identifying profitable self service markets a test in gasoline retailing the increased presence of self service products is explored a model is constructed that views service as an attribute of a product bundle that can be separated to create a self service substitute in terms of market elasticities and revenues we suggest an analytical measure of a seller s incentive to debundle service for retail gasoline markets we empirically estimate with reduced form equations the own and cross price elasticities of full and self service demand across standard metropolitan statistical areas in the united states to show that regional differences in sales of self service gasoline are explained by our measure

nonlinear price schedules and tied products illegal tying often occurs when a monopolist jointly sells a product with a complementary requirement also sold competitively along with selling the complement at its competi tive price this paper shows that profit can increase when a monopoli st lets consumers bundle any amount of the requirement with the basic product at a fixed price examples illustrate demand conditions that enhance the profitability of this nonlinear price strategy and show that profits can approximate those earned from tying as a noncoerciv e option to buyers legal entanglements are avoided certain nonlinea r schedules can be pareto superior to the most profitable uniform pri ces copyright 1988 by the london school of economics and political science

fragmentation and stability of markets trading skills are highly rewarded in practice but largely ignored in theoretical models of financial markets this paper demonstrates the importance of skills by examining their interaction with market fragmentation and market stability we consider a computational model where traders abilities to accurately price assets are endogenous in contrast to models that do not consider skills we find that centralising markets can lead to higher price volatility and less resilience to shocks because it increases the equilibrium proportion of unskilled traders

the ramsey problem for congestible facilities abstract in recent years a new set of models drawing on vickrey 1969 has been developed to analyze the economics of congestible facilities these models are structural in that they derive the cost function from consumers time of use decisions and the congestion technology standard models in contrast simply assume the general form of the cost function we apply the new approach to analyze the ramsey problem for a congestible facility and show that the solution generally entails cost inefficiency standard models have failed to reveal this result because they treat the cost function as completely determined by technology

determinants of corporate leasing policy the existing finance literature assumes the real operating cash flows from leasing or owning are invariant to the ownership of the asset and focuses on tax related incentives for corporate leasing policy our analysis suggests that taxes are important in identifying potential lessees and lessors but are less important in identifying the specific assets leased we provide a unified analysis of the various incentives affecting the lease versuspurchase decision we then show how these incentives explain the use of contractual provisions such as maintenance clauses deposits options to purchase the asset and metering when a firm buys an asset it obtains both the right to the services of that asset over the period it is owned plus the right to sell the asset at any future date with a lease the firm acquires only the right to the asset s services for a period specified in the contract the existing finance literature analyzing corporate leasing policy concentrates on the tax related incentives to lease or buy e g see miller and upton 19 myers et al 21 lewellen et al 13 franks and hodges 11 and brealey and young 4 we believe that taxes play an important role in explaining certain dimensions of leasing policy for example the choice between manufacturer and third party leasing however taxes provide only a limited explanation of why specific assets are leased rather than owned and for the choice of provisions in lease contracts in this paper we want to accomplish two things 1 to provide a unified analysis of the various incentives affecting the lease versus buy decision and 2 to employ that analysis to explain observed variation in corporate leasing policy in deriving testable hypotheses about the characteristics of lessees lessors the assets leased and provisions in lease contracts we extend the standard leaseversus buy analysis found in corporate finance textbooks e g brealey and myers

subscribe cancel or renew the economics of reading by subscription the authors investigate a consumer s decision of whether or not to join a bookclub and once his her contractual obligations are fulfilled whether to remain as a member cancel his her membership outrights or cancel his her membership and subsequently rejoin the bookclub since the consumer s subscription strategy depends on the transaction costs of purchasing books and on the marketing strategy adopted by bookclubs the authors investigate why bookclubs make introductory offers and or enforce minimum purchase requirements introductory offers allow bookclubs to price discriminate between consumers who self select alternative subscription strategies minimum purchase requirements increase the bookclub s profit by appropriating part of the consumer surplus

price formation and liquidity in the u s treasury market the response to public information the arrival of public information in the u s treasury market sets off a two stage adjustment process for prices trading volume and bid ask spreads in a brief first stage the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume demonstrating that price reactions to public information do not require trading the spread widens dramatically at announcement evidently driven by inventory control concerns in a prolonged second stage trading volume surges price volatility persists and spreads remain moderately wide as investors trade to reconcile residual differences in their private views how do financial markets form prices and provide liquidity when information arrives efforts to address this issue have led to an extensive microstructure literature on equity markets and to a lesser extent on the foreign exchange fx market relatively little work has focused on the u s treasury market however in spite of its importance in its own right and the advantages it offers as an alternative testing ground for microstructure hypotheses

brand names and price discrimination this paper explains the fact that firms market both labeled and unlabeled products as a practice of price discrimination that emerges as a non cooperative equilibrium outcome the authors consider a market for a differentiated product where the possibility to price discriminate by the selective use of labels is due to the fact that buyers differ in the intensity of their preferences and that before they buy they are unable to distinguish among the different brands without the aid of identifying labels copyright 1987 by blackwell publishing ltd

imperfect price discrimination and welfare we develop a model in which a monopolist uses differences across consumers in their valuation of time to imperfectly price discriminate though it is customary to analyse price discrimination problems by the calculus of variations after postulating a continuum of types we assume a finite number of types and exploit the geometry and duality of the contract set and the structure of the programming specification we analyse in detail the qualitative properties of the model s solution and show by construction that our results exhaust the implications of the model for equilibrium contract pairs we show that imperfect discrimination is not bounded in welfare terms between perfect discrimination and single price monopoly and that the deadweight loss consumer surplus and output comparisons between single price monopoly and imperfect discrimination are ambiguous

bond pricing and the term structure of interest rates a new methodology for contingent claims valuation this paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates the methodology based on the equivalent martingale measure technique takes as given an initial forward rate curve and a family of potential stochastic processee for its subsequent movements a no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk examples are provided to illustrate the key results in relation to the term structure of interest rates arbitrage pricing theory has two purposes the first is to price all zero coupon default free bonds of varying maturities from a finite number of economic fundamentals called state variables the second is to price all interest rate sensitive contingent claims taking as given the prices of the zero coupon bonds this paper presents a general theory and a unifying framework for understanding arbitrage pricing theory in this context of which all existing arbitrage pricing models are special cases in particular vasicek 1977 brennan and schwartz 1979 langetieg 1980 ball and torous 1983 ho and lee 1986 schaefer and schwartz 1987 and artzner and delbaen 1988 the primary contribution of this paper however is a new methodology for solving the second problem i e the pricing of interest rate sensitive contingent claims given the prices of all zero coupon bonds the methodology is new because i it imposes its stochastic structure directly on the evolution of the forward rate curve ii it does not require an inversion of the term structure to eliminate the market prices of risk from contingent claim values and iii it has a stochastic spot rate process with multiple stochastic factors influencing the term structure the model can be used to consistently price and hedge all contingent claims american or european on the term structure and it is derived from necessary and more importantly sufficient conditions for the absence of arbitrage the arbitrage pricing models of vasicek 1977 brennan and schwartz 1979 langetieg 1980 and artzner and delbaen 1988 all require an iformerly titled bond pricing and the term structure of interest rates a new methodology

money and economic activity inventories and business cycles abstract incomplete information is a necessary condition for any real effects produced by monetary impulses an alternative to the local global inference problem is explored in this paper agents are confronted with permanent and transitory shocks even with full knowledge about the stochastic structure their best perception at any particular time will usually be erroneous prices for each period are set at the beginning of the period on the basis of market conditions the realization of the shock process thus creates a short run disequilibrium absorbed by inventory adjustments this adjustment translates perceived transitory monetary shocks into serially correlated output movements the analysis proceeds within the context of rational expectations it offers a generalization of equilibrium analysis in two respects prices are always in equilibrium relative to perceived conditions but they do not reflect all ongoing shocks quantity adjustments reflect the perceived transitory shocks the framework used involves moreover a stock flow interaction operated by inventory adjustments the stock flow interaction imposes at any time a future expected adjustment path for price level and quantities to the system s unique stock equilibrium a major implication of the analysis resolves a puzzle experienced in a recent paper by robert hall it reconciles intertemporal substitution with lagged effects of monetary impulses it also reconciles small and inconclusive cyclic movements in real wages with the occurrence of production function and large variations in unemployment lastly the nature of the inference problem determined by the pattern of incomplete information produces serially correlated movements conditioned on large permanent shocks

monopoly provision of product quality and warranties an exploration in the theory of multi dimensional screening we address the monopoly problem of designing and pricing a product line of goods distinguished by different quality and warranty levels consumers vary in their evaluations of these attributes so that the problem is one of screening it is sufficiently complex that the local approach commonly used does not work instead we use new techniques for dealing with incentive constraints between nonadjacent consumer types these techniques allow us to characterize optimal allocations that may not be monotonic in particular although the more eager types of buyer do pay higher prices and yield the monopoly higher profit they may receive lower quality or lower warranty coverage we find preference restrictions that restore monotonicity concave risk tolerance implies that warranty coverage increases in type and constant absolute risk aversion implies that quality increases in type

on the importance of the supply side in demand side management we discuss how the structure of market supply affects the evaluation of policies to promote energy efficiency in household appliances if competitive markets offer the levels that consumers demand product standards inefficiently restrict choice if suppliers price discriminate minimum standards can restrict the inefficient use of energy intensity to segment consumers we also compare the effects of average intensity standards energy prices and innovation and consider what the different behavioral predictions imply for empirical studies of energy efficiency good policymaking requires knowing not only how consumers value energy efficiency in their decision making but also how producers respond to those values

testing for non linear structure in an artificial financial market abstract we present a stochastic simulation model of a prototype financial market our market is populated by both noise traders and fundamentalist speculators the dynamics covers switches in the prevailing mood among noise traders optimistic or pessimistic as well as switches of agents between the noise trader and fundamentalist group in response to observed differences in profits the particular behavioral variant adopted by an agent also determines his decision to enter on the long or short side of the market short run imbalances between demand and supply lead to price adjustments by a market maker or auctioneer in the usual walrasian manner our interest in this paper is in exploring the behavior of the model when testing for the presence of chaos or non linearity in the simulated data as it turns out attempts to determine the fractal dimension of the underlying process give unsatisfactory results in that we experience a lack of convergence of the estimate explicit tests for non linearity and dependence the bds and kaplan tests also give very unstable results in that both acceptance and strong rejection of iidness can be found in different realizations of our model all in all this behavior is very similar to experience collected with empirical data and our results may point towards an explanation of why robustness of inference in this area is low however when testing for dependence in second moments and estimating garch models the results appear much more robust and the chosen garch specification closely resembles the typical outcome of empirical studies

multidimensional incentive compatibility and mechanism design abstract incentive compatibility conditions are characterized in general for problems in which several goods are to be allocated and agents types are multidimensional two questions of monopoly pricing under multidimensional uncertainty are then analyzed first we find the optimal nonlinear pricing scheme when the monopolist knows only the distribution of an arbitrarily parameterized family of demand curves and second we solve for the optimal bundling policy for a multiproduct monopolist

on the economics of subscriptions firms sell journals both by offering subscriptions which provide the purchaser with all issues of the journal and by selling individual copies at a comparatively high price we show that by selling subscriptions in addition to individual copies a monopolist can price discriminate thereby increasing his profits and that such price discrimination may increase the level of social welfare compared to a situation in which no subscriptions are sold

the effects of increased copyright protection an analytic approach previous authors who have considered partially nonexcludable goods have claimed that an increase in copyright protection will have the following two effects on social welfare first it will decrease the social welfare loss due to underproduction second it will increase the social welfare loss due to underutilization in this paper we investigate these claims in a formal setting by analyzing a model in which consumers vary only in terms of their costs of obtaining a reproduction our analysis provides partial support to the first claim of these previous authors while giving little or no support to the second claim

monopolistic provision of congested service with incentive based allocation of priorities because of the uncertainty associated with capacity availability as well as demand all consumers in a public utility face a chance of not getting the service however small that chance may be in electric utilities for example the reserve margin the percent excess capacity over the peak demand determines the reliability of service to the consumer we will show in this paper that utilities can employ a priority service scheme i e offer a menu of prices and priorities that can work to the advantage of consumers as well as the utility unreliability in service obviously results in shortage costs to consumers and these shortage costs can vary a lot among consumers depending on how the consumers value the service and how well they are prepared to cope with any interruptions since it is uneconomical to provide a highly reliable service to everyone it would be desirable to have a scheme by which those with higher shortage costs get a higher priority of service two major points arise when we consider allocating service by priorities first the utility can not know the shortage cost to each consumer but only a distribution of the shortage costs in the population perhaps through a sample survey the utility thus is not in a position to determine what priority a consumer should have and has to let the consumer choose the priority from a menu of prices and priorities second the utility must have a mechanism by which consumers may be cut off in their priority order if priority service is to be feasible

asset price and wealth dynamics in a financial market with heterogeneous agents abstract this paper considers a discrete time model of a financial market with one risky asset and one risk free asset where the asset price and wealth dynamics are determined by the interaction of two groups of agents fundamentalists and chartists in each period each group allocates its wealth between the risky asset and the safe asset according to myopic expected utility maximization but the two groups have heterogeneous beliefs about the price change over the next period the chartists are trend extrapolators while the fundamentalists expect that the price will return to the fundamental we assume that investors optimal demand for the risky asset depends on wealth as a result of crra utility a market maker is assumed to adjust the market price at the end of each trading period based on excess demand and on changes of the underlying reference price the model results in a nonlinear discrete time dynamical system with growing price and wealth processes but it is reduced to a stationary system in terms of asset returns and wealth shares of the two groups it is shown that the long run market dynamics are highly dependent on the parameters which characterize agents behaviour as well as on the initial condition moreover for wide ranges of the parameters a locally stable fundamental steady state coexists with a stable non fundamental steady state or with a stable closed orbit where only chartists survive in the long run such cases require the numerical and graphical investigation of the basins of attraction other dynamic scenarios include periodic orbits and more complex attractors where in general both types of agents survive in the long run with time varying wealth fractions

let me talk to my manager haggling in a competitive environment although negotiating over prices with sellers is common in many markets such as automobiles furniture services consumer electronics etc it is not clear how a haggling price policy can help a firm gain a strategic advantage or whether it is even sustainable in a competitive market in this paper we explore the implications of haggling and fixed prices as pricing policies in a competitive market we develop a model in which two competing retailers choose between offering either a fixed price or haggling over prices with customers there are two consumer segments in our analysis one segment thehagglers has a lower opportunity cost of time and a lower haggling cost than the other segment thenonhagglers when both retailers follow the same pricing policy then a haggling policy is more profitable than a fixed price policy only when the proportion of nonhagglers is sufficiently high we find two kinds of prisoners dilemma under some conditions a more profitable haggling policy can be broken by a fixed price policy and under other conditions a fixed price policy can be broken by a haggling policy surprisingly we show that under some conditions an asymmetric outcome with one retailer haggling and the other offering a fixed price is also an equilibrium

what affects the market s ability to adjust for optimistic forecast bias evidence from experimental asset markets abstract this study uses experimental asset markets to investigate the effects of experience and common knowledge on a market s ability to adjust for optimistic forecast bias as a baseline we find that period end prices reflect unbiased forecasts in markets with private information and inexperienced traders with low bias forecasts traders need experience before price adjusts for the bias with high bias forecasts traders need experience and public forecast releases before price adjusts for the bias overall our findings provide insight into identifying conditions that are critical for the full revelation of biased imperfect forecasts and provide direction for future theoretical work

efficient durable good pricing and aftermarket tie in sales i introduction a number of alternative theories currently exist to explain the use of tying arrangements in general incentives involving price discrimination foreclosure variable proportions protection of franchise system goodwill and so on have all been shown to motivate tying under various market conditions 1 interestingly however most of these theories do not appear to apply directly to the tying of aftermarket sales to the purchase of a durable good in a competitive environment such tying or equivalently aftermarket monopolization was a central issue in the widely debated kodak case and continues to be a highly controversial aspect of a series of subsequent antitrust cases 2 the two predominant theories employed by opposing parties at trial in the kodak case were the so called installed based opportunism theory and the systems theory 3 the former posits conditions under which a durable good producer may find it profitable to raise aftermarket prices for maintenance and repair services above the competitive level to its locked in customers regardless of the intensity of competition in the equipment or fore market the latter in turn demonstrates the conditions under which such opportunistic behavior is either a not profitable or b profitable but very limited in its competitive effects 4 while both these theories provide some useful guidance regarding the question of post sale exploitation of purchasers of durable goods neither provides an explicit theory of aftermarket tie in sales that is driven by any sort of efficiency considerations in the wake of the controversy sparked by the kodak decision two important developments have emerged first the courts have demonstrated a strong reluctance to embrace the economic logic embodied in that decision despite a large number of similar claims that have subsequently been filed there have not yet been any decisions that clearly adopt the customer lock in argument that prevailed in kodak 5 second in response to some dissatisfaction with the state of the economic theory relevant to aftermarket tying or monopolization at the time the case was decided a series of articles has emerged that present newer and perhaps more relevant theories of kodak type behavior 6 these include inter alia aftermarket monopolization incentives that derive from a variable proportions production as in elzinga and mills 2001 b the time inconsistency problem of durable good pricing as in morita and waldman 2004 c price discrimination as in klein 1995 and chen and ross 1993 1999 d socially excessive maintenance as in carlton and waldman 2001 and e economies of scope in remanufacturing of used parts as in carlton and waldman 2001 the common thread that connects these theories is that most contain some sort of efficiency based motivation for aftermarket monopolization which results in an unambiguous improvement in social welfare 7 as a consequence considerable doubt has been cast on the legitimacy of kodak s broad condemnation of aftermarket monopolization this article attempts to contribute to this general line of research like the above mentioned articles it offers an efficiency driven motivation for aftermarket tie in sales or monopolization unlike these articles however the incentive arises directly from the contracting problem faced by buyers and sellers of durable goods specifically like the systems theory the model presented here assumes that buyers make their purchase decisions rationally on the basis of the expected life cycle or total ownership costs of the competing durable goods available at the time of purchase similarly sellers make offers that incorporate the life cycle profits anticipated from the sale including both the price received for the initial durable good purchase and the future stream of revenues from any subsequent aftermarket services provided by the seller

why do hot dogs come in packs of 10 and buns in 8s or 12s a demand side investigation this paper presents a theory that yields insight into the determination of package prices and sizes consumer heterogeneity in consumption rates storage costs and transactions costs costs of making trips to the store explains differences in package sizes and unit prices in the model fully informed consumers and a monopolist seller pursue optimizing behavior the seller chooses package sizes and prices to maximize profits and the consumers select package sizes that maximize their utilities the authors show that consumer heterogeneity may induce the seller to offer more than one size and that larger sizes would be sold either at unit price discounts or unit price premiums welfare implications and empirical tests of the theory are presented copyright 1987 by the university of chicago

a probabilistic approach to pricing a bundle of products or services the authors propose a probabilistic approach to optimally price a bundle of products or services that maximizes seller s profits their focus is on situations in which consumer decision making is o

a theory of clearance sales clearance sales are widely used by firms as an intertemporal selling policy in particular in markets where firms face demand uncertainty and need to choose capacity in advance clearance sales consist in charging a high price initially but then lowering the price in the sales period high valuation consumers purchase the good at the high initial price so as to avoid rationing at the low price while low valuation consumers wait for the price to drop we develop a simple model of intertemporal monopoly pricing under demand uncertainty and show that clearance sales may be the optimal intertemporal selling policy

concurrent renting and selling in a durable goods monopoly under threat of entry this article analyzes the choice of contract sales or rental of a durable goods monopolist facing a threat of future entry although in the absence of such a threat a monopolist would prefer to rent his entire output we show that the threat of entry alters that preference there is an optimal preentry contract mix involving both rental and sales if both firms behave as cournot duopolists after entry the optimal choice of preentry contracts enables the erstwhile monopolist to gain the same profits as he would if he behaved as a von stackelberg leader

random pricing by monopolists this paper considers the conditions under which a monopolist might wish to randomize its pricing when consumer demands depend on previous decisions by consumers the magnitude of monopoly profits becomes effectively dependent on the welfare consequences of the monopoly s pricing policy in these circumstances differing attitudes towards price gambles between a firm and its customers can imply that randomized pricing is more profitable on average than the best deterministic pricing policy sufficient conditions for profitable randomizations optimal randomizations and incentive issues are discussed copyright 1994 by blackwell publishing ltd

how markets process information news releases and volatility we examine the impact of scheduled macroeconomic news announcements on interest rate and foreign exchange futures markets we find these announcements are responsible for most of the observed time of day and day of the week volatility patterns in these markets while the bulk of the price adjustment to a major announcement occurs within the first minute volatility remains substantially higher than normal for roughly fifteen minutes and slightly elevated for several hours nonetheless these subsequent price adjustments are basically independent of the first minute s return we identify those announcements with the greatest impact on these markets we examine the impact on interest rate and foreign exchange markets of scheduled macroeconomic news releases such as the employment report the consumer price index cpi and the producer price index ppi many market participants believe that such announcements have a major impact on financial markets indeed a small industry devoted to predicting the figures to be released in upcoming releases has evolved in recent years with the exception of the weekly money supply figures however the impact of such announcements on financial markets has received scant attention 1 this is doubly surprising given the considerable research interest in market volatility since these news releases are a potential source of much of this volatility consider for instance figure 1 as shown there prices in interest rate and foreign exchange futures markets are much more volatile between 8 30 and 8 35 a m eastern time et than during any other five minute trading period including

durable services monopolists do better than durable goods monopolists the authors consider a monopolist who can commit to a price path when selling a good for which individual consumers demand at most one unit only if the monopolist can also commit to destroying unpurchased stock and the timing of stock release can she earn more than a static monopolist this additional commitment power has empirical revelance for a wide range of goods that the authors term durable services the inability to store output facilitates price discrimination by a durable services monopolist by permitting the credible threat of rationing the authors detail sufficient conditions for a durable services monopolist to produce more than a static or durable goods monopolist produces

genetic algorithm learning and the cobweb model this paper presents the cobweb model in which competitive firms in a market for a single good use a genetic algorithm to update their decision rules about next period production and sales the results of simulations show that the genetic algorithm converges to the rational expectations equilibrium for a wider range of parameter values than other algorithms frequently studied within the context of the cobweb model price and quantity patterns generated by the genetic algorithm are also compared to the data of experimental cobweb economies it is shown that the algorithm can capture several features of the experimental behavior of human subjects better than three other learning algorithms that are considered

the crash of ʼ87 was it expected the evidence from options markets transactions prices of s p 500 futures options over 1985 1987 are examined for evidence of expectations prior to october 1987 of an impending stock market crash first it is shown that out of the money puts became unusually expensive during the year preceding the crash second a model is derived for pricing american options on jump diffusion processes with systematic jump risk the jump diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during october 1986 to august 1987 both approaches indicate no strong crash fears during the 2 months immediately preceding the crash attempts to explain what caused the stock market crashes around the world in october 1987 have suffered from the paucity of major economic developments occurring around that time that could have triggered the crashes shifting expectations regarding monetary policy foreign investors fears of a dollar decline increasing riskiness of assets none of these appeared major enough if present at all to explain the magnitude of the crashes and although portfolio insurance strategies could conceivably magnify the effects of a jump in fundamentals the initiating jump in fundamentals appears to be lacking

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

profitable pricing when market segments overlap in this paper we analyze profitable pricing strategies when market segments overlap overlapping markets are segments that are not perfectly sealed and leakage between them can occur different consumers are assumed to incur possibly different transaction costs if they choose to purchase in the low price market a monopolist seller knows the distribution of transaction costs across consumers and must choose an optimal pricing strategy in particular the monopolist must decide whether to charge a single price or to price differentiate conditions are derived under which price differentiation will be the most profitable strategy when price differentiation is optimal the equilibrium amount of leakage is determined endogenously unlike the standard economics textbook model of price discrimination in which zero leakage is determined exogenously and is usually given as a necessary condition for price discrimination we show that zero leakage is not necessary for differential pricing to be optimal and that

tie in sales and price discrimination this paper analyzes a class of contracts between buyers and sellers which specifies that the purchase of one good cannot be effectuated unless a second good is also purchased the economic forces resulting from a tie in are shown to be influenced by factors such as depreciation of the tying good the sales policy of the firm and the discount rate price discrimination the traditional hypothesis for this tie in is seen to make sense only when these factors align themselves in particular ways although an alternative hypothesis risk reduction is unaffected by these factors the price discrimination hypothesis therefore loses much of its appeal relative to the alternative

price differentials and price discrimination reply and extensions precise definitions of price discrimination are analyzed in this paper as part of a reply to one of my earlier papers on a related topic the main conclusion is that the two definitions used most frequently are appropriate only in special circumstances not recognized previously no definition exists to cover all real world situations

competition and two part tariffs monopoly power of some sort is thought to have viewed two part tariffs as price discrimibe a necessary condition for a firm to have the nation devices empower to price discriminate for example a firm ployed exclusively by prefers to use a two part tariff see oi 1971 firms with market rather than charge a single price for output power this paper ofhowever a competing firm could always charge fers an explanation for the use of such price a single price that consumers would prefer and schedules by firms in earn nonnegative profits thus it seems that the highly competitive marexistence of competition in a market would result kets such as health in the elimination of any two part tariff howclubs it is argued that ever the existence of two part tariffs in many in a world with buyer markets that are or appear to be competitive uncertainty about future demands they can belies this standard assumption this paper exprovide insurance for plains why monopoly power is not required for risk averse buyers the the existence of a two part tariff i show circumfixed entry fee finances stances in which price discrimination using a a marginal price below marginal cost it is two part tariff is preferred by consumers to a sinshown that the benefits gle price and therefore why this pricing method from this lower price will be found in competitive markets such pricwill under certain ing occurs in environments with uncertainty bespecified conditions cause two part tariffs act as a form of insurance outweigh the costs of ex ante consumers plan consumption however the entry fee there is a random component to their consump

learning with misspecification in an artificial currency market abstract agents evolve their forecast rules over time via a modified genetic algorithm in a simple artificial currency market these forecast rules can be nonlinearly misspecified when the misspecification is suppressed learning tends to be complete when it is not suppressed learning can generate persistent exchange rate dynamics

time variation of higher moments in a financial market with heterogeneous agents an analytical approach a growing body of recent literature allows for heterogenous trading strategies and limited rationality of agents in behavioral models of financial markets more and more this literature has been concerned with the explanation of some of the stylized facts of financial markets it now seems that some previously mysterious time series characteristics like fat tails of returns and temporal dependence of volatility can be observed in many of these models as macroscopic patterns resulting from the interaction among different groups of speculative traders however most of the available evidence stems from simulation studies of relatively complicated models which do not allow for analytical solutions in this paper this line of research is supplemented by analytical solutions of a simple variant of the seminal herding model introduced by kirman 1993 embedding the herding framework into a simple equilibrium asset pricing model we are able to derive closed form solutions for the time variation of higher moments as well as related quantities of interest enabling us to spell out under what circumstances the model gives rise to realistic behavior of the resulting time series

on allocative distortions in problems of self selection this article considers the general structure of self selection models by imposing conditions which permit the ordering of agents by their preferences we provide a characterization of the distortions inherent in the sorting process

loss leader pricing and rain check policy loss leader pricing and rain check policies are common in retail markets yet research on these topics is surprisingly scarce in this paper we study the effects of leader pricing and rain check policy on stores profits and market outcomes suppose stores can accurately predict demand might they still run out of stock we investigate whether such a result is plausible when stores can offer rain checks the paper also helps resolve an issue that has recently attracted much attention should the ftc repeal its rule prohibiting stock outs of advertised sale items

evolving traders and the business school with genetic programming a new architecture of the agent based artificial stock market in this paper we propose a new architecture to study arti cial stock markets this architecture rests on a mechanism called school which is a procedure to map the phenotype to the genotype or in plain english to uncover the secret of success we propose an agent based model of school and consider school as an evolving population driven by single population gp sgp the architecture also takes into consideration traders search behavior by simulated annealing traders search density can be connected to psychological factors such as peer pressure or economic factors such as the standard of living this market architecture was then implemented in a standard arti cial stock market our econometric study of the resultant arti cial time series evidences that the return series is independently and identically distributed iid and hence supports the e cient market hypothesis emh what is interesting though is that this iid series was generated by traders who do not believe in the emh at all in fact our study indicates

quality and congestion in environmental goods the road to the wangapeka abstract an increasing complaint heard among new zealand residents is that their enjoyment of local environmental resources is being diminished by increased congestion from foreign visitors this paper considers a model of vertical differentiation in which foreign high value and domestic low value consumers incur congestion costs in using a common resource we demonstrate that reducing quality in the face of increased foreign demand is optimal absent discriminatory prices but not otherwise we also consider the provision of multiple environmental goods and demonstrate that providing differential qualities may be optimal even if domestic consumers do not use the high quality resources at all

optimal pricing of local telephone service although payment for nearly all other goods and services including toll long distance telephone calls increases with greater consumption nearly 90 percent of the residential telephone subscribers and more than half the business subscribers in the united states now pay a flat monthly rate for local calls see larry garfinkel recently however the telephone companies and regulatory commissions have been moving cautiously toward imposing usage charges for local telephone calls there is renewed interest in what is currently termed usage sensitive pricing t usp it is due to the combined forces of inflation increased local usage and competition from independent firms that sell telephone terminal equipment and supply private toll lines to business customers under usp the pricing of such services as telephone installation directory assistance and minutes of calling is based on incremental rather than average costs since world war ii technological advances have benefited long distance far more than local telephone calling development in microwave communications coaxial cable satellites and waveguides have dramatically lowered the costs of long distance transmission in contrast the costs of local service have moved upward since the late 1960 s at a rate not far below the general price index see at t 1975 faced with a continuing stream of requests for local telephone rate increases state regulatory commissions are finding the concept of tying prices to usage increasingly attractive at t and some of the independent telephone carriers are beginning to test usp plans in several cities with flat rate tariffs increases in local calling add to carrier costs but not to their revenues the local calling rate per subscriber has increased by an average of 2 percent for the past seven years at t s chairman has stated we are moving more and more in the direction of usage sensitive pricing see washington star news p a12 and according to newspaper accounts of at t management documents the bell system plans to phase out flat rate telephone service and begin charging for each local call in major metropolitan areas in 1978 80 see seattle postintelligencer pp 1 10 still regulatory commissions consumer groups and the carriers themselves remain cautious about requiring usage sensitive tariffs for all subscribers the prospective gains from prices more closely related to costs are at least partially offset by the added costs of metering equipment and billing most telephone subscribers prefer flat rates according to bell system marketing surveys see garfinkel p 28 and it is by no means clear which groups of subscribers will be helped and which harmed by such revisions in local tariff structures will the poor end up paying more because they use their phones more should different prices be charged for calls at different times of day on what bases should the monthly and per call rates be determined the purpose of this paper is to sort out some of the questions of economic efficiency and equity that arise when changes are considered in the methods of pricing local telephone services in section i i construct a department of economics the rand corporation and the international institute of management berlin this study was supported under a grant from the john and mary r markle foundation i am indebted to walter s baer for numerous contributions to this paper to s c littlechild and patricia munch and to the managing editor and a referee of this review for critical and constructive review of a draft i have benefited as well from the comments and suggestions of james h alleman stanley m besen william s comanor john m drew leland l johnson john a kay edward d lowry carl pavarini john rolph ralph turvey and chris witze bryant mori assisted with the computer programming see my 1976 paper for a more extensive version of this paper which also discusses optimal flat rate and optimal peak load tariffs

bundling decisions by a multiproduct monopolist with incomplete information this paper analyzes bundling decisions of a rnultiproduct monopolist facing uncertain demand the monopolist sells his products using an auction mechanism and the market is analyzed as a game with incomplete information in which the buyers as well as the seller are strategic agents with a small number of buyers a profit maximizing seller will bundle all his output this makes buyers uniformly worse off compared to the case where the same monopolist does not bundle in the sense that any buyer is worse off regardless of his demand for the monopolist s outputs with a larger number of buyers the seller will have a tendency to unbundle his output and high demand buyers are worse off than they would be if the monopolist bundled his output low demand buyers on the other hand are always better off when the monopolist unbundles his output regardless of the number of competing buyers despite the fact that high demand buyers are the typical purchasers of the monopolist s output the net effect of increasing the number of buyers is greater market efficiency since bundling creates market inefficiencies both ex post and ex ante

imperfect price discrimination and variety in many environments a monopolist can price discriminate even though consumers can select any option offered by the firm though consumers seem indistinguishable to the firm the monopolist can discriminate by exploiting its knowledge of the joint distribution of agents characteristics in this paper locations and reservation prices to offer the most profitable menu of alternatives given the constraints imposed by the maximizing behavior of each type of consumer see chiang and spatt 1982 for a partial bibliography of this research in many of these models consumers agree typically on the definition of the best available good exceptions include adams and yellin 1976 and telser 1979 but disagree on their incremental valuation of quality the consumer s selection of a price quality contract from the set offered by the monopolist can elicit information that the monopolist endogenously exploits for example the price discriminating monopolist may charge a steeper price quality gradient than predicted by cost considerations see mussa and rosen 1978 in a spatial market the monopolist can discriminate on the basis of differences in cost of travel or location of consumers i analyze a model i analyze by geometric techniques a spatial model in which a monopolist uses location differences across consumers to price discriminate the model is used to examine price discrimination in a model of variety in a setting in which consumers disagree on the definition of quality the full burden of separation of types is not on binding self selection conditions examples are presented in the paper to show the ambiguous output and welfare comparisons between imperfect discrimination and singleprice monopoly at various extremes discrimination can either relative to single price monopoly make some consumers better off and none worse off while raising firm profit or alternatively reduce firm output the effect of an increase in the cost of travel on output variety and consumer surplus is demonstrated the implications of the model are also shown to be exhaustive under various assumptions about the set of observables x an earlier version of this paper was presented at the nber nsf conference on hierarchies monitoring and the nature of the firm at the university of minnesota minneapolis december 1980 1 gratefully acknowledge the helpful comments of the referee and support from national science foundation grant ses 8015086

a direct discrete time approach to poisson gaussian bond option pricing in the heath jarrow morton model abstract term structure models employing poisson gaussian processes may be used to accommodate the observed skewness and kurtosis of interest rates this paper extends the discrete time pure gaussian version of the heath jarrow morton model to the pricing of american type bond options when the underlying term structure of interest rates follows a poisson gaussian process the poisson gaussian process is specified using a hexanomial tree six nodes emanating from each node and the tree is shown to be recombining the scheme is parsimonious and convergent this model extends the class of hjm models by i introducing a more generalized volatility specification than has been used so far and ii including jumps yet retaining lattice recombination thus making the model useful for practical applications

the implied jump risk of libor rates abstract this paper examines implied parameters from options on libor futures jump diffusion models are found to offer superior in sample and out of sample performance when compared to their pure diffusion counterpart the need to incorporate stochastic jump magnitudes into libor dynamics is also documented in addition empirical evidence reveals that the jump component in libor rates is important for pricing their derivatives furthermore variation in jump risk often coincides with federal open market committee fomc decisions and a small subset of macroeconomic announcements

long and short term interest rates in a risky world abstract the paper develops and tests a general equilibrium model in which variability or risk affects the choice of portfolios our measures of variability include only the variability of unanticipated growth in monetary and non monetary aggregates and our tests use data ending with the change in federal reserve procedures in october 1979 we find that increased variability of unanticipated money growth raises demands for debt and money and reduces the demand for real capital interest rates on both short and long term debt rise by a risk premium we estimate the size of the risk premium before and after the october 1979 change and we show that the change in federal reserve procedures moved the economy to a less efficient point

implied volatility functions in arbitrage free term structure models abstract we test six term structure models in the heath jarrow and morton 1992 class using eurodollar futures and options data from 1987 1992 we study the time series of implied interest rate volatilities from these models using one day lagged implied volatilities our one and two parameter models simultaneously price an average of 18 5 options each day with an average absolute error of one and a half to two basis points although the models fit well we document systematic strike price and time to maturity biases for all models we also implement simple trading strategies to test whether the models identify genuine biases

on the emergent properties of artificial stock markets the efficient market hypothesis and the rational expectations hypothesis abstract by studying two well known hypotheses in economics this paper illustrates how emergent properties can be shown in an agent based artificial stock market the two hypotheses considered are the efficient market hypothesis and the rational expectations hypothesis we inquire whether the macrobehavior depicted by these two hypotheses is consistent with our understanding of the microbehavior in this agent based model genetic programming is applied to evolving a population of traders learning over time we first apply a series of econometric tests to show that the emh and the reh can be satisfied with some portions of the artificial time series then by analyzing traders behavior we show that these aggregate results cannot be interpreted as a simple scaling up of individual behavior a conjecture based on sunspot like signals is proposed to explain why macrobehavior can be very different from microbehavior we assert that the huge search space attributable to genetic programming can induce sunspot like signals and we use simulated evolved complexity of forecasting rules and granger causality tests to examine this assertion