the assessment competition policy the paper advances four propositions concerning the objectives content and institutions of competition policy first the role of policy should be to advance economic efficiency rather than competition for its own sake or some wider definition of the public interest second economic analysis is generally ambiguous a priori about the efficiency effects of particular market structures and conduct third the design of policy and institutions needs to reflect this ambiguity policy rules are essential but there should be scope for parties to argue countervailing efficiency benefits a policy institution should be empowered to identify investigate and propose remedies for failures of competition subject to review by an independent competition tribunal fourth international harmonization of competition policies is essential current policies in the u k and ec and relationships between the two are evaluated and the case made for a radical reform of u k policy copyright 1993 by oxford university press

manufacturers channel structures when selling asymmetric competing products abstract manufacturers often face the fundamental channel structure decision namely whether to sell their products directly to consumers or indirectly through an intermediary to address this issue extensive research has analyzed equilibrium channel structures for competing equally substitutable products however in reality many competing products are asymmetric in both substitutability and brand equity in this paper we study how these two asymmetric characteristics affect the equilibrium channel structures of manufacturers selling competing products following some recent studies we adopt a refined consumer demand model derived from the representative consumer utility function based on this model we examine three possible types of competition between the two supply chains cournot quantity competition bertrand price competition and bertrand cournot competition we find that brand equity substitutability as well as the type of competition all play important roles in determining the equilibrium channel structures specifically in equilibrium a manufacturer always sells directly when its rival competes on quantity moreover when there is sufficient asymmetry in either brand equity or substitutability manufacturers tend to sell directly our results demonstrate that the benefits of selling indirectly shown in previous studies depend critically on the assumptions of equally substitutable products and bertrand competition

the long run demand for skilled and unskilled labor in colombian manufacturing plants this note estimates the long run demand for skilled and unskilled labor using panel data for colombian manufacturing plants unobserved heterogeneity and measurement error problems that commonly arise in microdata production estimates are examined output measurement errors cause ols estimators to underestimate the output and wage response of employment demand time difference estimators exaggerate the measurement error biases instrumental variable estimates of the output elasticities are 0 89 and 0 76 and own wage elasticities are 0 42 and 0 65 for skilled and unskilled labor respectively the output elasticity is larger for skilled labor whereas the wage elasticity is larger for unskilled labor in virtually every industry

oligopoly and the polarization of space one remarkable fact in economic geography is that production does not appear everywhere at the same time instead it occurs at a few points with variable intensity more precisely once the spatial distribution of consumption and the transportation infrastructures are given firms seem to be inexorably attracted by some particular places in economic space this results in a distribution of production characterized by a high degree of geographical polarization location theory has provided various explanations of this phenomenon see e g the surveys of fujita 1990 and stahl 1987 they often rely upon the existence of pecuniary externalities of different sorts the purpose of this note is to review some recent contributions that have shed new light on the role of more traditional factors in the agglomeration of industrial or retailing firms more precisely i want to discuss i the impact of the channelization of space created by transportation infrastructures and ii the main forces leading to geographical de concentration in the process of spatial competition in order to account for the polarization of space one must first recognize that increasing returns are essential for explaining the geographical distribution of production activities with nonincreasing returns and a uniform distribution of natural resources it would be desirable for every firm to disperse its activities among the consumption places at each of them a firm s plant would be set up in order to meet the local demand the transportation costs would then be saved and each consumption place would become an autarky put in a different way the distribution of production would mirror exactly the distribution of consumption unless the natural resources are unevenly distributed across locations while indisputably pertinent unequal distribution of resources seems weak as the main explanation for geographical polarization assume that increasing returns are now introduced into the picture their existence makes it profitable for the firms to concentrate their production in

asymmetric and neighborhood cross price effects some empirical generalizations this paper provides some empirical generalizations regarding how the relative prices of competing brands affect the cross price effects among them particular focus is on the asymmetric price effect and the neighborhood price effect the asymmetric price effect states that a price promotion by a higher priced brand affects the market share of a lower priced brand more so than the reverse the neighborhood price effect states that brands that are closer to each other in price have larger cross price effects than brands that are priced farther apart the main objective of this paper is to test if these two effects are generalizable across product categories and to assess which of these two effects is stronger while the neighborhood price effect has not been rigorously tested in past research the asymmetric price effect has been validated by several researchers however these tests of asymmetric price effect have predominantly used elasticity as the measure of cross price effect the cross price elasticity measures the percentage change in market share or sales of a brand for 1 change in price of a competing brand we show that asymmetries in cross price elasticities tend to favor the higher priced brand simply because of scaling effects due to considering percentage changes furthermore several researchers have used logit models to infer asymmetric patterns we also show that inferring asymmetries from conventional logit models is incorrect to account for potential scaling effects we consider the absolute cross price effect defined as the change in market share percentage points of a target brand when a competing brand s price changes by one percent of the product category price the advantage of this measure is that it is dimensionless hence comparable across categories and it avoids scaling effects we show that in the logit model with arbitrary heterogeneity in brand preferences and price sensitivities the absolute cross price effect is symmetric we develop an econometric model for simultaneously estimating the asymmetric and neighborhood price effects and assess their relative strengths we also estimate two alternate models that address the following questions i if i were managing the ith highest priced brand which brand do i impact the most by discounting and which brand hurts me the most through price discounts ii who hurts whom in national brand vs store brand competition based on a meta analysis of 1 060 cross price effects on 280 brands from 19 different grocery product categories we provide the following empirical generalizations 1 the asymmetric price effect holds with cross price elasticities but tends to disappear with absolute cross price effects 2 the neighborhood price effect holds with both cross price elasticities and absolute cross price effects and is significantly stronger than the asymmetric price effect on both measures of cross price effects 3 a brand is affected the most by discounts of its immediately higher priced brand followed closely by discounts of its immediately lower priced brand 4 national brands impact store brands more so than the reverse when the cross effect is measured in elasticities but the asymmetric effect does not hold with absolute effects store brands hurt and are in turn hurt the most by the lower priced national brands that are adjacent in price to the store brands 5 cross price effects are greater when there are fewer competing brands in the product category and among brands in nonfood household products than among brands in food products the implications of these findings are discussed

a modern analysis of giffen s paradox concern over the possibility of an upward sloping demand curve started with marshall who credited robert giffen an english statistician with having first observed that more of a commodity may be consumed when its price rises nearly 100 years after marshall published his remarks the received analysis of a giffen good is almost entirely contained in the assertion that in the slutsky equation for the own price effects on consumption of the good the income term may be sufficiently large to outweigh the negative pure substitution term even the elementary question of the impact of this large income effect on the consumption of other commodities seems to have been overlooked 2 in the standard two good x1 and x2 world for example if x1 is a giffen good i e if ox1 lp 0 then from the budget constraint p1ox1 p1 p2ax2 p1 x1 and thus ax2 ap1 o to satisfy the budget constraint the large negative income term for x1 must produce a large positive income effect for x2 that outweighs the net substitution term in the slutsky equation for the effects of changes in pi on x2 when the price of the giffen good changes therefore not only does the income term outweigh the substitution term for the giffen good but a similar result is produced for the cross effect on the other commodity this simple result seems to have gone unnoticed many economists have studied the giffen paradox but a satisfactory analysis appears to be lacking marshall believed that the marginal utility of money i must rise with an increase in the price of the giffen good george stigler asserted 1950 p 327 that the giffen case is inconsistent with an additively separable utility function 3 william gramm 1970 also examined the paradox but his interpretation was not intended to add to knowledge about the economics of the

asymmetric substitutability theory and some applications economists usually describe goods as being either gross complements or gross substitutes yet what is less known is that one good may be a gross substitute for a second good while the second good is a gross complement to the first good this paper shows the existence of asymmetric gross substitutability and shows some potential examples and applications

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

in search of giffen behavior in search of giffen behavior i introduction the existence of giffen behavior has intrigued students of traditional consumer theory for many years stigler 1947 1948 and hicks 1956 dealt with the giffen good by dismissing it as a theoretical possibility but a practical impossibility this solution was met with some discord especially by boland 1977 according to boland if demand theory cannot be revised to dismiss the theoretical possibility of a giffen good it should at least be able to explain why giffen goods do not exist empirically dougan 1982 answered boland s critique by demonstrating the impossibility of observing a giffen good at the market level because the estimated demand curve is the locus of market equilibria derived from a shifting supply curve it must slope downward in the long run if walrasian stability conditions hold this suggests empirical evidence of a giffen good from market data is impossible to obtain however the possibility of giffen behavior at the individual level is not ruled out more recently silberberg and walker 1984 explored the consistency of giffen behavior using marshall s additive utility assumption they conclude that the giffen paradox is consistent with marshall s assumptions but deem its actual existence a pathological case dwyer and lindsay 1984 provide an interesting historical perspective of the often cited irish potato example of giffen behavior they point out that no known reference by robert giffen to the irish potato exists although the example abounds in principles and intermediate textbooks 1 furthermore they argue that the classic irish potato example of a giffen good did not actually occur since a supply reduction due to the famine would have caused the price of potatoes to decline if potatoes were a giffen good but no such decline was observed interestingly recent experimental work by battalio dwyer and kagel 1987 battalio kagel and kogut 1988 and silberberg warren boulton and asano 1987 provides some evidence for the existence of giffen behavior the battalio kagel and kogut study found that poor rats those whose incomes only allow below normal levels of fluid intake decrease the quantity demanded for quinine water in response to a lower price rats used the increased purchasing power to buy larger quantities of root beer in a controlled experiment involving monkeys silberberg warren boulton and asano found an increase in the price of bitter food pellets caused consumption of these pellets to increase battalio dwyer and kagel found other evidence of giffen behavior in the form of labor supply curves that were positively sloped at low wages but backward bending at higher rates common textbook examples of giffen behavior meat and potatoes beer and whiskey or alfred marshall s transportation problem employing typical indifference curve illustrations take place in a two commodity world with exogenous prices and a negative income effect strong enough to overcome the substitution effect these classical examples rely on utility function implying unusually shaped indifference maps by contrast this paper shows how giffen behavior can occur independent to a large degree of the form of the utility function the model offers an alternative explanation of giffen like behavior that is consistent with commonly cited examples and recent experimental work the results illustrate not only the possibility but the plausibility of giffen behavior ii the utility maximization problem begin by considering the typical example of a giffen good that of potatoes and meat the analysis is confined to peasants of very modest means assume the two goods meat m and potatoes or spuds s have exogenously determined prices given by p sub m and p sub s respectively the fixed income of consumers is denoted by r following the typical presentation of the giffen problem further assume peasant incomes are too small for subsistence on meat alone but are sufficient for subsistence solely on potatoes

the shopping basket a model for multicategory purchase incidence decisions consumers make multicategory decisions in a variety of contexts such as choice of multiple categories during a shopping trip or mail order purchasing the choice of one category may affect the selection of another category due to the complementary nature e g cake mix and cake frosting of the two categories alternatively two categories may co occur in a shopping basket not because they are complementary but because of similar purchase cycles e g beer and diapers or because of a host of other unobserved factors while complementarity gives managers some control over consumers buying behavior e g a change in the price of cake mix could change the purchase probability of cake frosting co occurrence or co incidence is less controllable other factors that may affect multi category choice may be unobserved household preferences or observed household demographics we also argue that not accounting for these three factors simultaneously could lead to erroneous inferences we then develop a conceptual framework that incorporates complementarity co incidence and heterogeneity both observed and unobserved as the factors that could lead to multi category choice we then translate this framework into a model of multi category choice our model is based on random utility theory and allows for simultaneous interdependent choice of many items this model the multivariate probit model is implemented in a hierarchical bayes framework the hierarchy consists of three levels the first level captures the choice of items for the shopping basket during a shopping trip the second level captures differences across households and the third level specifies the priors for the unknown parameters we generalize some recent advances in markov chain monte carlo methods in order to estimate the model specifically we use a substitution sampler which incorporates techniques such as the metropolis hit and run algorithm and the gibbs sampler the model is estimated on four categories cake mix cake frosting fabric detergent and fabric softener using multicategory panel data the results disentangle the complementarity and co incidence effects the complementarity results show that pricing and promotional changes in one category affect purchase incidence in related product categories in general the cross price and cross promotion effects are smaller than the own price and own promotions effects the cross effects are also asymmetric across pairs of categories i e related category pairs may be characterized as having a primary and a secondary category thus these results provide a more complete description of the effects of promotional changes by examining them both within and across categories the co incidence results show the extent of the relationship between categories that arises from uncontrollable and unobserved factors these results are useful since they provide insights into a general structure of dependence relationships across categories the heterogeneity results show that observed demographic factors such as family size influence the intrinsic category preference of households larger family sizes also tend to make households more price sensitive for both the primary and secondary categories we find that price sensitivities across categories are not highly correlated at the household level we also find some evidence that intrinsic preferences for cake mix and cake frosting are more closely related than preferences for fabric detergent and fabric softener we compare our model with a series of null models using both estimation and holdout samples we show that both complementarity and co incidence play a significant role inpredicting multicategory choice we also show how many single category models used in conjunction may not be good predictors of joint choice our results are likely to be of interest to retailers and manufacturers trying to optimize pricing and promotion strategies across many categories as well as in designing micromarketing strategies we illustrate some of these benefits by carrying out an analysis which shows that the true impact of complementarity and co incidence on profitability is significant in a retail setting our model can also be applied to other domains the combination of item interdependence and individual household level estimates may be of particular interest to database marketers in building customized cross selling strategies in the direct mail and financial service industries

discriminating oligopolists and common markets we analyse the properties of a cournot nash equilibrium which arises when two monopolies operating each in a separate market become a duopoly in a common market with two sub markets the formerly separated markets and are allowed to price discriminate across sub markets this equilibrium implies intra industry trade or crosshauling of identical commodities and freight absorption which is an increasing function of the slope of the marginal cost schedule it also leads to price differences such as those observed in the european car market

cournot competition yields spatial agglomeration most theoretical models of spatial competition show a strong tendency toward spatial dispersion of firms yet common observations suggest that firms tend to agglomerate in this paper the authors show that competition between cournot type oligopolists that discriminate over space leads to spatial agglomeration one implication is that firms do not necessarily earn supernormal profits at the free entry equilibrium copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

innovative strategic groups in multinational industries abstract differences in innovative strategies between groups of domestic and multinational enterprises are analyzed within a two stage game model that incorporates the asymmetries in transaction costs between the two species of enterprises nash and cooperative behaviour is shown to result in different equilibrium r d strategies with the multinational companies doing typically more r d for larger markets and domestic companies focusing on specific market segments survey data from companies operating in eleven high tech multinational industries in belgium provide support for these strategic differences and show how they are related to company performance

framing of incentives and effort provision a prospect theory model combining loss aversion and diminishing sensitivity predicts that the link between incentives framing and effort is ambiguous small penalties yield higher effort but isomorphic contracts with large penalties decrease effort we conduct two experiments a framed field and a conventional lab experiment in which economically equivalent contracts are framed as menus of either i bonuses ii penalties or iii bonuses and penalties the experimental results confirm the main intuition of the model as subjects performed best when bonuses and penalties are combined a follow up lottery experiment confirms that both loss aversion and diminishing sensitivity influenced the performance

gain versus loss contracts does contract framing affect agents reciprocity abstract loss contracts are rarely observed in practice although research suggests that they induce higher effort compared to gain contracts we experimentally examine one potential reason for this scarcity agents reciprocity toward the principal might be negatively affected by loss contracts first agents worked on a real effort task under either a gain or a loss contract second principals and agents played a trust game we find that loss contracts induce more effort and thus a higher payoff for the principal in the real effort task however we do not find a spillover effect of contract framing in the trust game differences in reciprocity are small in size and not significant thus they cannot explain the rare use of loss contracts in practice

a dynamic heterogeneous labour demand model for german manufacturing this paper presents an application of the generalised error correction model gecm for heterogeneous factor demands based on the quadratic cost function using data for 26 west german manufacturing industries over the period 1976 1995 it turns out that less general specifications such as the partial adjustment and the static ar 1 model are rejected furthermore both shortrun and long run labour demands of different skill classes are inelastic unskilled labour is found to have a somewhat higher wage elasticity in absolute terms than medium skilled labour a small part of shift in demand away from unskilled labour can be explained by the substitutability relationship between intermediate materials and unskilled labour between 6 and 13 percent of the observed shift towards high skilled labour can be explained by capital accumulation

quality perceptions and asymmetric switching between brands rotating indifference curves are used to induce an income effect that favors superior brands at the expense of inferior brands in a discrete choice model when calibrated on scanner panel data the model yields an objective measure of brand quality which is related to the rate of rotation the model also leads to asymmetric responses to price promotions where switching up to high quality brands is more likely than switching down the model is capable of nesting the standard logit model and is similar to a nested logit model when there exists clusters of brands of like quality the model is used to explore a product line pricing decision where profits are maximized subject to the constraint that consumer utility is maintained

indirect competition with spatial product differentiation although two markets may appear to be separate sometimes one firm participates in both of them that firm provides a link between the two markets such a straddling firm transmits indirect competition from each market to the other since its actions reflect competitive conditions in both markets in a model of spatial product differentiation the author shows that indirect competition may make a market perform significantly better than the number of firms would indicate moreover total consumer surplus increases if two previously distinct markets are linked by a straddler finally the author considers implications of these results for antitrust analysis copyright 1989 by blackwell publishing ltd

optimizing an international network of partially owned plants under conditions of trade liberalization for the last four decades the preferred economic philosophy in much of latin america was that of import substituting industrialization as a result multinational corporations mncs approached different countries with the expectation that each plant would primarily serve its domestic market each of these plants was partially owned by the mnc beginning in the late 1980s latin america countries began decreasing barriers to cross border trade this made competition between the units belonging to a common network possible for the first time operations which had subsisted side by side in spite of differences in costs and quality of output and which were under the control of different owners now found themselves in competition with one another and having to rationalize their efforts in this paper we analyze the problem of operating a network of plants under conditions of free trade and exchange rate fluctuations when the firms that compose it are partially owned subsidiaries of an mnc a model of three subsidiaries and four countries is developed for one industry based on actual corporate and economic data we study the problem of coordinating the activities of the subsidiaries and allocating the gains arising from coordination

the welfare effects of third degree price discrimination in a differentiated oligopoly this article examines the welfare effects of third degree price discrimination under oligopolistic competition with horizontal product differentiation we derive a necessary and sufficient condition for price discrimination to improve social welfare the degree of substitution must be sufficiently greater in the strong market where the discriminatory price is higher than the uniform price than in the weak market where it is lower it is verified however that consumer surplus is never improved social welfare improves solely owing to an increase in the firms profits in the case of linear demands jel d43 l11 l13 i introduction this article examines the welfare effects of oligopolistic third degree price discrimination explicitly considering product differentiation as a source of market power and strategic interaction product differentiation is one of the main reasons why firms can enjoy market power it enables them to sell products that are no longer perfect substitutes for example coca cola and pepsico sell similar types of soda although it is arguable that they differ in taste each firm thereby attracts some consumers over another as a form of price discrimination coca cola was once reported to be testing a vending machine that would automatically raise prices in hot weather 1 although the plan triggered nationwide controversy and coca cola had to abandon the project as a result it could have changed the regime of uniform pricing to one of price discrimination in the soda market how would the resulting change affect consumer welfare and firms profits in other words is third degree price discrimination good or bad answering this question is important because it helps us to evaluate price discrimination under oligopoly in this article we focus on horizontal product differentiation to consider substitutability as well as complementarity 2 by assuming a linear quadratic utility function of a representative consumer and focusing on the symmetric equilibrium of a pricing game we characterize the conditions relating to such demand properties as substitutability and complementarity required for price discrimination to improve social welfare more specifically we derive a necessary and sufficient condition for price discrimination to improve social welfare the degree of substitution must be sufficiently greater in the strong market where the discriminatory price is higher than the uniform price than in the weak market where it is lower it is also shown that aggregate output must increase for price discrimination to improve social welfare we verify however that consumer surplus is never improved by price discrimination welfare improvement from price discrimination is solely owing to an increase in firms profits in the example above the degree of substitution would be higher in the strong market i e when the temperature is high because consumers care less about which brand when it is hot weather our analysis below implies that social welfare might improve in this case the degree of substitution can vary across markets even if consumers in each market face exactly the same products because consumers taste depends on various market specific factors such as geographical and natural conditions if the strong market is where consumers demand a product more eagerly caring less about which brand in the above example individuals demand soda more eagerly in hot weather then our results suggest that price discrimination has large potential to improve social welfare 3 why does allowing price discrimination improve social welfare notice that there are two forces that determine equilibrium prices in price setting oligopoly a larger market size raises the price whereas a larger substitutability parameter lowers the price for price discrimination to raise social welfare it is necessary that a high degree of substitutability mitigates an increase in the discriminatory price in the larger market

equilibrium incentives for most favored customer clauses in an oligopolistic industry abstract this paper analyzes the economics of contemporaneous most favored customer clauses mfcc in a non cooperative n firm oligopoly in the first stage of a two stage game each firm independently decides whether to adopt mfcc in the second stage firms set prices non cooperatively given the first stage choices in contrast to work on retroactive mfcc by cooper the rand journal of economics 1986 17 377 388 our analysis shows that not adopting mfcc can be a dominant strategy the difference between our results and cooper s highlights important differences between retroactive and contemporaneous mfcc and suggests that mfcc are a less powerful facilitating practice than retroactive mfcc our analysis also sheds new light on grether and plott s economic inquiry 1984 22 497 507 experimental results regarding the effects of mfcc on average industry prices

your loss is my gain a recruitment experiment with framed incentives empirically labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success an effect attributed to loss aversion this is puzzling as penalties are infrequently used in practice the most obvious explanation is selection loss averse agents are unwilling to accept such contracts i formalize this intuition then run an experiment to test it surprisingly i find that workers were 25 percent more likely to accept penalty contracts with no evidence of adverse or advantageous selection consistent with the existing literature penalty contracts also increased performance on the job by 0 2 standard deviations i outline extensions to the basic theory that are consistent with the main results but argue that more research is needed on the long term effects of penalty contracts if we want to understand why firms seem unwilling to use them

do people anticipate loss aversion there is growing interest in the use of loss contracts that offer performance incentives as up front payments that employees can lose standard behavioral models predict a trade off in the use of loss contracts employees will work harder under loss contracts than under gain contracts but anticipating loss aversion they will prefer gain contracts to loss contracts in a series of experiments we test these predictions by measuring performance and preferences for payoff equivalent gain and loss contracts we find that people indeed work harder under loss than gain contracts as the theory predicts surprisingly rather than a preference for the gain contract we find that people actually prefer loss contracts in exploring mechanisms for our results we find suggestive evidence that people do anticipate loss aversion but select into loss contracts as a commitment device to improve performance using one bias loss aversion to address another dynamic inconsistency data as supplemental material are a