extended to allow investments in additional marketing variables e g advertising interestingly the leader takes advantage of strong demand for its current product by focusing more on advertising whereas the follower expends more on r d by shedding light on the implications of industry position for investment incentives and market evolution the analysis provides valuable insights for formulating marketing strategy in fast paced high tech business environments

relative pricing of eurodollar futures and forward contracts past research explains observed spreads between futures and forward eurodollar yields as being due to the futures contract s mark to market feature we derive closed form solutions for this yield spread and show that theoretically it should be small also differences in liquidity taxation and default risk cannot account for the large spreads observed we also present evidence that the spreads which are nonnegligible primarily in the first half of the sample period are likely to be attributable to the mispricing of futures contracts relative to the forward rates and that the mispricing was gradually eliminated over time

market trading structures and asset pricing evidence from the treasury bill markets earlier studies report signfficant price disparities betweenfutures andforward or spot markets examining the treasury bill markets this article demonstrates that differences in market trading structures explain these disparities treasury billfutures rates contain significantly lower liquidity and default premia than do syntheticforward rates this reflects the functioning of a futures clearing association and differences between an open outcry auction futures market and an over the counter dealer spot market the same factors that make futures contracts nonredundant securities also explain the existence in equilibrium of price disparities

implicit delivery options and optimal delivery strategies for financial futures contracts abstract futures contract specification usually allow the short position some variation as to when where how much and what is to be delivered in this paper we derive the optimal delivery policy for the treasury bond futures contracts and find that our policy produces profits that are positive and statistically significant this indicates that future prices are too high in that the short position can earn profits by skillfully exercising his delivery options we find the actual delivery policies of market participants depart substantially from the optimal strategy the implications of these findings for futures traders and bond dealers are discussed

forward and futures prices with markovian interest rate processes the authors derive a closed form expression for the differences between forward and futures prices in the framework of a lucas equilibrium model they calculate this difference for fixed income securities in two ways using historic interest rate data to calibrate the matrix of nominal state prices and testing a large sample of randomly generated state price matrices in both cases the authors find few meaningful differences between forward and futures prices larger differences are generated from highly diagonal state price matrices the authors conclude that in economically relevant circumstances the costs of marking to market for fixed income securities are negligible copyright 1994 by university of chicago press

market motives distinctive capabilities and domestic inertia a hybrid model of innovation generation the authors develop and test a model of innovation in which the generative process of innovation is fostered by a balance of three forces market motives distinctive capabilities and domestic ine

valuation and optimal exercise of the wild card option in the treasury bond futures market the chicago board of trade treasury bond futures contract allows the short position several delivery options as to when and with which bond the contract will be settled the timing option allows the short position to choose any business day in the delivery month to make delivery in addition the contract settlement price is locked in at 2 00 p m when the futures market closes despite the facts that the short position need not declare an intent to settle the contract until 8 00 p m and that trading in treasury bonds can occur all day in dealer markets if bond prices change significantly between 2 00 and 8 00 p m the short has the option of settling the contract at a favorable 2 00 p m price this phenomenon which recurs on every trading day of the delivery month creates a sequence of 6 hour put options for the short position which has been dubbed the wild card option this paper presents a valuation model for the wild card option and computes estimates of the value of that option as well as rules for its optimal exercise the treasury bond futures contract on the chicago board of trade gives several delivery options to the short position the quality option which allows the short to deliver any of several eligible delivery bonds has already been studied fairly extensively because many bonds are eligible to be delivered against the futures contract and the conversion factors used to adjust for the bond actually delivered do not perfectly reflect relative price differences the short side trader will choose to deliver the cheapest eligible bond kilcollin 71 presents a discussion and analysis of conversion factors and their effects on the optimal delivery bond gay and manaster 4 present a theoretical valuation model for the quality option when two classes of commodities with uncertain end of period spot prices may be delivered garbade and silber 3 provide a similar analysis and estimate parameters of the valuation formula for a variety of agricultural commodity futures kane and marcus 6 have used monte carlo simulations to value the quality option in the treasury bond futures market in contrast the various timing options embedded in the delivery process have received comparatively little attention one of the most important of these is the so called wild card option the wild card option arises because the futures market closes each trading day at 2 p m central standard time which locks in the futures settlement price for the rest of the day while the short trader has until 8 p m of each trading day in the delivery month to declare an intent to deliver

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

the benefits and costs of strong patent protection a contribution to the current debate abstract today s conventional wisdom is that strong patent rights are conducive to economic progress yet not long ago students of the patent system took a more nuanced position arguing that often strong patents were not necessary to induce invention and entailed significant economic costs several empirical studies have supported this position however the current advocacy invokes theories of the positive benefits of patents that were repressed in the earlier more negative analyses this essay reviews these theories and the empirical evidence that might bear on them the authors conclude that there is reason for concern that the present movement towards stronger patent protection may hinder rather than stimulate technological and economic progress

disentangling pioneering cost advantages and disadvantages existing literature discusses a number of possible pioneering cost advantages and disadvantages in this paper we empirically test three different sources of long term pioneering cost advantage experience curve effects preemption of input factors and preemption of ideal market space and three different sources of pioneering cost disadvantage imitation vintage effects and demand orientation we disentangle these sources by breaking total cost of a business unit into three different components purchasing production and selling general and administrative sg a costs and identifying conditions that intensify or reduce the effect of the proposed source using two samples of business units one for consumer goods and one for industrial goods we find support for five of the six sources of pioneering cost advantage and disadvantage in both samples while the advantage due to preemption of ideal market space is limited to the consumer goods sample the unconditional analysis shows a pioneering purchasing cost advantage but even larger pioneering production and sg a cost disadvantages the complexity of our obtained findings suggests that managers need to think carefully about their particular conditions before making assumptions about the cost and therefore profit implications of a pioneering strategy

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

an empirical analysis of implicit delivery options in the treasury bond futures contract abstract assuming perfect frictionless and efficient markets this paper develops a framework to estimate the composite value of the quality wild card and end of month options implicit in the t bond futures contract the value of delivery options is shown to be the excess of forward price of the cheapest bond over its conversion factor times the exercise price of futures contract empirical results indicate that the option values over the last quarter of the nearby contract are on average less than 0 5 percent of the mean futures price which is substantially lower than the value reported by previous studies further scrutiny reveals that although the empirical estimates are contaminated by non synchronous bond data they are consistent with certain known theoretical properties of option values

employing financial futures to increase the return on near cash treasury bill investments the purpose of this article is to formulate and test a decision model to increase the return on a pool of liquid assets through the use of treasury bill futures contracts recent literature has documented inefficiencies in the pricing of t bill futures these inefficiencies can be exploited to increase the return on a portfolio of t bills without affecting the maturity of the portfolio the solution technique used is dynamic programming the results of applying a dynamic programming algorithm parameterized on available data to trade in real time are presented the rules lead to increased returns

the temporal price relationship between s p 500 futures and the s p 500 index this paper empirically examines the intraday price relationship between s p 500 futures and the s p 500 index using minute to minute data three stage least squares regression is used to estimate lead and lag relationships with estimates for expiration days of the s p 500 futures compared with estimates for days prior to expiration the results suggest that futures price movements consistently lead index movements by twenty to forty five minutes while movements in the index rarely affect futures beyond one minute

the acquisition and commercialization of invention in american manufacturing incidence and impact abstract recent accounts suggest the development and commercialization of invention has become more open greater division of labor between inventors and innovators can enhance social welfare through gains from trade and economies of specialization moreover this extensive reliance upon outside sources for invention also suggests that understanding the factors that condition the extramural supply of inventions to innovators is crucial to understanding the determinants of the rate and direction of innovative activity this paper reports on a recent survey of over 5000 american manufacturing sector firms on the extent to which innovators rely upon external sources of invention our results indicate that between 2007 and 2009 16 of manufacturing firms had innovated meaning had introduced a product that was new to the industry of these 49 report that their most important new product had originated from an outside source notably customers suppliers and technology specialists i e universities independent inventors and r d contractors we also compare the contribution of each source to innovation in the us economy although customers are the most common outside source inventions acquired from technology specialists tend to be the more economically significant in term of their gross commercial value as a group external sources of invention make a significant contribution to the overall rate of innovation in the economy innovation policies both public and private should pay careful attention to the external supply of invention and the efficiency of the mechanisms affecting the relationships between inventors and innovators

a new venture s optimal entry time abstract we formulate a model of the decision of when a new venture should enter the market based on the uncertain evolution over time of environmental volatility and market competition we characterize the performance maximizing time to enter the market and show how this entry time is affected by changes in the business environment by further focusing our modeling assumptions we are able to translate our time based criteria into environmental terms and propose that management set a target environment level that must be met before entering the market we also demonstrate that management should adjust this target over time to respond to changes in the business context this modeling feature is important because it allows for a better assessment of when to enter a market based on future performances we translate the model s theoretical insights into testable propositions and explore possible ways to operationalize these for empirical testing

an empirical examination of the convexity bias in the pricing of interest rate swaps abstract this paper examines the convexity bias caused by the non linearity of payoffs in the pricing of interest rate swaps off the eurocurrency futures curve the evidence from four major currencies dm and during 1987 1996 suggests that swaps were initially being priced off the futures curve ignoring the convexity adjustment subsequently the market swap rates drifted below the rates implied by futures prices after rejecting alternative explanations we use alternative term structure models to show that the convexity bias is related to the empirically observed swap futures differential we interpret these results as evidence of mispricing of swap contracts during the early years which was eliminated over time

historical method in marketing research with new evidence on long term market share stability abstract several researchers have advocated historical or longitudinal approaches to study marketing phenomena although some have applied this approach more often it has been overlooked or denigrated the author argues that historical method is capable of producing scientific knowledge that is currently useful rather than simply a remembrance of the past the author presents a complete description of the historical method so researchers can use this article as a guide when applying this method the value of the method is illustrated by examining the prevailing finding in the marketing literature that market shares are stable over time although this finding is considered an empirical generalization an analysis of more than 650 brands in 100 categories raises doubts about the longevity of market share stability

delivery uncertainty and the efficiency of futures markets this paper examines the effects of the delivery basis risk embedded in nearly all futures contracts on efficiency tests of these markets examining soybean futures contracts we show that delivery basis risk has important implications for market efficiency tests as suming no delivery basis risk the market efficiency hypothesis is rejected however fu tures prices contain signiflcant time varying expected delivery basis and time varying ex pected delivery risk premiums once these expected delivery basis and delivery risk premiums are accounted for the apparent inefficiency is eliminated equilibrium spot prices also contain signiflcant time varying expected delivery risk premiums

options on the spot and options on futures this paper analyzes and compares the valuation of two types of options that relate to the same asset options on the asset itself and options on the futures on the asset the early exercise privilege plays a central role in explaining the differences between the values of the two options it is shown that in the case of a cash instrument that does not make interim payments such as gold the value of a call option on the spot is smaller than the call option on the futures contract the opposite is true for put options the early exercise boundaries which characterize when it pays to exercise are also compared and analyzed the financial markets have recently witnessed a proliferation of various types of listed options on commodities and on financial assets commencing with call options on individual common stocks recent innovations have included call and put options on treasury bonds metals foreign currencies and stock market

market segmentation self selection and product line design the purpose of this paper is to develop a theory of market segmentation based on consumer self selection the extant theory is based on the third degree price discrimination model of pigou central assumptions of which are that the firm can directly address individual segments and isolate them by using consumer self selection i am relaxing these assumptions in the context of a monopolist designing a product line i show that this relaxation has significant implications for how the products and prices are chosen and what they look like in particular segments may be aggregated even though there are no economies of scale furthermore consumer self selection enables us to model cannibalization and competition among firms

locational price spreads and the pricing of contracts for difference evidence from the nordic market in electricity markets not only does the risk of substantial price variations over time exist but so does the risk of price variations over space as prices between locations can differ due to transmission congestion to manage this risk contracts for difference cfds i e forwards on the spread between a particular area price and the unconstrained system price were introduced at the scandinavian electricity exchange nord pool at the end of 2000 we empirically investigate the pricing of these cfds over the period 2001 through 2006 and find that cfd prices contain significant risk premia their sign and magnitude however differ substantially between areas and delivery periods because areas are subject to transmission congestion to a varying extent while the relation between risk premia and time to maturity is not uniform for cfds there is a negative relation for implied area and system forwards which can be explained by the relative hedging demand of market participants in addition we find that risk premia of cfds and implied area forwards vary systematically with the variance and skewness of the underlying spot prices this confirms both implications of the bessembinder and lemmon bessembinder h lemmon m l 2002 equilibrium pricing and optimal hedging in electricity forward markets journal of finance 57 1347 1382 model

bank funding risks risk aversion and the choice of futures hedging instrument currently theories of financial futures hedging are based on either a portfolio choice approach or a duration approach this article presents an alternative a firm theoretic model of bank behavior with financial futures assuming the bank is uncertain about cash cd interest rates and the quantity of cds it needs in the future expressions for the optimal futures hedge are derived under constant absolute risk aversion and constant relative risk aversion the performance of these two strategies is estimated from 19811983 using either the recently developed cd futures contract or the t bill futures contract these results are also compared with the performance of a portfolio choice strategy and a routine hedging strategy the analysis indicates that the cd futures market can serve a hedging purpose that is not served by the previously established t bill futures market the emergence and rapid growth of interest rate futures markets suggest that

an ex post valuation of the quality option implicit in the treasury bond futures contract abstract this paper develops three empirical estimates of the value of the quality delivery option implicit in the treasury bond futures contract a an ex ante value as given by the excess of forward price of the cheapest to deliver bond over its conversion factor times the futures price b an ex post value equal to the payoffs to a strategy of buying and holding a short futures long forward position at the start and delivering the cheapest bond at the expiration of futures contract and c another ex post value equal to the sum of payoffs to a continuous rollover strategy involving a short futures long forward position in the cheapest to deliver bonds three months prior to delivery the average values of the three estimates are 464 329 and 2 075 respectively the differences among the three estimates appear to be largely due to nonsynchronous spot futures data

the quality delivery option in treasury bond futures contracts this paper uses three methods to estimate quality option values for cbot treasury bond futures contracts it presents evidence regarding 1 payoffs from exercising this option at delivery 2 estimates from a t bond futures pricing model that incorporates this option and 3 estimates obtained from an exchange option pricing formula the results indicate that this option is worth considerably less than reported by kane and marcus 1986a for example payoffs obtained by switching from the bond cheapest to deliver three months prior to delivery to the one cheapest at time of delivery average less than 0 30 percentage points of par

eating your own lunch protection through preemption recent discussions of management practices among successful high technology companies suggest that one key strategy for success is to eat your own lunch before someone else does the implication is that in intensely competitive or hypercompetitive markets firms with a leading position should aggressively cannibalize their own current advantages with next generation advantages before competitors step in to steal the market given the pace of technological and other types of change such strategy often requires creating next generation advantages while the current advantages are still profitable that is trading current profits for future market leadership we capture the tradeoff between a market leader s willingness to reap profits with its current set of advantages and its desire to maintain market leadership by investing in the next generation using a competitive model that determines the equilibrium launch time of a next generation advantage we find that in absence of lower launch costs for an

hedging performance and basis risk in stock index futures in early 1982 trading began at three different exchanges in futures contracts based on stock indexes stock index futures were an immediate success and quickly led to a proliferation of new futures and options markets tied to various indexes one reason for this success was that index futures greatly extended the range of investment and risk management strategies available to investors by offering them for the first time the possibility of unbundling the market and nonmarket components of risk and return in their portfolios many portfolio management and other hedging applications in investment banking and security trading have been described elsewhere1 ranging from use by a passive fund manager to reduce risk over a long time horizon to use by an underwriter to hedge the market risk exposure in a stock offering for one or two days in considering the potential applications of index futures it is clear that in nearly every case a cross hedge is involved that is the stock position that is being hedged is different from the underlying portfolio for the index contract 2 this means that return and risk for an index futures hedge will depend upon the behavior of the basis i e the difference between the futures price and the cash price hedging a position in stock will necessarily expose it to some measure of basis risk risk that the change in the futures price over time will not track exactly the value of the cash position basis risk can arise from a number of different sources and is a more significant problem for stock index contracts than for other financial futures like treasury bills and bonds 3 the most apparent cause of basis risk is the nonmarket component of return on the cash stock position since the index contract is tied to the behavior of an underlying stock market index nonmarket risk cannot be hedged this is the essential problem of a cross hedge however basis risk can be present even when the hedge involves a position in the index portfolio itself and there is no nonmarket risk for one thing returns to the index portfolio include dividends while the index and the index future only track the capital value of the portfolio any risk associated with dividends on the portfolio will become basis risk in a hedged position still dividends are fairly low and also quite stable so this may not be a terribly important shortcoming

post entry competition in the plain paper copier market this paper reviews events in the plain paper copier ppc market immediately after xerox s monopoly ended xerox s behavior and that of a flood of ppc entrants are viewed through the lens of recent advances in the theory of entry and entry deterrence the events of the early post entry period also cast some interesting light on the theory of technological competition the modern theory of entry deterrence rests on a simple if not obvious proposition the socially worst industry performance is after entry the more monopolies there will be since the interests of the entrant and society are opposed once entry has occurred a series of papers have considered endogenous changes in the conditions of competition monopolists who make their industry more competitive conditional on entry in order to deter potential entrants there are two distinct steps in the entry deterrence argument first it must be possible for events during the monopoly period to affect postentry competition some intertemporal complication must be present either in costs or in firm specific demand if the state of the industry at the time of entry is to form important initial conditions for competition second the monopolist must find it profitable to manipulate the initial conditions by some pre entry action the general theoretical questions of entry and deterrence have been cast in quite specific terms for the problem of technological competition one view emphasizes the arrow effect kenneth arrow 1962 jennifer reinganum 1983 drew fudenberg and jean tirole because any innovation destroys some of the rents to older products and processes incumbent monopolists have a smaller incentive to innovate than potential entrants another view richard schmalensee 1983 richard gilbert and david newbery 1982 points out that the incumbent s losses from entrant s innovation create a motive for preemptive r d product introduction or patenting if incumbents are leaders and entrants followers the second view will hold independent of technology note that the difference is over the profitability of entry deterring strategies in both views the presence of valuable assets like patents or secrets provides the necessary intertemporal link events in the ppc market during the time of xerox s monopoly did have a substantial impact on the nature of competition in the early postentry period an arrow effect is evident as are other equilibrium explanations of xerox s rapid decline the alternative explanation that xerox was fat is also considered below

intra day tests of the efficiency of the treasury bill futures market in this paper we use intra day prices to examine the efficiency of the treasury bill futures market the use of intra day data allows us to carefully match in time trades in the futures and cash markets by matching trades and allowing delays between observing apparent inefficiencies and the trade we are examining realistic trading strategies we find profitable arbitrage swaps and a preferred strategy for initial purchase these profits do not depend on an assumption of an equilibrium model hence these tests are direct tests of efficiency rather than a joint test of efficiency and equilibrium t his paper examines the efficiency of the treasury bill futures market this subject has been examined before by capozza and cornell 1979 cornell 1981 lang and rasche 1978 rendleman and carabini 1979 vignola and dale 1979 poole 1978 and puglisi 1978 there are a number of reasons why this paper makes an important contribution to the literature the first reason is that by using trade by trade futures prices we can make more realistic assumptions about the pnces at which trades could have taken place this paper uses intra day prices to examine efficiency prior studies at best used closing prices to examine apparent inefficiencies and assumed that transactions took place at these closing prices there are two problems with this procedure first simultaneous transactions cannot actually occur at closing prices there is almost an hour difference between the closing of the chicago futures and new york spot markets thus when the closing spot market price is observed the futures market has been closed for about an hour closing prices could be used to judge apparent discrepancies however it would be necessary to execute trades at the open making decisions based on closing prices and then assuming trades can take place at these prices is an approximation which could significantly affect results in addition using only closing prices ignores any intra day trades which could lead to profits in this study we match in time intra day prices in the spot and futures market these matched prices are used to identify apparently profitable trading rules we then assume trades take place at prices which are observed later in the day this is a test of a trading rule which an investor could actually follow as we discuss later in the paper our results differ from prior studies these differences are primarily due to using intra day prices and carefully matching times so that information used to initiate trades would actually be available to the investor at the time of the trade the second reason is that we examine more complex trading strategies than those which have been employed in other studies the random walk literature provides a useful analogy the original random walk studies simply correlated past and future prices or returns later studies examined filter rules and other more complicated trading rules in this study we employ alternative trading rules of increased complexity to test for the existence of trading profits finally we explicitly examine the consequence of t bills futures contracts being futures rather than forward contracts futures contracts unlike forward contracts involve flows every settlement day the intermediate cash flows on futures contracts can affect the profitability of any strategy the only prior study that even considered this effect is the one by rendleman and carabini 1979 they used the theoretical model of cox ingersoll and ross 1981 to try to estimate whether the difference between forward and futures prices was likely to be large enough to affect the payoff from alternative trading strategies this is a useful first attempt however ultimately the effect of daily settlement or marking to the market has to be examined directly as part of trading strategies to see if it affects the outcome of these strategies there are other problems with prior studies these involve gross estimates of prices and averaging data in a way that can mask inefficiencies since these problems are discussed in some detail in rendleman and carabini there is no reason to review them further here probably no area in finance has received more attention than the efficiency literature the reader may well wonder why even given the approximareceived for publication august 23 1982 revision accepted for publication may 20 1983 new york university new york university and baruch college respectively the authors would like to thank the center for the study of futures markets at columbia business school for financial support

the case against patents evidence that they serve to increase innovation and productivity unless productivity is identifi ed with the number of patents awarded which as productivity is identifi ed with the number of patents awarded which as evidence shows has no correlation with measured productivity this disconnect is evidence shows has no correlation with measured productivity this disconnect is at the root of what is called the patent puzzle in spite of the enormous increase in at the root of what is called the patent puzzle in spite of the enormous increase in the number of patents and in the strength of their legal protection the us economy the number of patents and in the strength of their legal protection the us economy has seen neither a dramatic acceleration in the rate of technological progress nor a has seen neither a dramatic acceleration in the rate of technological progress nor a major increase in the levels of research and development expenditure major increase in the levels of research and development expenditure both theory and evidence suggest that while patents can have a partial equiboth theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent the general equilibrium effect on librium effect of improving incentives to invent the general equilibrium effect on innovation can be negative the historical and international evidence suggests that innovation can be negative the historical and international evidence suggests that while weak patent systems may mildly increase innovation with limited side effects while weak patent systems may mildly increase innovation with limited side effects strong patent systems retard innovation with many negative side effects more generstrong patent systems retard innovation with many negative side effects more generally the initial eruption of innovations leading to the creation of a new industry from ally the initial eruption of innovations leading to the creation of a new industry from chemicals to cars from radio and television to personal computers and investment chemicals to cars from radio and television to personal computers and investment banking is seldom if ever born out of patent protection and is instead the fruit of a banking is seldom if ever born out of patent protection and is instead the fruit of a competitive environment it is only after the initial stage of rampant growth ends that competitive environment it is only after the initial stage of rampant growth ends that mature industries turn toward the legal protection of patents usually because their mature industries turn toward the legal protection of patents usually because their internal growth potential diminishes and they become more concentrated these internal growth potential diminishes and they become more concentrated these observations supported by a steadily increasing body of evidence are consistent with observations supported by a steadily increasing body of evidence are consistent with

hedging interest rate risk with futures portfolios under term structure effects this study develops and tests a methodology for reducing interest rate risk in a fixed spot portfolio of assets and liabilities with default free cash flows a minimum variance hedge is constructed by adding a portfolio of financial futures to the spot portfolio theorems are given which establish necessary and sufficient conditions for the existence of unique and zero variance hedges the risk reduction characteristics of the methodology are demonstrated by an empirical analysis unexpected interest rate fluctuations may have significant impact on the market value of both bond portfolios and interest sensitive institutions the early literature on this subject includes the seminal works of samuelson 27 redington 26 and wallas 29 all of whom consider the impact of unexpected interest rate changes on financial institutions briefly their results indicate that interest rate risk is minimized when the mean time of the assets and liabilities are equal assuming equal initial asset and liability values redington coined the term immunization to refer to the absence of interest rate risk the immunization solutions in their simplest form depend on the duration mean time of asset and liability cash flows the concept of duration was apparently developed independently by macaulay 22 and hicks 18 macaulay interested in the effective maturity of a bond defined duration as

imitation costs and patents an empirical study it has long been recognised that the costs of imitating new products have an important effect on the incentives for innovation in a market economy as arrow i962 and others have pointed out if firms can imitate an innovation at a cost that is substantially below the cost to the innovator of developing the innovation there may be little or no incentive for the innovator to carry out the innovation in their discussions of the innovation process economists frequently have called attention to the major role played by the costs of imitation but there has been little or no attempt to measure these costs to test various hypotheses concerning the factors influencing them or to estimate their effects in this paper we report some findings of what seems to be the first study of this topic in addition we present data regarding the effects of patents on imitation costs and on the rate of innovation

the influence of local search and performance heuristics on new design introduction in a new product market abstract this study develops and tests three sets of predictions concerning new design introduction during the initial period of ferment in a new product market we root our predictions most directly in the evolutionary economic concepts of local search and performance heuristics first we argue that new entrants will introduce most designs that are new to a product market during an initial period of ferment second we argue that local search will lead most product market incumbents that introduce second or subsequent designs after their entry to introduce designs that are similar to those incorporated in their existing products third we argue that firms selling products based on designs that are losing aggregate share in the market will be likely to introduce products based on new designs while firms losing market share to firms that are selling the same design are unlikely to introduce new designs our empirical analysis examines the magnetic resonance imaging mri subfield of the diagnostic imaging equipment industry between 1980 and 1986 a period that begins with the introduction of the first mri design and ends with the emergence of widely accepted design characteristics the results support the argument that local search and performance heuristics along with other market factors and business characteristics influence design introduction during a period of ferment

optimal hedging in futures markets with multiple delivery specifications nearly all futures contracts allow delivery of any of several qualities of the underlying asset consequently the price of the futures contract is associated more with the price of the expected cheapest deliverable variety than with the price of the par delivery variety the delivery specifications introduce a delivery risk for every hedger in the market we derive the optimal hedging strategies in these markets their hedging effectiveness is evaluated for wheat futures contracts in chicago hedging optimally would have significantly reduced the variance of the rates of return on hedges while yielding similar mean returns nearly all futures contracts on commodities and financial assets allow the seller to deliver any of several qualities of the underlying asset the contracts specify discounts or premiums for delivering a nonpar quality but the realized price differences can be significantly different consequently the futures price on a delivery date converges to the spot price of the quality that is cheapest to deliver rather than the spot price of the par delivery quality since it is uncertain which quality will be the cheapest to deliver this introduces a delivery risk for every hedger in the market gay and manaster 9 and kane and marcus 13 find that hedgers in the treasury bond futures market have neither hedged nor exploited the delivery specifications in an optimal way 1 this paper addresses how to hedge optimally in futures markets with multiple delivery specifications 2 we derive the optimal hedging strategies and evaluate their hedging effectiveness futures markets are hedging markets working 20 they enable traders to hedge the risk of unexpected changes in the spot price of their asset the hedging effectiveness of futures markets is therefore an important issue earlier studies include ederington 3 figlewski 5 and koppenhaver 16 among others this study also differs from those studies in that we evaluate an ex ante hedging

portfolio choice in research and development we analyze the effects of a winner take all patent mechanism on the riskiness of the research strategies chosen by competingfirms as well as on thefirms incentives to duplicate research projects nash equilibrium choices are compared with the social optimum in a oneshot simultaneous move game in which competitors choose the riskiness or correlation of their research performances we show that neither society nor firms have any preference for correlation per se while the divergence between social and privately optimal levels of risk depends on skewness characteristics of the probability distribution over discovery dates and on levels of risk aversion

difference systems in financial futures markets many financial futures markets allow substitutions for the par grade of security at delivery substitutes are deliverable at premiums or discounts differences in commodities parlance to the futures price the rule that establishes these differences is called a difference system this paper characterizes financial futures market equilibrium with yield based difference systems and investigates particular systems in use the major finding is that currently used difference systems effectively limit deliverable supply in the futures markets and lead to futures prices which understate the cash market price of the par security in order to increase deliverable supply many financial futures markets allow the delivery of a variety of grades issues of securities in fulfillment of a financial futures contract the par grade of security on which the futures contract is based is deliverable at the futures price various other grades of securities are deliverable at premiums or discounts to the futures price in commodities parlance these premiums and discounts are called differences and the rule that establishes the set of premiums and discounts is called a difference system see hoffman 2 chapter xv for an excellent discussion of difference systems in commodity futures contracts there are two types of difference systems currently in use in financial futures markets both are based on security yields the first is called variable rate or yield maintenance pricing under this system nonpar securities are deliverable at the futures price times a factor which is the price of the delivered security relative to the par security where both are discounted by the yield of the par security selling at the futures price the second is called fixed rate or factor pricing under this system nonpar securities are deliverable at the futures price times a factor which is the price of the delivered security relative to the par security where both are discounted at the yield of the par security selling at par this paper first characterizes financial futures market equilibrium with yieldbased difference systems and then investigates theoretically and empirically the particular characteristics of factor pricing and yield maintenance pricing the major finding is that currently used differences systems produce financial futures prices which systematically understate the spot market price of the par security vice president chicago mercantile exchange this research was conducted while the author was economist financial studies section board of governors of the federal reserve system the opinions in this paper are those of the author and do not necessarily reflect the opinions of the board

a high tech product market share model with customer expectations in a product category based on dynamic technology new products enter the market in rapid succession and the competitive situation changes almost daily because technological features of available products tend to improve while prices tend to decline customers develop expectations that may influence their purchase decisions we model the impact of customer expectations regarding price and technology on product market share in the personal computer industry finding significant nonlinear effects of both these effects are observed when actual product price and or technology differ from expectations by a threshold amount our results suggest implementable implications for high tech product managers in particular price and technology should meet but not exceed customer expectations this does not mean that managers should strive for mediocrity rather continuous improvement should be implemented so that product development efforts lead customer expectations

dealing with resource disadvantage generic strategies for smes this paper identifies three generic strategies for smes taking into account explicitly their resource disadvantage in addition to the much advocated niching strategy we show that smes can free ride on the bigger firm s market development efforts and or they can form strategic alliances to force accommodation by the bigger rivals contrary to conventional arguments we show that success in niching is not conditional upon the continued ignorance of the niche by the bigger firms it is also not true that the smes must have a cost advantage vis a vis the bigger firms in order to niche or to free ride successfully the bigger firms faced with entry into their markets by smes encounter the classical chain store paradox the three generic strategies proposed here are designed to force accommodation by the bigger firms

when to adopt a service innovation nash equilibria in a competitive diffusion framework abstract we study the optimal timing of adoption of a service innovation that a new entrant firm brings to a market populated by two incumbent firms our analysis is based on a model of competitive diffusion dynamics that extends the monopolistic bass model to include customer churn processes as well as a potential market expansion driven by the innovation we obtain expressions for the time trajectories of the customer bases i e the numbers of customers that use old and new service processes for the competing firms as well as sharper closed form characterizations for the setting with a stable market and homogeneous imitation process in modeling competitive dynamics we consider settings where incumbents anticipate a potential failure of the innovation we use the trajectories for the customer bases to model an optimal adoption response problem faced by one of the incumbent firms when the adoption time for the other incumbent can be anticipated or is pre announced and analyze this problem in the absence of market expansion or intra generational customer churn using the optimal response results we provide the nash equilibrium analysis of the adoption decisions by competing incumbent firms and derive sufficient conditions for the now now now never and never never adoption equilibria we use the trading volume data from the foreign exchange markets to estimate the parameters of the competitive diffusion dynamics for our model and to conduct a numerical investigation of the impact of the uncertainty associated with the success of the innovation on the incumbents nash equilibrium adoption times

a comparison of forward and futures prices of an interest rate sensitive financial asset this paper focuses on contractual distinctions as an explanation for the price divergence between futures and forward contracts specifically it investigates the effect of marking to market on the observed price differences using the pricing model described in cox ingersoll and ross cir 1981 journal of financial economics 9 321 346 using previously unavailable data this paper employs eurodollars an interest rate sensitive financial asset to test the cir model unlike prior empirical studies test results support both the weak prediction concerning the sign of the average price difference and the stronger prediction that specific covariances explain the variation in the price differences futures contracts and forward contracts are fundamentally similar both contracts are agreements between two parties to trade a specific good or asset at a future date at a price determined today these agreements facilitate the transfer of risk between contracting parties permitting the creation of hedging strategies in spite of their conceptual similarity the implementation of these two contracts is quite different participants in futures markets trade highly standardized contracts by open outcry on organized exchanges clearing associations tor the exchanges control default risk by assuming the opposite side of each transaction guaranteeing payment to reduce traders incentive to default the exchanges mark positions to market by settling contract gains and losses daily in contrast to the futures market the market for forward contracts is mostly an over the counter market in the absence of a clearinghouse trader reputation helps control default risk unlike futures contracts no markingto market occurs the parties in the contract make no payments until maturity of the contract the forward market for financial interest rate instruments departs even further from the futures market format a trader can use the cash market for interest rate instruments to establish a forward position for example a trader can secure a forward position for a three month t bill beginning three months in the future by buying a t bill with a six month maturity and selling a t bill with a three month maturity

taxes and the pricing of stock index futures stock index futures prices are generally below the level predicted by simple arbitrage models this paper suggests that the discrepancy between the actual and predicted prices is caused by taxes capital gains and losses are not taxed until they are realized as constantinides demonstrates in a recent paper this gives stockholders a valuable timing option if the stock price drops the investor can pass part of the loss on to the government by selling the stock on the other hand if the stock price rises the investor can postpone the tax by not realizing the gain since this option is not available to stock index futures traders the futures prices will be lower than standard no tax models predict on 24 february 1982 the kansas city board of trade began trading futures contracts on the value line average stock index during the next two months both the chicago mercantile exchange and the new york futures exchange also initiated trading in stock index futures although these contracts are actively traded their prices have puzzled both practitioners and academics the observed

new organizational forms and strategies for managing in hypercompetitive environments strong forces of change globalization demographic shifts e g aging population and declining fertility rates advances in information technology demassification of society and hypercompetition are reshaping the competitive landscape worldwide as a result companies in most industries are not only undergoing rapid and radical change but are also experiencing a fundamental shift in the rules of competition and the way the game of competition is played the old genteel stable oligopolies that defined competition during the 20th century are rapidly restructuring in their place are emerging markets fraught with uncertainty diverse global players rapid technological change widespread price wars and seemingly endless reorganization that transition is occurring not only in the united states but also in europe latin america and asia in this issue we demonstrate that as predicted by those early researchers a dramatic and far reaching shift has occurred in the nature of competition in most ind

whose sabbath matters or when does the weekend effect occur abstract the weekend effect and other seasonal anomalies in financial markets are now familiar in many countries in searching for explanations for the weekend effect in particular it would be helpful to know when exactly it occurs whatever the it may be that produces the effect since most countries do not have weekend trading in financial assets the timing of it has not been narrowed down israel has trading in all financial assets except currency trading on sunday by examining day of the week effects for israel it appears that the weekend effect occurs on sunday late in the day and not an friday evening ar saturday other seasonal anomalies in israel seem to be similar to those elsewhere the generalizability of the findings to other countries is discussed

direct tests of index arbitrage models previous tests of stock index arbitrage models have rejected the no arbitrage constraint imposed by these models this paper provides a detailed analysis of actual s p 500 arbitrage trades and directly relates these trades to the predictions of index arbitrage models an analysis of arbitrage trades suggests that i short sale rules are unlikely to affect the cashfutures mispricing ii the opportunity cost of arbitrage funds exceeds the treasury bill rate and iii the average price discrepancy captured by arbitrage trades is small tests of the models provide some support for a version ofthe arbitrage model that incorporates an early liquidation option the ability of these models to explain arbitrage trades however is surprisingly low

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

market incumbency and technological inertia this paper uses a case study and a simple mathematical model to study the link between the incumbency and incentives to innovate and introduce drastically new products it identifies the conditions under which fears of self cannibalization are particularly likely to lead incumbents to soft pedal such innovations

a diffusion theory model of adoption and substitution for successive generations of high technology products this study deals with the dynamic sales behavior of successive generations of high technology products new technologies diffuse through a population of potential buyers over time therefore diffusion theory models are related to this demand growth furthermore successive generations of a technology compete with earlier ones and that behavior is the subject of models of technological substitution building upon the bass bass f m 1969 a new product growth model for consumer durables management sci 15january 215 227 diffusion model we develop a model which encompasses both diffusion and substitution we demonstrate the forecasting properties of the model by estimating parameters over part of the data and projecting shipments for later periods

price dynamics in foreign currency futures markets abstract nested tests of samuelson s submartingale and martingale models of price behavior in an efficient futures market find significant autocorrelation at low lags in daily changes of log prices for four of ten currency futures contracts satisfying the assumptions of the statistical tests negative serial correlation following large price changes is also found the analysis controls for bias due to institutional limits on daily price movements simulated trading based on out of sample forecasts suggests the dependencies probably could be exploited by traders who are members of the futures exchange to earn net profits greatly exceeding buy and hold

taxes and the futures forward price difference in the 91 day t bill market this paper investigates a tax based explanation for the futures forward price divergence in the ninety one day t bill the explanation is firstly in terms of the distinction between capital gains and losses and ordinary gains and losses and secondly in terms of investors to whom the above distinction applies and investors such as broker dealers to whom it does not the empirical results are encouraging though more ambiguous in the post 1981 period overall it would seem that other factors in addition to taxes are also at work copyright 1989 by ohio state university press

the paradox of openness appropriability external search and collaboration a b s t r a c t to innovate firms often need to draw from and collaborate with a large number of actors from outside their organization at the same time firms need also to be focused on capturing the returns from their innovative ideas this gives rise to a paradox of openness the creation of innovations often requires openness but the commercialization of innovations requires protection based on econometric analysis of data from a uk innovation survey we find a concave relationship between firms breadth of external search and formal collaboration for innovation and the strength of the firms appropriability strategies we show that this concave relationship is stronger for breadth of formal collaboration than for external search there is also partial evidence suggesting that the relationship is less pronounced for both external search and formal collaboration if firms do not draw ideas from or collaborate with competitors we explore the implications of these findings for the literature on open innovation and innovation strategy 2013 the authors published by elsevier b v all rights reserved