decomposing promotional effects with a dynamic structural model of flexible consumption abstract in this article the authors offer a methodology to decompose the effects of price promotions into brand switching stockpiling and change in consumption by explicitly allowing for consumer heterogeneity in brand preferences and consumption needs they develop a dynamic structural model of a household that decides when what and how much to buy as well as how much to consume to maximize its expected utility over an infinite horizon by making certain simplifying assumptions the authors reduce the dimensionality of the problem they estimate the proposed model using household purchase data in the canned tuna and paper towels categories the results from the model offer insights into the decomposition of promotional effects into its components this could help managers make inferences about which brand s sales are more responsive to stockpiling or increase in consumption expansion and how temporary price cuts affect future sales contrary to previous literature the authors find that brand swi

economic determinants of free trade agreements abstract the purpose of this study is to provide the first systematic empirical analysis of the economic determinants of the formation of free trade agreements ftas and of the likelihood of ftas between pairs of countries using a qualitative choice model we develop this econometric model based upon a general equilibrium model of world trade with two factors of production two monopolistically competitive product markets and explicit intercontinental and intracontinental transportation costs among multiple countries on multiple continents the empirical model correctly predicts based solely upon economic characteristics 85 of the 286 ftas existing in 1996 among 1431 pairs of countries and 97 of the remaining 1145 pairs with no ftas

do switching costs make markets less competitive abstract the conventional wisdom in economic theory holds that switching costs make markets less competitive this article challenges this claim the authors formulate an empirically realistic model of dynamic price competition that allows for differentiated products and imperfect lock in they calibrate this model with data from frequently purchased packaged goods markets these data are ideal in the sense that they have the necessary variation to identify switching costs separately from consumer heterogeneity equally important consumers exhibit inertia in their brand choices a form of psychological switching cost this makes the results applicable to the broad range of products that are distinctly identified i e branded rather than just to products for which there is a product adoption cost or explicit switching fee in the simulations prices are as much as 18 lower with than without switching costs more important equilibrium prices do not increase even in the presence of switching costs that

practice prize report an assortmentwide decision support system for dynamic pricing and promotion planning in diy retailing the main objective of this report is to describe a decision support system for dynamic retail pricing and promotion planning our weekly demand model incorporates price reference price effects seasonality article availability information features and discounts building on previous research we quantify demand interdependencies and integrate the resulting profit lifting effects into the optimal pricing model the methodology was developed and implemented at baumax an austrian do it yourself retailer along with the practical requirements an objective function was employed that can be used as a vehicle for implementing a retailer s strategy eight pricing rounds with thousands of different stock keeping units have each served as a testing ground for our approach based on various benchmarking methods a positive impact on profit was reported the currently implemented marketing decision support system increased gross profit on average by 8 1 and sales by 2 1

please or squeeze brand performance implications of constrained and unconstrained multi item promotions existing research on price promotions typically investigates the effects of single product promotions however brand managers often promote multiple items simultaneously to bolster the performance of a complete brand line this paper investigates the brand performance implications of such multi item promotions we distinguish between two types of multi item promotions traditional unconstrained multi item promotions that grant a discount irrespective of the size or composition of the purchase set and constrained multi item promotions that require consumers to purchase specific quantities self bundling or even predetermined combinations fixed bundling of promoted items using a normative consumer decision model the authors analyze the relative effectiveness of these promotions in terms of unit sales and revenue impact and show that promotion performance is moderated by consumers preference for variety the authors find that unconstrained multi item promotions outperform single item promotions especially in markets without variety seeking in markets with variety seeking unconstrained multi item promotions are not as effective in stealing extra sales from competition because consumers prefer to spread their purchases across all items including competitive ones however in those markets self bundling promotions are particularly effective because they force consumers to adopt larger amounts of the promoted items at the expense of competitors finally in neither type of market does fixed bundling substantially improve promotion performance

endogenous free trade agreements and the multilateral trading system i evaluate in this paper the impact of free trade areas ftas on the world trading system i use an oligopolistic political economy model where the external tariffs of fta members as well as the decision to form ftas are endogenously determined in this context i show that ftas are primarily beneficial to the multilateral trading system this conclusion is based first upon the finding that ftas induce their member governments to lower their external tariffs and to do so deeply enough to enhance trade even between fta members and non members while this ensures gains for the latter in general fta members may not gain i show however that governments will endorse only welfare improving arrangements in spite of their political motivations as a result fta members benefit from ratified arrangements as well finally i find that ftas by reducing the role of special interests criteria in governments trade regime decisions also tend to enhance support for further liberalization at the multilateral level

optimal tariff equilibria with customs unions the authors construct a model of customs unions in which countries charge optimal tariffs customs unions internalize the externality that exists whenever two countries import the same good also customs unions make several countries into one large unit with more market power big customs unions can improve their members welfare relative to the free trade the authors model of customs unions separates the effects of tariff reduction from the effects of policy coordination the movement from nash equilibrium to a free trade association improves global resource allocations moving from a free trade association to a full customs union has ambiguous resource allocation effects

the asymmetric information model of state dependence marketing researchers and practitioners are interested in consumer loyalty because of its managerial consequences previous empirical studies find that consumers are loyal not only to a brand but also to a firm umbrella brand that is even when firms offer new products consumers tend to continue to purchase from the same firm this repeat purchase behavior might result from state dependence or from heterogeneity the meaning of state dependence is that the current choice behaviorally depends on the previous one the traditional model of state dependence assumes that the previous choice affects the current utility this study suggests another source of state dependence the previous choice affects the current information set specifically the model assumes that the consumer a knows the attributes of the new product offered by the firm from which he she purchased in the previous period b is uncertain about the attributes of the new products offered by the other firms c can obtain full information about the attributes of all the products through a costly search and d if the consumer decides not to search he she purchases the new product offered by the firm from which he she purchases in the previous period it is shown that state dependence can result either from the effect of previous choices on the current utility or from its effect on the current information set this theoretical result raises the following question what kind of data does a researcher need in order to distinguish between the two sources of state dependence this study shows that the two sources can be distinguished with a standard panel data set in other words although the new source of state dependence is based on the search activity of consumers there is an identifying factor that enables a researcher to detect such activity even without direct data on search the empirical distinction is possible because the behavioral implications of the two sources of state dependence are different they differ in the effect of product attributes on the repeat purchase probability the following example partially illustrates this result there are two firms a and b the consumer purchased a product from firm a in period t 1 the only product attribute is x and the utility is a linear function of x one aspect of our findings is that in the traditional model of state dependence a change in both x a and x b that leaves the difference between them x a x b unchanged neutral change hereinafter has no effect on the repeat purchase probability however such a change does affect the repeat purchase probability in the asymmetric information model of state dependence this is only one aspect of the finding the implications of the models differ in a more general fashion the intuition of this result is the following a neutral change has no effect on the repeat purchase probability in the traditional model of state dependence because it does not affect the difference between the utilities from both alternatives in the asymmetric model of state dependence the consumer s decision process consists of two stages first he decides whether to search for information about the other alternative or not then if he searches for information he chooses the alternative that maximizes his utility in the second stage a neutral change has no effect on choices since such a change does not affect the difference between the utilities from the two alternatives in the first stage the consumer knows x a but does not know x b it turns out that in this stage a neutral change does affect the search decision when for example both x s decrease and the utility is a positive function of x the probability of search increases and thus the repeat purchase probability decreases the proposed source of state dependence is examined using structural estimation and panel data on television viewing choices in the united states controlling for both observed and unobserved heterogeneity it is found that the suggested source is more important in creating repeat purchase than the traditional one for most of the population 71 this indicates that what was considered by previous studies to result from the dependence of consumer utility on their previous choices is at least partially due to the effect of the previous choices on consumers information set the distinction between the two sources of repeat purchase is important because ignoring the informational explanation may lead to incorrect theoretical and empirical conclusions for example price discounts to induce trial are more important for consumers whose utility depends on previous choices while advertising is more effective for those whose information set depends on previous choices

bilateralism and free trade we study a setting with many countries in each country there are firms that can sell in the domestic as well as foreign markets countries can sign bilateral free trade agreements that lower import tariffs and thereby facilitate trade we allow a country to sign any number of bilateral free trade agreements a profile of free trade agreements defines the trading regime our principal finding is that in symmetric settings bilateralism is consistent with global free trade we also explore the effects of asymmetries across countries and political economy considerations on the incentives to form trade agreements

on the recoverability of choice behaviors with random coefficients choice models in the context of limited data and unobserved effects random coefficients choice models are seeing widespread adoption in marketing research partly because of their ability to generate household level parameter estimates with limited data however the power of such models may tempt researchers to trust that they continue to produce reasonable estimates when in fact either model misspecification or insufficient data limits the models ability to recover household level parameters successfully if household level choice behaviors are not recovered successfully managerial decisions such as marketing mix planning and targeting direct marketing segmentation and forecasting may not produce the desired results this study addresses the following questions first can random coefficients choice models correctly identify markets characterized by preference and response heterogeneity state dependence the use of alternative decision heuristics that result in reduced choice sets and combinations of these effects if so how much data is required and is this realistic given the size of data sets typically used in marketing analyses which model selection criteria should be used to identify these markets when there is spurious market identification which parameters contribute to the spurious result an extensive simulation experiment is conducted wherein random coefficients logit models with varying specifications of parameter heterogeneity state dependence effects and choice set heterogeneity are applied to 128 experimental conditions the results show which types of markets can be identified reliably and which cannot based on the results of the simulation the authors develop a model selection heuristic that identifies the correct market in 81 of the experimental conditions in contrast strict application of the best model selection criterion alone results in correct market identification in at most 34 of experimental conditions interestingly we find that the amount of data number of households or number of purchases per household does not affect our ability to identify the correct market type with this heuristic so there is a good chance of identifying the correct market type even when little data is available

bilateralism multilateralism and the quest for global free trade abstract we develop an equilibrium theory of trade agreements in which both the degree and the nature bilateral or multilateral of trade liberalization are endogenously determined to determine whether and how bilateralism matters we also analyze a scenario where countries pursue trade liberalization on only a multilateral basis we find that when countries have asymmetric endowments or when governments value producer interests more than tariff revenue and consumer surplus there exist circumstances where global free trade is a stable equilibrium only if countries are free to pursue bilateral trade agreements by contrast under symmetry both bilateralism and multilateralism yield global free trade

a model of stochastic variety seeking in this paper we propose and test a stochastic model of consumer choice that incorporates attribute based variety seeking our stochastic variety seeking model svs has nested within it a fixed variety seeking model a zero order model of choice and a first order pure variety model we compare the svs model to alternative models under stochastic variety seeking we examine the nature of the variety sought and provide a test of the satiation hypothesis unlike fixed variety seeking models our model allows variety seeking to vary in intensity and consistency over individuals as well as over purchase occasions we show that the model is equivalent to a random utility model with the features that the attributes of brands relative to those of the brand previously bought influence choice and the extent of variety seeking is random over choice occasions for a given individual the model permits a closed form solution to the conditional switching probabilities parameterized by variety seeking parameters and dependent on brand attributes we apply our model to individual choice data obtained from a field study specifically designed for the purpose at hand

commentary on the interpretation of temporal inflation parameters in stochastic models of judgment and choice the implications of salisbury and feinberg s 2010 paper salisbury l c f m feinberg 2010 alleviating the constant stochastic variance assumption in decision research theory measurement and experimental test marketing sci 29 1 1 17 for the process of model development and testing in the field of intertemporal choice analysis is explored although supporting the overall thrust of salisbury and feinberg s critique of previous empirical work in the area we also see their paper as illustrating the dangers of drawing strong inferences about the behavioral interpretation of statistical model parameters without seeking convergent empirical evidence in particular we are skeptical about the extent to which the reported effects of temporal distance on the estimated scale parameter c are uniquely or even primarily due to unobserved error inflation that reflects consumer s uncertainty about future utility this interpretation is brought into question by several lines of reasoning conceptually we note that uncertainty is different from error and that for choice data the error inflation model is mathematically identical to a model in which the scale parameter is a deterministic function of the temporal discount rate empirically a reanalysis of data from previously published experiments does not consistently support temporal error inflation temporal convergence of choice shares or the scale parameter as an explanation of variety seeking in choice sequences in our opinion the cumulative results of research on intertemporal choice require models in which the attributes of choice alternatives are differentially discounted over time despite these findings we advocate that choice researchers should indeed follow salisbury and feinberg s advice to not assume that error variances will be unaffected by experimental manipulations and such effects should be explicitly modeled we also agree that uncovering effects on error variance is just the first step and the ultimate goal should be to rigorously explain the reasons for such effects

preferential versus multilateral trade liberalization and the role of political economy abstract in this paper we analyze the effect of the freedom to pursue preferential trade liberalization permitted by article xxiv of the gatt on country s incentives to participate in multilateral negotiations and on feasibility of global free trade we present a model in which countries choose whether to participate in preferential or multilateral trade agreements under political pressures from domestic special interest groups we show that heterogeneity in political preferences across countries plays an important role in determining the relative merits of preferential and multilateral approaches to trade liberalization on one hand the opportunity to liberalize preferentially may be necessary to induce countries with strong political motivations to participate in multilateral free trade negotiations on the other hand when countries share similar political preferences multilateral free trade that would have been politically supported otherwise becomes unattainable if countries can pursue preferential liberalization

speed of replacement modeling brand loyalty using last move data abstract the authors study brand loyalties for durable goods using automobile survey data that are peculiarly censored and track only elapsed times since transitions but not the transition times themselves this censoring problem is typical of commercially available durable goods survey data however little attention has been paid to such last move data in the statistics or marketing literature on the analysis of transition times the authors propose a multistate continuous time nonstationary markov model with a parsimonious brand loyalty structure and also propose an estimation approach to recover the parameters of the proposed model using the automobile survey data the proposed model fits observed brand choice outcomes even better than a model with a fully unrestricted and therefore highly parameterized transition structure the authors also obtain several substantive findings for example chrysler is significantly weaker than general motors and ford insofar as it has the lowest brand loyal

are food choices really habitual integrating habits variety seeking and compensatory choice in a utility maximizing framework given the large number of food choices that consumers make each day it seems likely that they will adopt decision strategies that minimize cognitive effort to examine this issue we develop a conceptual and empirical model of habitual choice and the factors that result in transitions to two strategies other than habitual selection utility maximizing choice and a variety seeking strategy our approach provides an alternative to traditional state dependence methods used in this type of panel data we apply this framework to the choice of two food products that illustrate the heterogeneity across types of products in decision strategies and routine choice patterns copyright 2013 oxford university press

the dynamic effect of discounting on sales empirical analysis and normative pricing implications baseline sales measure what retail sales would be in the absence of a promotion abraham and lodish 1993 and models that measure baseline sales are widely used by managers to assess the profitability of promotions bucklin and gupta 1999 this issue estimates of baseline sales and promotional response are typically independent of past promotional activity even though there is evidence to suggest that increased discounting reduces off promotion sales and increases the percentage of purchases made on deal e g krishna 1994 as a result models that do not consider dynamic promotional effects can mislead managers to overpromote given the widespread use of static models to evaluate the efficacy of promotions it is particularly desirable to calibrate a dynamic brand sales model and use it to establish an optimal course of action accordingly we develop a descriptive dynamic brand sales model and use it to determine normative price promotion strategies our descriptive approach consists of estimating a varying parameter sales response model letting model parameters vary with past discounting activity accommodates the possibility that market response changes with firms discounting policies in the normative model we use the estimates obtained in the descriptive model to determine optimal retailer and manufacturer prices over time the results of the descriptive model indicate that promotions have positive contemporaneous effects on sales accompanied by negative future effects on baseline sales the results of the normative model suggest that the higher share brands in our data tend to overpromote while the lower share brands do not promote frequently enough we project that the use of our model could improve manufacturers profits by as much as 7 to 31 more generally the normative results indicate that i if deals become more effective in the current period i e if consumers are more price sensitive promotions should be used more frequently and ii as the negative dynamic effect of discounts on sales increases the optimal level of discounting should go down without our approach it would be difficult to make this trade off exact finally we demonstrate that these dynamic effects provide another perspective to the marketing literature regarding the existence of promotions

investigating heterogeneity in brand preferences in logit models for panel data in analyzing panel data the issue of heterogeneity across households is an important consideration if heterogeneity is present but is ignored in the analysis it will result in biased and inconsi

political violence and excess liquidity in egypt in this article we estimate a time series model of excess liquidity in the egyptian banking sector while financial liberalisation and financial stability are found to have reduced excess liquidity these effects have been offset by an increase in the number of violent political incidents arising from conflict between radical islamic groups and the egyptian state the link between political events and financial outcomes provides a rationale for economic policy interventions by the international community in response to increases in political instability

political instability freedom and economic growth some further evidence over time the impact of both political and institutional factors on the rate of economic growth has received a lot of attention in the economic literature since adam smith if not before it has been observed that economic performance depends in part on political and institutional factors unfortunately attempts to discover how and under what conditions such factors impinge on economic performance often did not progress beyond anecdote 1 it is only recently that more systematic attempts were undertaken to analyze the importance of political and institutional factors in explaining cross country variances in economic growth for instance many researchers have examined whether the democratic character of national political procedures and institutions can help explain cross country differences in national development l sirowy and a inkeles reviewed 13 studies all of which attempted to evaluate the economic consequences of variation in the democratic character of national political regimes sirowy and inkeles conclude that the studies they considered present a very mixed and confusing picture with regard to the effect of democracy on economic growth 2 the relationship between civil and political liberty on the one hand and economic growth on the other has also been the subject of much discussion two conflicting hypotheses have been advanced concerning the connection between economic growth and political freedom some economists argue that freedom fosters economic performance and hence economic growth others pose that high growth rates require economic controls and reduced freedom four recent cross section studies on economic growth have found evidence that lack of civil and political liberties is negatively correlated with economic growth 3 all of these studies used r d gastil s measures of civil liberties or political rights 4 g w scully concludes that for the

removing heterogeneity bias from logit model estimation this paper introduces a new estimation procedure for the logit model that is an extension of a conditional estimation procedure developed by chamberlain chamberlain g 1978 on the use of panel data working paper harvard university 1 52 chamberlain g 1980 analysis of covariance with qualitative data rev econom stud 47 225 238 the method eliminates heterogeneity bias which is present in the estimates produced by traditional estimation techniques it improves the goodness of fit and explanatory power of these models while incorporating purchase event feedback

all things considered the role of choice set formation in diversification abstract the diversification effect a tendency toward greater variety as multiple choices are made simultaneously in advance of consumption is a robust and important phenomenon researchers have typically explained the diversification effect in terms of differences in the process by which people select items from among those available this precludes the possibility that the locus of the effect lies in people s choice sets themselves that is how people decide which options to consider when making choices the authors examine the effects of set formation using an experimental choice sequence task and conjoined stochastic model of set formation and conditional choice the findings demonstrate that set formation plays a critical role in diversification previously chosen options are indeed discounted but only for simultaneous choices and only in the set formation portion of the model furthermore the expected number of choice set items is substantially greater in multiple versus single item choice s

modeling multiple sources of state dependence in random utility models a distributed lag approach we propose a utility theoretic brand choice model that accounts for four different sources of state dependence 1 effects of lagged choices structural state dependence 2 effects of serially correlated error terms in the random utility function habit persistence type 1 3 effects of serial correlations between utility maximizing alternatives on successive purchase occasions of a household habit persistence type 2 and 4 effects of lagged marketing variables carryover effects our proposed model also allows habit persistence to be a function of lagged marketing variables while accommodating the effects of unobserved heterogeneity in household choice parameters this model is more flexible than existing state dependence models in marketing and labor econometrics using scanner panel data we find structural state dependence to be the most important source of state dependence marketing mix elasticities are systematically understated if state dependence effects are incompletely accounted for the seetharaman and chintagunta 1998 model is shown to recover spurious variety seeking effects while overstating habit persistence effects ignoring habit persistence type 1 leads to an underestimation while ignoring habit persistence type 2 leads to an overestimation of structural state dependence effects we find lagged promotions to have carryover effects on habit persistence ignoring one or more sources of state dependence underestimates the total incremental impact of a sales promotion we draw implications for manufacturer pricing

category pricing with state dependent utility there is substantial literature documenting the presence of state dependent utility with packaged goods data typically a form of brand loyalty is detected whereby there is a higher probability of purchasing the same brand as has been purchased in the recent past the economic significance of the measured loyalty remains an open question we consider the category pricing problem and demonstrate that the presence of loyalty materially affects optimal pricing the prices of higher quality products decline relative to those of lower quality when loyalty is introduced into the model given the well known problems with the confounding of state dependence and consumer heterogeneity loyalty must be measured in a model which allows for an unknown and possibly highly nonnormal distribution of heterogeneity we implement a highly flexible model of heterogeneity using multivariate mixtures of normals in a hierarchical choice model we use an euler equations approach to the solution of the dynamic pricing problem which allows us to consider a very large number of consumer types

state dependence and alternative explanations for consumer inertia for many consumer packaged goods products researchers have documented inertia in brand choice a form of persistence whereby consumers have a higher probability of choosing a product that they have purchased in the past using data on margarine and refrigerated orange juice purchases we show that the finding of inertia is robust to flexible controls for preference heterogeneity and not due to autocorrelated taste shocks thus the inertia is at least partly due to structural not spurious state dependence we explore three economic explanations for the observed structural state dependence preference changes due to past purchases or consumption experiences which induce a form of loyalty search and learning our data are consistent with loyalty but not with search or learning properly distinguishing among the dierent sources of inertia is important for policy analysis because the alternative sources of inertia imply qualitative dierences in firm s pricing incentives and lead to quantitatively dierent equilibrium

testing for choice dynamics in panel data this article applies different approaches to distinguish state dependence from unobserved heterogeneity and serial correlation and hence test for state dependence in consumer brand choices first we apply a simple method proposed by chamberlain which involves lagged exogenous variables only second we also estimate a lagged dependent variable specification proposed by wooldridge third we use the estimation approach suggested by wooldridge to estimate a model with both lagged dependent and exogenous variables to distinguish between the two different sources of choice dynamics state dependence and lagged effects of the exogenous variables our analysis reveals that the best approach is to use models with both lagged dependent and exogenous variables our findings include strong evidence for state dependence in five out of the six product categories studied in this article

parameter bias from unobserved effects in the multinomial logit model of consumer choice abstract over the past two decades validation of choice models has focused on predictive validity rather than parameter bias in real world validation of choice models true parameter values are unknown so examination of parameter bias is not possible in contrast the main focus of this study is parameter bias in simulated scanner panel choice data with known parameter values study of parameter bias enables the assessment of a fundamental issue not addressed in the choice modeling literature the extent to which the logit choice model is capable of distinguishing unobserved effects that give rise to persistence in observed choices e g heterogeneity and state dependence although econometric theory provides some information about the causes of bias the extent of such bias in typical scanner data applications remains unclear the authors present an extensive simulation study that provides information on the extent of bias resulting from the misspecification of four unobserved effects that receive fr

identifying the hand of past distinguishing state dependence from heterogeneity a basic problem in social science is to ascertain the importance of initial endowments on subsequent outcomes of a dynamic process interest in this topic centers on two distinct issues a do initial endowments have a temporally persistent effect on outcomes i e is there heterogeneity b are the effects of initial endowments attenuated or accentuated by subsequent experiences of the process being studied or by related processes i e is there state dependence these two questions show up in a variety of contexts 1 the importance of family background on a person s subsequent education and earnings is a hotly debated topic do market or nonmarket mechanisms reinforce or diminish initial endowments 2 the incidence of criminal activity is concentrated among a small population of repeated offenders are certain persons prone to criminality or does crime breed crime 3 are persons who experience unemployment more likely to experience future unemployment due to loss of work experience or market stigma 4 does early entry into an industry confer an advantage of incumbency or does it merely proxy the basic managerial and innovative ability of early entrants many formal models of state dependent processes or processes with persistent effects of initial conditions have been formulated invariance of steady states to initial endowments was viewed as a desirable feature of an economic model in the 1960 s and 1970 s path dependent synergism and nonergodicity are fashionable features of models today is the choice between models with long run dependence on initial conditions and those without solely a matter of intellectual esthetics can data discriminate between these two classes of models how many economically extraneous statistical regularity conditions have to be imposed in order to distinguish between these models how many and what kind of maintained assumptions are required in order to let the data speak on these important questions in this paper i focus on one nonergodic model that receives much attention in the literature the model of duration dependence and heterogeneity discussed by herbert silcock 1954 and also examined by tony lancaster 1979 chris elbers and geert ridder 1982 myself and burton singer 1984 and myself and bo honore 1989

try it you will like it does consumer learning lead to competitive price promotions there is strong evidence that consumers learn from their brand consumption experiences and continuously update their brand purchase probabilities however in explaining why established competitive brands continuously compete through periodic price promotions most of the existing theories do not attribute this phenomenon to underlying consumer learning yet try it you will like it is often the stated rationale of the practicing marketing manager in offering consumers a price promotion on a brand this paper examines the connection between consumer learning and the offering of price promotions the consumer model specified is markovian in nature and encompasses in addition to consumer learning other empirical findings such as the increase in product class consumption in response to price reductions the consumer models used in the existing game theoretic approaches to this problem are shown to be mostly special cases of the proposed model it is demonstrated that for the commonly used price response functions the existence of consumer learning at a level of intensity consistent with that identified in empirical works makes it optimal for competing brands to periodically offer price promotions moreover it is shown that the competing brands should promote in different periods as opposed to head to head

the institutional framework and economic development the compound growth rates of per capita output and farrell type efficiency measures for 115 market economies over the period 1960 80 were compared with measures of political civil and economic liberty it was found that the institutional framework has significant and large effects on the efficiency and growth rate of economies politically open societies which subscribe to the rule of law to private property and to the market allocation of resources grow at three times the rate and are two and one half times as efficient as societies in which these freedoms are abridged

alleviating the constant stochastic variance assumption in decision research theory measurement and experimental test analysts often rely on methods that presume constant stochastic variance even though its degree can differ markedly across experimental and field settings this reliance can lead to misestimation of effect sizes or unjustified theoretical or behavioral inferences classic utility based discrete choice theory makes sharp testable predictions about how observed choice patterns should change when stochastic variance differs across items brands or conditions we derive and examine the implications of assuming constant stochastic variance for choices made under different conditions or at different times in particular whether substantive effects can arise purely as artifacts these implications are tested via an experiment designed to isolate the effects of stochastic variation in choice behavior results strongly suggest that the stochastic component should be carefully modeled to differ across both available brands and temporal conditions and that its variance may be relatively greater for choices made for the future the experimental design controls for several alternative mechanisms e g flexibility seeking and a series of related models suggest that several econometrically detectable explanations like correlated error state dependence and variety seeking add no explanatory power a series of simulations argues for appropriate flexibility in discrete choice specification when attempting to detect temporal stochastic inflation effects

explaining fiscal policies and inflation in developing countries abstract in this paper we investigate empirically the determinants of inflation seigniorage and fiscal deficits in developing countries we first test the optimal taxation theory of inflation for a group of 21 lcds we find that the implications of this theory are rejected for all these countries we then proceed to implement a number of tests based on the new political economy approach to macroeconomic policies we deal with some of the implications of a credibility and reputation model and of a strategic government behavior model we find that the data support the most important predictions of the political economy view of fiscal policy our measures of political instability and political polarization play an important role in explaining cross country differences in seigniorage inflation government borrowing and fiscal deficits we end by discussing directions for future research

a dynamic analysis of market structure based on panel data internal market structure analysis infers brand positions in an attribute space from preference and choice data given a market in which consumers have heterogeneous tastes for attributes previous market structure models have adopted a static framework e g elrod 1988 chintagunta 1994 elrod and keane 1995 furthermore they assumed that consumer perceptions of brand attributes do not vary across consumers yet these approaches may render inaccurate representations of market structure if there is state dependence in consumer choice behavior this paper attempts to incorporate consumer choice dynamics into market structure models by specifying the source of choice dynamics explicitly in particular the process by which past purchases affect current choices is modeled in a framework which captures both consumer habit persistence and variety seeking behavior more specifically consumer preferences for brand attributes are modeled to depend on the attributes of brands bought on the previous purchase occasion furthermore the modeling approach adopted incorporates heterogeneity in both consumer preferences and perceptions of brand attributes the audience of this paper includes practitioners and academics interested in understanding consumer choice processes and inferring market structure from consumer choice data the proposed models are estimated on nielsen scanner panel data for margarine peanut butter yogurt and liquid detergent using simulated maximum likelihood techniques the empirical results suggest that accounting for choice dynamics improves both in sample and out of sample fit the results indicate that the average consumer is habit persistent in all the product categories studied this result is consistent with the findings of kannan and sanchez 1994 who conducted an aggregate analysis of consumer variety seeking behavior across product categories however the results obtained in this paper suggest that consumers are heterogeneous with respect to the processes by which past purchases affect current purchases these results provide strong evidence for habit persistence and variety seeking in brand attributes to be the behavioral source of consumer choice dynamics in food categories thus consumer tastes utility weights seem to be affected by the attributes of the brands consumed in the past given the empirical result that a large proportion of consumers are habit persistent this suggests that tastes are reinforced by the brand attributes consumed in the past the empirical results also show that not accounting for state dependence in market structure models for panel data may produce misleading results that is depending on consumer behavior patterns models that do not account for state dependence may distort the true nature of competition among brands more specifically the results confirm the expectation that if there is habit persistence that is if consumer tastes are reinforced by attributes of brands consumed in the past models that do not capture this choice dynamics will overestimate the distance between similar brands furthermore the policy experiments conducted suggest that 1 static models overestimate the short run impact of a price cut on the sales of the brand on promotion 2 price cuts hurt the sales of the more similar brands more and 3 free samples affect relatively less similar brands the most finally this paper studies variety seeking and habit persistence across brands over purchase occasions however variety seeking behavior may also involve the purchase of a portfolio of brands or items at a purchase occasion consumers may buy multiple items knowing that prior to the next trip they may want to consume different items simanson 1990 walsh 1995 this type of behavior can be modeled within the context of dynamic expected utility maximization with forward looking consumers the development and estimation of market structure models that include forward looking consumers who maximize expected utility over a planning horizon incorporating their future tastes and needs and shopping for an inventory of brands remain an important future research issue

behavioral price discrimination in the presence of switching costs we study the strategic impacts of behavioral price discrimination bpd on manufacturers and retailers in a distribution channel when there are switching costs in consumer demand unlike previous empirical studies of behavioral price discrimination which rely only on differences in price elasticity across customers our pricing model allows the firm strategies to additionally account for differences in price elasticity across time due to switching costs we estimate a dynamic pricing model using empirical data from the cola category and through a series of counterfactuals we find that the retailer should simply outsource the data analytics and customization of coupons to manufacturers and improve its profit beyond what it can achieve by proactively couponing on its own we further find that serving as an information broker to sell its customer database to manufacturers can be a vital source of profit to the retailer by contrast manufacturers end up worse off illustrating that customer information

modeling heterogeneity and state dependence in consumer choice behavior in frequently purchased consumer goods markets consumer brand choices exhibit substantial persistence across purchase occasions in this article i estimate a choice model that admits of both heterogeneity in preferences and true state dependence as sources of this persistence using nielsen scanner data on ketchup i find evidence for true state dependence in the choice process even after controlling for a rich heterogeneity structure simulation of the model indicates that the long term effect of a promotion induced purchase on future purchase probabilities is positive but small

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

a framework for investigating habits the hand of the past and heterogeneity in dynamic brand choice in this paper we develop a general class of dynamic brand choice models called lightning bolt lb models which are consistent with the theory of random utility maximization of consumer choice behavior the underlying random utility process is markov and the inter temporal evolution of the utility maximizing brand choice process is also markov the models permit parsimonious parameterizations of the random utility process in brand choices with the resulting switching probabilities being functionally related to explanatory variables the model allows for structural state dependence feedback habit persistence inertia and unobserved heterogeneity the theoretical development shows that several well known stochastic brand choice models can be deduced from random utility maximization theory from a managerial perspective the usefulness of the proposed model stems from its ability to separate out the effects of habits state dependence and heterogeneity strong state dependence effects imply incentives for inducing trial of a brand e g product sampling in contrast with state dependence a strong habit persistence effect may be indicative of buyer behavior where inducement of trial of a different brand may not be sufficient to maintain a sustained defection of the consumer from the habitually purchased brand to the trial brand failure to distinguish between these two effects has important implications for example a model that only accounts for state dependence effects would in the presence of only habit persistence incorrectly attribute it to state dependence based on this the manager could decide to embark on an expensive sampling program that might prove ineffective due to the absence of state dependence it is also important to distinguish between the effects of unobserved heterogeneity and state dependence in the absence of true state dependence failing to account for unobservable variations across households such as differences in price sensitivities results in the temporally persistent unobservable elements showing up as state dependence in the model hence a manager may incorrectly opt for sampling as the appropriate marketing action whereas a couponing or price promotion strategy should have been preferred we estimate the model parameters using the ac nielsen household scanner panel data set on catsup purchases further we investigate empirical techniques for overcoming the initial conditions problem that affects many dynamic models of brand choice through simulation analysis using the estimated parameters we show that the calculated profitability of a promotion must take into account the multi period impact due to state dependence further we demonstrate how ignoring heterogeneity can result in spurious state dependence thereby making marketing tactics such as product sampling appear far more attractive than they actually are specifically the model that accounts only for habit persistence and state dependence effects predicts a share increase of 2 4 points through sampling for one of the brands in the empirical analysis once the effects of unobserved heterogeneity are accounted for however this number drops precipitously to 0 3 while even this low number might fulfill the objectives of the brand manager it ensures that expectations are not eight times that number it is important to note that this paper is a first attempt at analyzing the three fundamental dimensions of dynamic brand choice behavior our formulation represents a reduced form approach as opposed to a structural approach other limitations of the model include our focus on time invariant choice sets extensions of the model to situations where choice sets vary over time are possible but are difficult another limitation is the dependence on multivariate extreme value distributions an alternative would be to use multivariate normal distributions i e a probit like structure which has certain useful properties a comparison of the two approaches would be useful empirical extensions of the model to allow for higher order processes and nested logit type model structures could also be fruitful explicitly incorporating variety seeking behavior in the model would further enrich the theoretical framework proposed in this paper

do customers learn from experience evidence from retail banking we study customers adoption and subsequent switching decisions with regard to a menu of three part tariff plans offered by a commercial bank using a rich panel data set covering 70 510 fee based checking accounts over 30 months before and after the introduction of the plans we find that most customers adopt non cost minimizing plans preferring plans with large monthly allowances and high fixed payments furthermore after adoption customers who exceed their allowances and consequently pay overage fees are more likely to switch to plans with larger allowances than customers who do not experience such fees notably after switching these overage paying customers pay higher monthly payments than before in contrast switching customers who did not pay overage payments before switching pay less after switching our findings unlike those of previous research on experience based learning suggest that the behavior of experienced customers does not converge to the predictions of neoclassical models we p

an alternative explanation for lower repeat rates after promotion purchases several authors have observed that average repeat rates are lower after a promotion purchase one interpretation of this result is that a media coupon or cents off promotion undermines the consumer

winners and losers in a major price war abstract although retail price wars have received much business press and some research attention it is unclear how they affect consumer purchase behavior this article studies an unprecedented price war in dutch grocery retailing that started in fall 2003 initiated by the market leader to halt its sliding market share the authors investigate the short and long term effects of the price war on store visits on spending and on the sensitivity of these decisions to weekly prices and price image they use a unique data set with consumer hand scan and perceptual data for a national panel of 1821 households covering two years before and two years after the price war started although the price war initially entailed more shopping around and increased spending spending per visit ultimately dropped because consumers redistributed their purchases across stores the price war made consumers more sensitive to weekly prices and price image which helped both the chain that showed an improvement in price image

brand inertia in u s household cheese consumption to analyze u s consumers brand choices for cheese purchases we derive a set of discrete choice models from dynamic utility maximization acnielsen homescan survey data on u s households is used to estimate a dynamic probit model for each of the top brands for cheddar shredded and sliced cheese in four u s regions we find that households have strong brand inertia a result robust across alternative specifications predicted probabilities confirm greater inertia in the top brands and consumers are more likely to switch into them brand inertia is relatively larger in cheddar and sliced cheese especially in the central and southeast regions copyright 2008 oxford university press

replacing a disobedient central bank governor with a docile one a novel measure of central bank independence and its effect on inflation this paper identifies two mechanisms that empirical papers on central bank independence assume to be embedded in the yardstick measure of turnover rate of central bank governor i the removal of a governor who is perceived as a challenger by the government and ii whether his her replacement is an ally of the government we identify the first mechanism with premature exits of central bankers and the second by examining whether or not the incoming governor is drawn from the ranks of the executive branch of the government we find that only premature exits and replacements with government allies increase inflation

research note a cross category model of households incidence and quantity decisions this paper advances the literature on multicategory demand models by simultaneously handling more than one purchase decision of the household we propose a two stage bivariate logit model of incidence and quantity outcomes in multiple categories our results show that cross category promotional spillovers are asymmetric between the two product categories of bacon and eggs the total retail profit responds more to bacon price than to egg price promoting bacon is found to have a bigger impact on egg profit than the impact of egg promotion on bacon profit we decompose 1 the total retail profits as well as 2 the cross category profit impact of a price promotion into its two components and find that 1 23 67 of the total retail profit impact of a promotion on bacon eggs arises on account of quantity effects and 2 40 33 of the increase in egg bacon profit from promoting bacon eggs is on account of quantity effects

third country effects on the formation of free trade agreements the recent proliferation of free trade agreements ftas has resulted in an increasingly complex network of preferential trading relationships the economics literature has generally examined the formation of ftas as a function of the participating countries economic characteristics alone in this paper we show both theoretically and empirically that the decision to enter into an fta is also crucially dependent on the participating countries existing fta relationships with third countries accounting for the interdependence of ftas helps to explain a significant fraction of fta formations that would not otherwise be predicted by countries economic characteristics

a strategic and welfare theoretic analysis of free trade areas abstract we construct a three country model to determine how the formation of free trade areas ftas affects optimal tariffs and welfare we find that at constant rest of the world row tariffs the adoption of internal free trade induces union members to reduce their external tariffs below the kemp wan j int econom 6 1976 95 97 level and causes row s terms of trade to improve and its welfare to rise when row also behaves optimally its policy response to the formation of the fta is to raise tariffs generally fta members prefer to liberalize internal trade partially and find regional integration appealing only if their collective size is sufficiently large we also demonstrate how ftas may undermine the attainment of global free trade

trade diversion and declining tariffs evidence from mercosur abstract this paper empirically examines the alternative posed by richardson j intern econ 34 1993 39 to the traditional view that trade integration may exacerbate inefficiencies richardson s hypothesis boldly predicts that trade diversion and trade creation may actually cause tariffs to decline the hypothesis is fundamentally attributable to the presence of a political component in the governments objective functions a cross sectionally rich data set on trade and tariffs from the mercosur pact countries primarily argentina is used the evidence yields surprising conclusions about the validity of endogenous tariff determination in models of trade integration

price competition in markets with consumer variety seeking we investigate price competition between firms in markets characterized by consumer variety seeking while previous research has addressed the effect of consumer inertia on prices there exists no research on the effects of variety seeking on price competition our study fills this gap in the literature using a two period duopoly framework as in klemperer s analysis of inertial markets we show that the noncooperative pricing equilibrium in a market with consumer variety seeking may be the same as the collusive outcome in an otherwise identical market without variety seeking specifically our variety seeking model implies tacit collusion between firms in both periods unlike the inertia model of klemperer that implies tacit collusion between firms only in the second period but implies fierce price competition in the first period when consumers are assumed to have rational expectations about future prices the implied first period prices increase further which is consistent with what klemperer finds in an inertial market to summarize while our variety seeking analyses support two key results pertaining to second period prices and rational expectations previously derived for inertial markets by klemperer they depart from one key result pertaining to first period prices

a dynamic model of rational addiction evaluating cigarette taxes addiction creates an intertemporal link between a consumer s past and present decisions altering their responsiveness to price changes relative to nonaddictive products we construct a dynamic model of rational addiction and endogenous consumption to investigate how consumers respond to policy interventions that aim to reduce purchases of cigarettes we find that on average the category elasticity is about 35 higher when the model correctly accounts for addiction however some policies spur substitution from more expensive single packs to less expensive cartons of cigarettes resulting in higher overall consumption for some consumers

modelling political instability and economic performance israeli investment during the intifada i construct a model of investment in israel that incorporates both standard economic factors and indicators of political instability and unrest the model is used to estimate both the extent to which the intifada has depressed israeli investment in different kinds of capital good and the size of the corresponding peace dividend

free trade networks abstract the paper examines the formation of free trade agreements ftas as a network formation game we consider an n country model in which possibly asymmetric countries trade differentiated industrial commodities we show that if all countries are symmetric the complete fta network is pairwise stable and it is the unique stable network if industrial commodities are not highly substitutable we also compare ftas and customs unions cus as to which of these two regimes facilitates global trade liberalization noticing that unlike cus each signatory of an fta can have another fta without consent of other member countries

negotiating free trade we develop a dynamic bargaining model in which a leading country endogenously decides whether to sequentially negotiate free trade agreements with subsets of countries or engage in simultaneous multilateral bargaining with all countries at once we show how the structure of coalition externalities shapes the choice between sequential and multilateral bargaining and we identify circumstances in which the grand coalition is the equilibrium outcome leading to worldwide free trade a model of international trade is then used to illustrate equilibrium outcomes and how they depend on the structure of trade and protection global free trade is not achieved when the political economy motive for protection is sufficiently large furthermore the model generates both building bloc and stumbling bloc effects of preferential trade agreements in particular we describe an equilibrium in which global free trade is attained only when preferential trade agreements are permitted to form a building bloc effect and an equilibrium in which global free trade is attained only when preferential trade agreements are forbidden a stumbling bloc effect the analysis identifies conditions under which each of these outcomes emerges

tariffs and formation of free trade agreements networks this paper examines the formation of bilateral free trade agreements ftas on the basis of country heterogeneity in the tariff level we demonstrate that a country s unilateral incentive to form an fta depends on the relative magnitudes of the negative market concession effect and the positive market expansion effect both of which are determined by the tariff levels of the two fta partner countries global welfare is maximised when all country pairs form ftas two countries in equilibrium are more likely to form an fta when their tariff gap is smaller or when their tariff levels are neither very high nor very low this finding is robust to several extensions of the model our preliminary empirical analysis provides some evidence for the finding