direct payments spatial competition and farm survival in norway we argue that farm survival is influenced by neighboring farmers characteristics and in particular by the direct payments neighboring farmers receive the article shows empirically that these interdependencies are crucial for an assessment of the effects of direct payments on farm survival using spatially explicit farm level data for nearly all norwegian farms a spatial probit model is estimated to explain farm survival from 1999 to 2009 controlling for spatial farm interdependence we show that ignoring spatial interdependencies between farms leads to a substantial overestimation of the effects of direct payments on farm survival to our knowledge this article is the first attempt to empirically analyze the importance of neighboring interdependencies for the effects of direct payments on farm survival

the long run and short run impact of captive supplies on the spot market price an agent based artificial market an agent based model is developed that matches the results of xia and sexton 2004 as well as our generalization of their model we relax xia and sexton s assumption of no supply response by captive feeders which reduces the price depressing effect of captive supplies finally the agent based model is used to simulate packers choosing both captive supply quantities and spot market quantities packers in the relaxed agent based model choose no captive supplies and thus reach the cournot solution the research narrows the gap between theoretical models and the empirical work on captive supplies that shows little effect on prices but a gap remains

learning competitive pricing strategies by multi agent reinforcement learning abstract in electronic marketplaces automated and dynamic pricing is becoming increasingly popular agents that perform this task can improve themselves by learning from past observations possibly using reinforcement learning techniques co learning of several adaptive agents against each other may lead to unforeseen results and increasingly dynamic behavior of the market in this article we shed some light on price developments arising from a simple price adaptation strategy furthermore we examine several adaptive pricing strategies and their learning behavior in a co learning scenario with different levels of competition q learning manages to learn best reply strategies well but is expensive to train

information provision in a vertically differentiated competitive marketplace this paper examines the interaction of information provision product quality and pricing decisions by competitive firms to explore the following question in a competitive market where consumers face uncertainty about product quality and or their preference for quality which firms those that sell higher or lower quality products have the higher incentive to provide what type of information we find that while the higher quality firm should always provide information resolving consumer uncertainty on product quality the lower quality firm under certain conditions will have the higher incentive to and will be the one to provide information resolving consumer uncertainty about their quality preferences in the analysis we trace the latter result to competition and to free riding on the information provision specifically in a monopoly market or when consumer free riding is restricted by the costliness of store visits the lower quality firm would have a lower incentive to provide information resolving consumer preference uncertainty than otherwise the model is also adapted to examine product returns as a possible strategy of information provision

signaling quality with a money back guarantee the role of transaction costs direct marketing is witnessing explosive growth as consumers increasingly purchase products from their homes their ability to judge the quality of products they buy is significantly reduced in this paper we study how money back guarantees can signal product quality in such environments we interpret product quality broadly to mean both the level of attributes promised as well as the firm s consistency in delivering on those promises key aspects of our formulation are the explicit consideration of transaction costs and alternative signals of product quality transaction costs are the costs the seller or buyer faces when redeeming a money back guarantee we show that money back guarantees signal quality by exploiting the higher probability of returns for a lower quality product and the attendant higher transaction costs however if the seller s transaction costs are very large then there are less costly ways to signal namely charging a high price we compare the signaling performance of 1 price 2 price with uninformative advertising and 3 price with a money back guarantee whereas uninformative advertising does not work at all in our model under certain conditions a money back guarantee is necessary to signal and under other conditions a money back guarantee is a useful supplement to price

spatial price discrimination in agricultural product procurement markets a computational economics approach significant transport costs and spatially distributed supply and processing create oligopsony power in agricultural markets price discrimination expressed in the form of partial or complete absorption of freight charges by processors is often observed in these environments but we understand little about how these pricing decisions are made analytical approaches are often intractable as an alternative we propose a computational economics approach to analyze a general spatial competition model and study firms choices of spatial pricing policy instead of the commonly presumed free on board pricing we find that buyers choose price discrimination either through uniform delivered pricing or through partial freight absorption

on the function of sales assistance the paper provides a formal rationale for the common practice of using sales assistance the argument is made in a model where a consumer s situation determines his needs the products are differentiated and the map identifying the best match between a consumer s situation and a product is known only to the sales assistant i look at procedure which involves the consumer revealing his needs and the sales assistant identifying the best matching product this is compared to several other procedures and found to be best when the number of possible consumer situations is large it is shown that reputational considerations may keep the sales assistant honest i look at the impact of guarantees and other modifications to the model and discuss normative implications

on the endogeneity of cournot nash and stackelberg equilibria games of accumulation abstract we characterize equilibria of games with two properties i agents have the opportunity to adjust their strategic variable after their initial choices and before payoffs occur but ii they can only add to their initial amounts the equilibrium set consists of just the cournot nash outcome one or both stackelberg outcomes or a continuum of points including the cournot nash outcome and one or both stackelberg outcomes a simple theorem that uses agents standard one period reaction functions and the one period cournot nash and stackelberg equilibria delineates the equilibrium set applications include contribution oligopoly and rent seeking games

assessing the importance of oligopsony power in agricultural markets oligopoly competition among few sellers is the cornerstone of industrial organization io conversely its sister concept oligopsony competition among few buyers is scarcely mentioned for example oligopsony is not discussed in the entire two volume handbook of industrial organization and monopsony is mentioned only in the context of incentives to integrate vertically two reasons apparently account for io economists lack of interest in buyer market power i they don t think it s very important and ii they don t believe it presents any unique modeling issues relative to seller market power scherer and ross illustrate this first viewpoint arguing that average concentration on the buyers side in manufacturing is undoubtedly lower than seller concentration p 519 tirole in his masterful treatise on io theory illustrates the second dispatching monopsony power in one sentence naturally the conclusions regarding monopoly power would also hold as well for monopsony power p 65 we argue that this dismissive treatment of buyer market power is not reasonable for economists interested in agriculture and agricultural markets the scherer and ross viewpoint may apply when considering generic inputs such as labor capital and energy competition for these inputs is apt to exceed competition for the outputs they produce because firms cross product market boundaries to compete for these inputs and there is essentially no branding among input buyers to diminish price competition among them moreover these inputs are typically mobile hence in elastic supply to individual buyers limiting the exercise of oligopsony power even in geographic settings where relatively few buyers prevail this view of input markets does not apply however to first handler markets for the raw agricultural commodities that are inputs into the processed or fresh packed food products we identify the following distinctive structural characteristics of these markets

fob or uniform delivered prices strategic choice and welfare effects in spatial markets firms typically use either fob mill or uniform delivered ud pricing what competitive factors motivate this choice and what are the welfare implications of the choice we study these questions in a duopsony market where farmers with unit elastic supply curves sell to processing firms in results that differ considerably from prior work we show that the equilibrium price policy depends upon the extent of competition in the market with fob pricing emerging under very competitive structures and ud pricing emerging under less competition mixed fob ud pricing may also emerge in equilibrium in most cases welfare is higher under ud than fob pricing

new light on the impressionistic view of the balancing item in australia s balance of payments accounts recently fausten and brooks offered what they refer to as an impressionistic view of the temporal evolution of australia s balancing item which is a measure of the accuracy of the balance of payments accounts they claim that the balancing item has been increasing in magnitude and volatility violating with increasing frequency internationally agreed acceptability criteria for smallness in the present paper it is shown that fausten and brooks results derive from data that incorporates excessively a dynamically asymmetric concentration of revisions and is therefore unsuitable for statistical analysis this paper develops and empirically evaluates a model of the process of revisions of balance of payments data this model illustrates that dynamically inconsistent time series of the balancing item such as that employed by fausten and brooks are bound to generate an artificial impression that it follows an explosive time trend subsequently it is illustrated that when alternative dynamically c

backward induction algorithm for a class of closed loop stackelberg games abstract in the paper a new deterministic continuum strategy two player discrete time dynamic stackelberg game is proposed with fixed finite time duration and closed loop information structure the considered payoff functions can be widely used in different applications mainly in conflicts of consuming a limited resource where one player called leader is a superior authority choosing strategy first and another player called follower chooses after in case of convex payoff functions and certain parameter values we give a new particular backward induction algorithm which can be easily realized to find a leader follower equilibrium of the game in a certain sequential equilibrium realization from the last step towards the first one with respect to the current strategy choices of the players considerations on uniqueness and game regulation i e setting parameters of the game to achieve a predefined equilibrium are also provided the finite version of the game with finite strategy sets is also given along with its simplification and solution method several practical examples are shown to illustrate the comprehensive application possibilities of the results

on the conservation of distance in international trade the volume of world trade has grown more than twice as fast as real world income since 1980 surprisingly the effect of distance on trade has increased during this period it could be that countries are trading greater volumes of goods that are highly sensitive to distance an alternative explanation is that distance has become more import for a significant share of goods using highly disaggregated bilateral trade data we find that adjustment in the composition of trade has not influenced the way in which distance affects trade in contrast for about 25 percent of industries distance has become more important this implies that the increased distance sensitivity of trade is a result of a change in relative trade costs that affects many industries as opposed to a shift to more distance sensitive products we also find that homogeneous products are twice as likely to have become more distance sensitive as compared with differentiated goods this is consistent with the hypothesis that falling search costs resulting from improvements in transport and communications are relatively more important for differentiated goods the results offer no evidence of the death of distance rather they suggest that distance related relative trade costs have remained unchanged or shifted in favor of proximate markets

hedging price volatility using fast transport abstract purchasing goods from distant locations introduces a significant lag between when a product is shipped and when it arrives these transit lags are trade barriers for firms facing volatile demand who must place orders before knowing the resolution of demand uncertainty we provide a model in which airplanes bring producers and consumers together in time fast transport allows firms to respond quickly to favorable demand realizations and to limit the risk of unprofitably large quantities during low demand periods the model predicts that the likelihood and extent to which firms employ air shipments is increasing in the volatility of demand they face decreasing in the air premium they must pay and increasing in the contemporaneous realization of demand we confirm all three conjectures using detailed us import data fast transport thus provides firms with a real option to smooth demand volatility on international markets and we provide simple calculations of that option value this enables us to identify how the option value relates to goods characteristics and to changes in air transport premia associated with technological and policy change including the introduction of jet engines and liberalization of trade in air services

facilitating fit revelation in the competitive market this study examines firms strategic decisions in the competitive market regarding whether to engage in marketing activities to assist consumers in finding the fit between their personal tastes and products horizontal attributes we find that competitive firms strategies to facilitate fit revelation critically depend on the product qualities they offer in particular a firm offering a high quality product is more likely to facilitate fit revelation in the competitive market than it would as a market monopolist whereas a firm offering a low quality product is less likely to do so in addition the firm offering the high quality product implements fit revealing activities in a greater intensity than its rival that offers the low quality product if the quality difference between the two products is small and both products qualities are sufficiently high

incomplete information and incentives to free ride on international environmental resources abstract this paper studies free riding incentives on common environmental resources in an incomplete information repeated game where abatements are perishable and perfect substitutes two contrasting types of perfect bayesian equilibria emerge for high discount factors or low discount factors but pessimistic prior beliefs the inclusion of incomplete information has no impact on the pattern of abatements otherwise the countries attempt to use their private information strategically and the game becomes a war of attrition this generates an outcome where the pessimistic country unilaterally abates forever and another which involves delay until the first abatement if both countries are optimistic

international pollution control cooperative versus noncooperative strategies abstract international pollution control involving two neighboring countries is modeled as a simple two player dynamic game each country produces a good that is consumed by domestic households production of each consumption good results in emissions of pollutants households in each country derive utility from the consumption of the domestically produced good but incur costs through the total stock of pollution stock externality in this setting we characterize cooperative as well as noncooperative pollution control strategies of the governments of the two countries that maximize the discounted stream of net benefits of a representative consumer it turns out that when the governments are restricted to use linear strategies noncooperative behavior results in overall losses for both countries if on the contrary governments use nonlinear markov perfect strategies and the discount rate is small enough a pareto efficient steady state pollution stock can be supported as a differentiable subgame perfect equilibrium thus the emergence of first best solutions cooperative outcomes does not require any institutional arrangements threats retaliation etc but can be brought about through the use of nonlinear markov perfect equilibrium strategies

the behavior of the exchange rate in the genetic algorithm and experimental economies this paper studies the behavior of the exchange rate in the kareken wallace overlapping generations economy with two currencies in which decision rules are updated using the genetic algorithm the analysis shows that a stationary monetary equilibrium of the kareken wallace model is not stable under the genetic algorithm dynamics the fluctuations in the genetic algorithm exchange rate are driven by fluctuations in the portfolio fractions which change over time in response to the inequality between the rates of return on two currencies further both the genetic algorithm simulations and the experiments with human subjects were characterized by continuing fluctuations of the exchange rate with first period consumption values close to a stationary value

price and variety in the spokes model the spokes model of nonlocalized spatial competition provides a new analytical tool for dierentiated oligopoly and a representation of spatial monopolistic competition an increase in the number of rms leads to lower equilibrium prices when consumers have relatively high product valuations but surprisingly to higher equilibrium prices for in termediate consumer valuations new entry alters consumer and social welfare through price market expansion and matching eects with free entry the market may pro vide too many or too few varieties from a social welfare perspective and the equilibrium price remains above marginal cost even when the number of rms is arbitrarily large

distance time and specialization lean retailing in general equilibrium transport time increases with distance traveled and time is valuable we show the implications of these facts for global specialization and trade products where timely delivery is important will be produced near the source of final demand where wages will be higher as a result in the model timely delivery is important because it allows retailers to respond to final demand fluctuations without holding costly inventories and timely delivery is possible only from nearby locations using a unique dataset that allows us to measure the retail demand for timely delivery we show that the sources of u s apparel imports have shifted in the way predicted by the model with products for which timeliness matters increasingly imported from nearby countries jel f1 transporting goods and people costs time and money and both transport fees and time in transit generally increase with the distance traveled these facts imply an incentive to economize on distance and the equilibrium effects

dealing with uncertainty in agent based simulation farm level modeling of adaptation to climate change in southwest germany climate change will most likely confront agricultural producers with natural economic and political conditions that have not previously been observed and are largely uncertain as a consequence extrapolation from past data reaches its limits and a process based analysis of farmer adaptation is required simulation of changes in crop yields using crop growth models is a first step in that direction however changes in crop yields are only one pathway through which climate change affects agricultural production a meaningful process based analysis of farmer adaptation requires a whole farm analysis at the farm level we use a highly disaggregated mathematical programming model to analyze farm level climate change adaptation for a mountainous area in southwest germany regional level results are obtained by simulating each full time farm holding in the study area we address parameter uncertainty and model underdetermination using a cautious calibration approach and a comprehensive uncertainty analysis we deal with the resulting computational burden using efficient experimental designs and high performance computing we show that in our study area shifted crop management time slots can have potentially significant effects on agricultural supply incomes and various policy objectives promoted under german and european environmental policy schemes the simulated effects are robust against model uncertainty and underline the importance of a comprehensive assessment of climate change impacts beyond merely looking at crop yield changes our simulations demonstrate how farm level models can contribute to a process based analysis of climate change adaptation if they are embedded into a systematic framework for treating inherent model uncertainty

coordinating channels under price and nonprice competition this paper analyzes how manufacturers should coordinate distribution channels when retailers compete in price as well as important nonprice factors such as the provision of product information free repair faster check out or after sales service differentiation among retailers in price and nonprice service factors is a central feature of markets ranging from automobiles and appliances to gasoline and is especially observed in the coexistence of high service retailers and lower price discount retailers therefore how a manufacturer should manage retail differentiation is an important channel management question yet the approach in the existing literature has been to examine channel coordination under the standard symmetric contracting assumption that offering a uniform contract to all the retailers in a market will be sufficient for coordination i bring this assumption into question and ask when is it optimal for the manufacturer to use the channel contract to deliberately induce retail differentiation even if the retailers were ex ante identical in their cost and other characteristics the paper identifies the type of channel contracts that can endogenously induce symmetry as opposed to differentiation among retailers next the paper highlights a type of channel conflict that arises from the very nature of retail price service competition a manufacturer might find the retailers to be excessively biased towards price competition at the cost of service provision or vice versa the paper establishes when a manufacturer is likely to stimulate greater price as opposed to greater service competition among the retailers the framework that i develop to address these issues highlights the role of two basic types of consumer heterogeneity consumers are heterogeneous in their locations as in the spatial models of horizontal differentiation and in their willingness to pay for retail services as in the models of vertical differentiation the model also uses a natural relationship in retail markets between the travel time cost incurred by a consumer and her willingness to pay the more affluent consumers who have a higher willingness to pay for retail services also have a higher cost for their personal time given these market features the paper analyzes the problem faced by a manufacturer who sells to competing retailers the paper shows that the standard notion in the literature of offering similar contracts to all the retailers is sufficient only in markets with substantial locational differentiation relative to the differences in the willingness to pay effective channel management in these markets simply requires mechanisms that ensure that retailer interests are aligned so that they compete by offering a mix of price and service that is desirable from the manufacturer s point of view however in markets with small locational differentiation and substantial diversity in consumer willingness to pay the manufacturer s problem is not just to align retailer interests but to also use the channel contract to induce the correct level of retail differentiation this helps the manufacturer to better cater to the diversity in consumer willingness to pay and to prevent the cut throat competition that the retailers would otherwise have indulged in the manufacturer can achieve this through the use of menu based contracts menu based contracts induce differentiated retailer behavior despite the fact that the retailers are not forced into accepting different terms of trade this aspect can be useful in shielding manufacturers from litigation under the robinson patman act the paper also shows that for relatively high ticket items retailers tend to be excessively biased towards competing in the provision of retail services the correlation between consumer willingness to pay for service and travel costs implies that for high ticket products the competing retailers will focus on the more service sensitive customers at the cost of ignoring the price sensitive consumers in the market the manufacturer is therefore likely to encourage greater price competition among the retailers in contrast for low ticket items the manufacturer prefers to reduce price competition and encourage greater provision of services this provides an endogenous rationale for the use of price ceilings versus floors the basic model is also extended to consider the effect of upstream competition between manufacturers under upstream competition coordinating retail price and service decisions is not always optimal for an individual manufacturer this extension to manufacturer competition provides a basis for understanding the role of retail price service differentiation in the context of a channel duopoly it also shows that a mixed distribution channel a channel in which one manufacturer chooses to be coordinated while the other chooses to be noncoordinated can be an equilibrium in markets with weak brand loyalty

dynamic programming approach to discrete time dynamic feedback stackelberg games with independent and dependent followers stackelberg games play an extremely important role in such fields as economics management politics and behavioral sciences stackelberg game can be modelled as a bilevel optimization problem there exists extensive literature about static bilevel optimization problems however the studies on dynamic bilevel optimization problems are relatively scarce in spite of the importance in explaining and predicting some phenomena rationally in this paper we consider discrete time dynamic stackelberg games with feedback information dynamic programming algorithms are presented for the solution of discrete time dynamic feedback stackelberg games with multiple players both for independent followers and for dependent followers when the followers act dependently the game in this paper is a combination of stackelberg game and nash game

timeliness and agglomeration an important element of the cost of distance is time taken in delivering final and intermediate goods we argue that time costs are qualitatively different from direct monetary costs such as freight charges the difference arises because of uncertainty unsynchronised deliveries can disrupt production and delivery time can force producers to order components before demand and cost uncertainties are resolved using several related models we show that this generates a hitherto unexplored mechanism for clustering if final assembly takes place in two locations and component production has increasing returns to scale then component production will tend to cluster around just one of the assembly plants

evaluating the integration of contiguous discontinuous markets this paper applies the concepts of structural models of markets market integration and market discontinuity to show that discontinuous markets alter the integration characteristics of continuous markets when analyzing systems of contiguous markets some of which are discontinuous it appears that the continuous markets are less well integrated when the discontinuous markets are operating than when they are not operating

on price taking behavior in a nonrenewable resource cartel fringe game abstract we consider a nonrenewable resource game with one cartel and a set of fringe members we show that i the outcomes of the closed loop and the open loop nonrenewable resource game with the fringe members as price takers the cartel fringe game a la salant 1976 coincide and ii when the number of fringe firms becomes arbitrarily large the equilibrium outcome of the closed loop nash game does not coincide with the equilibrium outcome of the closed loop cartel fringe game thus the outcome of the cartel fringe open loop equilibrium can be supported as an outcome of a subgame perfect equilibrium however the interpretation of the cartel fringe model where from the outset the fringe is assumed to be price taker as a limit case of an asymmetric oligopoly with the agents playing nash cournot does not extend to the case where firms can use closed loop strategies

the existence of equilibrium in discontinuous economic games ii applications in part i of this study we established two existence theorems for mixed strategy equilibrium in games with discontinuous payoff functions see theorems 4 4 and 5 5 in dasgupta and maskin 1986 hereafter d m 1986 in this second part we use the second of these two theorems to prove the existence of mixed strategy equilibrium in some wellknown discontinuous economic games that fail to have pure strategy equilibria the models we analyse are the bertrand edgeworth example of price setting duopolists with capacity constraints see section 2 2 price competition among firms producing differentiated products hotelling 1929 and d aspremont gabszewicz and thisse 1979 see section 2 3 spatial competition eaton and lipsey 1975 and shaked 1975 see section 3 and models of market dependent information rothschild and stiglitz 1976 and wilson 1977 section 4 the paper concludes section 5 with a classification of these models

on the limits and possibilities of the principle of minimum differentiation abstract introducing a finite reservation price in hotelling s spatial duopoly with linear transportation costs shows that i there does not exist a pure strategy symmetric location equilibrium if the reservation price is high ii there is a continuum of monopolistic equilibria if the reservation price is low and iii there exists a unique pure strategy symmetric location equilibrium in which the two firms compete with each other and cover the entire market if the reservation price is intermediate the equilibrium distance between the two firms in the latter case is at least a quarter and at most half the length of the market

spatial pricing in the united states west germany and japan this paper investigates the spatial pricing policies of a sample of firms in the united states west germany and japan we begin in section i by providing general results for the three countries these suggest that f o b pricing is the exception rather than the rule furthermore there appear to be significant differences between the countries in the degree of spatial price discrimination the remainder of the paper examines whether the inter country differences in spatial discrimination can be explained by a theory of spatial pricing section ii uses the theory of spatial pricing proposed in greenhut and greenhut 1975 to derive an operational model in section iii the parameters of this model are estimated from the individual country data and the results are discussed section iv presents the conclusions the data used in this study were obtained from a survey of firms in the three countries in each country target regions were selected with a similar urban rural proportions as restricted by b existing acquaintanceships with professors in or near these urban rural centres survey constraint b was imposed after a mailed questionnaire pilot study in the united states had indicated a likely need for follow up mailings phone calls and even interviews before a sufficient number of responses from a particular place e g a particular state in the united states could be expected after selecting our comparable survey areas firms were picked at random from industrial lists of business establishments in each country and questionnaires were mailed to them the questionnaire is reproduced in the appendix the firms that returned questionnaires were compared to non responding firms no distinction in size of firm industry type or location was apparent for any country or sub region studied among the respondents we dropped from the sample all firms that were not subject to a significant freight cost defined to be a 5 per cent minimum freight cost to delivered cost ratio on sales to at least one distant market point our findings on pricing strategies are summarized in table 1 firms in the united states tend to price discriminatorily of 174 sampled firms less than one third priced non discriminatorily f o b the spokesmen for the remaining firms 67 per cent admitted that they did not add full freight cost to their mill price on all of their distant sales these firms therefore priced discriminatorily the tendency to price discriminatorily is even greater in west germany and japan with the percentage of discriminating firms approximately

the end of the robinson patman act evidence from legal case data the robinson patman act rp an antitrust statute aimed at protecting small businesses limits price setting in distribution channels to avoid costly penalties under rp managers take a variety of precautions when pricing to retailers and wholesalers but how likely is a court to find a defendant guilty of violating the rp we find that this likelihood has dropped drastically as a result of recent supreme court rulings from more than 1 in 3 before 1993 to less than 1 in 20 for the period 2006 2010 the analysis also points to an increased success of the no harm to competition defense which reflects the view that the courts have raised the hurdle for plaintiffs to establish competitive harm finally our results indicate that smaller plaintiffs over time have fared worse than larger ones a trend that challenges the notion that rp protects small businesses

imperfect competition in agricultural markets and the role of cooperatives a spatial analysis important characteristics of many agricultural markets are costly to transport raw products and relatively few processors one or more of which is often a cooperative this paper analyzes pricing behavior in these oligopsonistic spatial markets and focuses specifically upon the conjecture that cooperatives may have a procompetitive effect on the behavior of rival non co op processors the existence and magnitude of a procompetitive effect is shown to depend upon a number of structural and strategic factors including competitive relations among the non co op processors and a cooperative s membership and pricing policies

improving channel coordination through franchising in this paper we explore the role of franchising arrangements in improving coordination between channel members in particular we focus on two elements of the franchising contract namely the royalty structure and the monitoring technology we begin with a simple analysis where a manufacturer distributes its product through a retailer and the retail demand is affected by the retail price and the service provided by the retailer in this context we show that neither royalty payments nor monitoring are needed for full coordination we then extend the model to allow for free riding by franchisees and show that although monitoring helps affect the behavior of the franchisees royalty payments are still unnecessary to coordinate the activities of the franchisor and the franchisees finally we show that in environments where factors affecting retail sales are controlled by both the franchisor and the franchisee royalty payments provide the necessary incentives for the franchisor while monitoring systems are used to ensure that franchisees also behave in the best interest of the channel our general results are found to be consistent with those in brickley and dark 1987 and norton 1988 who conclude that franchising is affected by principal agent problems our theory finds special support in the work of lafontaine 1988 where it is concluded that the incidence of franchising is related to cost of monitoring and the importance of franchisor investments

voluntary quality disclosure and market interaction marketers disclose quality information directly to potential consumers using a variety of communication channels this study investigates how competition may influence duopoly firms incentive to voluntarily reveal quality information we show that firms in competitive markets reveal less information than a monopoly firm in addition sequential disclosure leads to asymmetric equilibrium disclosure behavior the disclosure leader reveals unambiguously less information than in the simultaneous disclosure case whereas the follower ex ante reveals less more private information than that released by the leader or by the firms in the simultaneous case when the disclosure cost is sufficiently low high we also examine the equilibrium firm profits and social welfare we demonstrate that there may be a u shaped relationship between equilibrium monopoly profits or social welfare under both monopoly and duopoly and the disclosure cost moreover in comparison to the simultaneous disclosure case sequential disclosure can lead to increasingly softened competition improving both firm profitability and social welfare

mail versus mall a strategic analysis of competition between direct marketers and conventional retailers consumers now purchase several offerings from direct sellers including catalog and internet marketers these direct channels exist in parallel with the conventional retail stores the availability of multiple channels has significant implications for the performance of consumer markets the literature in marketing and economics has however been dominated by a focus on the conventional retail sector this paper is an effort toward modeling competition in the multiple channel environment from a strategic viewpoint at the outset a parsimonious model that accommodates the following consumer and market characteristics is introduced first the relative attractiveness of retail shopping varies across consumers second the fit with the direct channel varies across product categories third the strength of existing retail presence in local markets moderates competition fourth in contrast with the fixed location of the retail store that anchors its localized market power the location of the direct marketer is irrelevant to the competitive outcome the model is first applied in a setting where consumers have complete knowledge of product availability and prices in all channels in the resulting equilibrium the direct marketer acts as a competitive wedge between retail stores the direct presence is so strong that each retailer competes against the remotely located direct marketer rather than against neighboring retailers this outcome has implications for the marketing mix of retailers which has traditionally been tuned to attract consumers choosing between retail stores in the context of market entry conditions under which a direct channel can access a local market in retail entry equilibrium are derived our analysis suggests that the traditional focus on retail entry equilibria may not yield informative or relevant findings when direct channels are a strong presence next the role of information in multiple channel markets is modeled this issue is particularly relevant in the context of direct marketing where the seller can typically control the level of information in the marketplace sometimes on a customer by customer basis e g by deciding on the mailing list for a catalog campaign when a certain fraction of consumers does not receive information from the direct marketer the retailers compete with each other for that fraction of the market the retailer s marketing mix has to be tuned in this case to jointly address direct and neighboring retail competition the level of information disseminated by the direct marketer is shown to have strategic implications and the use of market coverage as a lever to control competition is described even with zero information costs providing information to all consumers may not be optimal under some circumstances in particular when the product is not well adapted to the direct channel the level of market information about the direct option should ideally be lowered the only way to compete with retailers on a larger scale with a poorly adapted product is by lowering direct prices which lowers profits lowering market information levels and allowing retailers to compete more with each other facilitates a higher equilibrium retail price in turn this allows a higher direct price to be charged and improves overall direct profit on the other hand when the product is well adapted increasing direct market presence and engaging in greater competition with the retail sector yields higher returns the finding that high market coverage may depress profits raises some issues for further exploration first implementing the optimal coverage is straightforward when the seller controls the information mechanism as in the case of catalog marketing the internet in contrast is an efficient mechanism to transmit information but does not provide the sellers with such control over the level of market information a key reason is that the initiative to gather information on the internet lies largely with consumers the design and implementation of mechanisms to control aggregate information levels in electronic markets can therefore be an important theme for research and managerial interest second direct marketers have traditionally relied on the statistical analysis of customer records to decide on contact policies the analysis in this paper reveals that these policies can have significant strategic implications as well research that integrates the statistical and strategic aspects could make a valuable contribution the paper concludes with a discussion of issues for future research in multiple channel markets including avenues to model competition in settings with multiple direct marketers

spatial competition and spatial price discrimination the analysis of spatial competition under conditions of free entry which derives its major impetus from the seminal work of losch 1954 has been conducted in general on the assumption that the competitive firm will adopt an f o b pricing scheme see for example capozza and van order 1978 and holahan 1978 greenhut 1956 does consider some of the implications of discriminatory pricing within competitive markets but his analysis adopts an essentially short run view and provides little rationale for the choice of such a pricing policy by competitive firms this is in contrast with developments in the analysis of spatial monopoly the early work of singer 1937 and hoover 1937 and subsequent developments by for example greenhut 1956 beckmann 1976 beckmann and ingene 1976 greenhut and greenhut 1977 holahan 1975 and norman 1977 indicate that the spatial monopolist should adopt a discriminatory spatial pricing policy where spatial price discrimination is taken conventionally to mean that delivered prices do not follow an f o b scheme but that all concumers equidistant from a particular supplier pay the same price it is rarely however that the results generated by the analysis of spatial monopoly are reconsidered in the analysis of spatial competition in particular although we know that spatial price discrimination will in general increase a monopolist s profit the assumption that profit maximising spatially competitive firms will adopt f o b pricing schemes has rarely been questioned and has not been questioned within the loschian competitive framework greenhut and ohta 1975a chapter 8 and chapter 8 appendix i are notable exceptions but in both cases they depart from the loschian scheme the first objective of this paper is therefore to show that when loschian competitive firms are allowed the option of discriminatory pricing i e are free of institutional constraints which require f o b pricing they will be forced to exercise that option in order to maintain normal profits secondly we shall show that if competitive conditions change the form of price discrimination will also change and that under certain competitive conditions the degree of discrimination will increase with the degree of competition leading eventually to uniform pricing thirdly we compare two competitive cases with multi plant monopoly and derive the spatial analogue of the conventional spaceless monopoly perfect competition comparison the monopolist s plants will be larger in area and total output than each competitive firm but will supply less per consumer at a higher average price welfare comparisons are less clear cut in that they are dependent upon the type of competition we assume we show however that welfare maximisation requires marginal cost pricing where marginal cost includes transport costs and so requires f o b pricing if there are economies of scale to production it follows that welfare maximisation will require production subsidy

export sensitivity to time delays and the pattern of international trade a growing body of literature in the field of international trade highlights the increasing importance of the time delays associated with transporting goods over long distances and the differing eff

when and how is the internet likely to decrease price competition conventional wisdom seems to claim that by lowering the cost of distribution and by making search easier for consumer the introduction of the internet is likely to intensify price competition this paper intends to challenge this view by asking when and how is the internet likely to decrease the level of price competition between firms to answer this question we develop an analytic model with the following characteristics on the demand side consumers need to gather information on two types of product attributes digital attributes which can be communicated on the web at very low cost and nondigital attributes for which physical inspection of the product is necessary consumers choose between two brands but are familiar with the nondigital attributes of only the brand purchased on the last purchase occasion on the supply side firms use traditional stores and the internet to inform consumers about their products attributes and to sell their products in this setup we show that the impact of the internet on competition will be radically different depending on the relative importance of parameters describing the relevant shopping and distribution context specifically we find that the introduction of the internet might lead to monopoly pricing when 1 the proportion of internet users is high enough 2 when nondigital attributes are relevant but not overwhelming 3 when consumers have a more favorable prior about the brand they currently own and 4 when the purchase situation can be characterized by destination shopping more surprising we also show that in such cases the use of the internet not only leads to higher prices but can also discourage consumers from engaging in search as such an important message of the paper is that under some conditions the internet might represent an opportunity for firms to leverage their brand loyalty and increase their profits the intuition behind our results is the following the internet allows consumers to evaluate digital attributes easily i e without visiting the stores however nondigital attributes can only be evaluated through physical presence as such for goods where both types of attributes are important the introduction of the net changes the effective cost of search for consumers without the internet the cost of search is the cost of visiting more than one store with the introduction of the net however nonsearching consumers do not have to undertake the shopping trip at all because they can order products on the net thus in the presence of the internet the cost of search is related to the cost of undertaking the entire shopping trip in the case of destination shopping i e when the fixed cost of undertaking the shopping trip is higher than the cost of visiting an additional store the presence of the internet creates higher effective search costs for consumers given this shift of paradigm in search costs due to the internet consumers may not take the risk of searching for products with better nondigital attributes but instead remain with the product they are familiar with this results in increased consumer loyalty which induces firms to increase their prices our results have important managerial implications first they provide guidelines for firms on when i e for which product categories they should consider expanding their distribution network to the internet in this respect an important additional insight of the paper is that the internet can lower price competition and lead to reduced consumer search even if it is more expensive than the traditional distribution channel this can easily be the case if distribution through the internet represents additional costs such as the costs associated with shipping and handling and return policies second the paper also provides guidelines on how to plan the firm s internet strategy interestingly the results suggest that with the general availability of the internet the role of stores might actually become more important while we do not explicitly model a dynamic market our findings together with klemperer s 1987 results suggest that stores might have a key role in consumer acquisition while the internet can help leverage the acquired customer base through demand fulfillment this might imply that for certain product categories firms should actually allocate additional resources to improve their in store environment when considering the internet as a complementary distribution channel

stackelberg versus cournot equilibrium we reconsider stackelberg s classical critique of the cournot duopoly in the framework of endogenous timing for two player games for quantity duopoly we provide different sets of minimal conditions directly on the demand and cost functions yielding respectively the simultaneous and the two sequential modes of play while our findings essentially confirm the predominance of the former they also indicate that the latter is natural under some robust but restrictive conditions no extraneous assumptions such as concavity existence or uniqueness of equilibria are needed and the analysis makes crucial use of the basic results from the theory of supermodular games classification numbers b21 c72 d43 l13 c 1999 academic press

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

country competition and us overseas assembly to examine the role of international competition in outsourcing production decisions i study the decisions of producers who used the u s overseas assembly program oap to conduct assembly operations in developing countries the evidence which is based on u s oap imports between 1991 to 2000 shows that production costs and corporate tax policies both shaped production decisions while increases in own country costs reduced the size of a developing country s oap shipments increases in competitor costs helped to increase a country s shipments the effects of competitor country cost changes were relatively large as the analysis suggests that a ten percent increase in competing country costs would increase a country s oap outsourcing activities by 5 8 percent while a ten percent increase in competitor country taxes would increase a country s oap exports by 1 6 percent

endogenous timing in general rent seeking and conflict models we examine simultaneous versus sequential choice of effort in a two player contest the timing of moves determined in a preplay stage prior to the contest subgame as well as the value of the prize is allowed to be endogenous contrary to endogenous timing models with an exogenously fixed prize the present paper finds the following 1 players may decide to choose their effort simultaneously in the subgame perfect equilibrium spe of the extended game 2 the spe does not need to be unique in particular there is no unique spe with sequential moves if the direct costs of effort are zero 3 symmetry among players does not rule out incentives for precommitment to effort locally away from the cournot nash level 4 finally there may be no correlation between win probability and strategic incentives in our framework a finding most central in the analysis of fixed prize contests

on noncooperative oligopoly equilibrium in the multiple leader follower game abstract in this paper we provide new proofs of existence and uniqueness of a stackelberg market equilibrium for a multiple leader follower noncooperative oligopoly model in which heterogeneous firms compete on quantities to this end we consider a two stage game of complete and perfect information in which many leaders interact strategically with many followers the stackelberg market equilibrium constitutes a pure strategy subgame perfect nash equilibrium of this game existence and uniqueness are more difficult to handle in this framework insofar as the presence of several leaders and followers displays a richer set of strategic interactions then to prove existence we notably provide a new procedure to determine the conditions under which the optimal behavior of the followers may be written as functions of the sole strategy profile of the leaders some examples outline our procedure and discuss our assumptions

a spatial analysis of maize marketing policy reforms in zambia in this study we analyze recent and proposed maize marketing reforms in zambia to capture the effects of changing transport systems we use a continuous space model in place of the traditional point representation model of takayama and judge this method permits us to use prereform data on supply demand and transport costs to infer both intra and interregional effects of liberalization and shows that the welfare gains from liberalization are larger than commonly thought these results provide policy makers with estimates of the magnitude of change associated with alternative reform programs beyond what would be available from a conventional approach

when showrooming increases retailer profit abstractshowrooming the phenomenon of consumers visiting a brick and mortar b m store to learn about products but then buying online to obtain lower prices is attracting increased attention both in business practice and in academic literature it is considered a major threat to the b m retailers and determining how to fight it seems to be the only consideration however the manufacturer s need for retail informational services has always been one of the essential reasons for retailers to exist and is a means for retailers to achieve profitability the popular arguments about the threat of showrooming ignore the strategic role of the manufacturer in the distribution channel this article analytically shows that when the manufacturer s decisions are considered i e when the manufacturer retailer contract is endogenous consumers ability to engage in showrooming may lead to increased rather than decreased profitability for b m retailer s thus retail efforts to restrict showrooming behavior m

a genetic game of trade growth and externalities abstract a genetic algorithm is introduced to search for optimal policies in the presence of knowledge spillovers and local pollution in a dynamic north south trade game non cooperative trade compounds inefficiencies stemming from externalities cooperative trade policies are efficient and yet not credible short of a joint maximization of the global welfare transfer of knowledge remains as a viable route to improve world welfare

optimal reverse channel structure for consumer product returns consumers often return a product to a retailer because they learn after purchase that the product does not match as well with preferences as had been expected this is a costly issue for retailers and manufacturers in fact it is estimated that the u s electronics industry alone spent 13 8 billion dollars in 2007 to restock returned products lawton c 2008 the war on returns wall street journal may 8 d1 the bulk of these returns were nondefective items that simply were not what the consumer wanted to eliminate returns and to recoup the cost of handling returns many retailers are adopting the practice of charging restocking fees to consumers as a penalty for making returns this paper employs an analytical model of a bilateral monopoly to examine the impact of reverse channel structure on the equilibrium return policy and profit more specifically we examine how the return penalty is affected by whether returns are salvaged by the manufacturer or by the retailer interestingly we find that the return penalty may be more severe when returns are salvaged by a channel member who derives greater value from a returned unit also the manufacturer may earn greater profit by accepting returns even if the retailer has a more efficient outlet for salvaging units

the existence of low end firms may help high end firms two models of competition between high end and low end products benefiting the high end firms are presented one is a quantity competition model and the other is a price competition model with product differentiation the key factor is the existence of two heterogeneous consumer groups those who demand only high end name brand products and those who care little whether products are high or low end we show that under certain conditions the profits of firms in the high end market are larger when there are firms producing low end products than when there are not the existence of price sensitive consumers who care little about product quality intensifies competition among the high end firms the existence of low end firms functions as a credible threat which induces the high end firms not to overproduce because price sensitive consumers buy products from the low end firms the result provides a new theoretical mechanism concerning the profitability and pricing of national brand firms after the entry of private labels it has an implication for pricing and marketing strategies established firms should not decrease their prices after the entry of nonestablished firms

single leader multiple follower games with boundedly rational agents abstract this paper studies a class of hierarchical games called single leader multiple follower games slmfgs that have important applications in economics and engineering we consider such games in the context of boundedly rational agents that are limited in the information and computational power they may possess agents in our slmfg are modeled as adaptive learners that use simple reinforcement learning schemes to learn their optimal behavior the proposed learning approach is illustrated using a well studied problem in economics it is shown that with a patiently learning leader the repeated plays of the game result in approximate equilibrium outcomes

on line computation of stackelberg equilibria with synchronous parallel genetic algorithms this paper develops a method to compute the stackelberg equilibria in sequential games we construct a normal form game which is interactively played by an arti1cially intelligent leader ga l and a follower ga f the leader is a genetic algorithm breeding a population of potential actions to better anticipate the follower s reaction the follower is also a genetic algorithm training on line a suitable neural network to evolve a population of rules to respond to any move in the leader s action space when gas repeatedly play this game updating each other synchronously populations converge to the stackelberg equilibrium of the sequential game we provide numerical examples attesting to the e7ciency of the algorithm 2002 elsevier science b v all rights reserved

changes in beef packers market power after the livestock mandatory price reporting act an agent based auction controversy remains about the effectiveness of the 1999 livestock mandatory price reporting act mpra we determine the likely changes in beef packers market power after the mpra by using an agent based first price common value auction past research has employed cournot models but we use an auction model which more closely resembles the actual cattle procurement process we find that feeders benefit from the mpra regardless of whether price uncertainty decreases for packers and or feeders if the packers price uncertainty is reduced the feeder benefits from an increase in competition between the packers if the feeder s price uncertainty is reduced the feeder benefits from imposing more accurate reserve prices copyright 2013 oxford university press

has distance died evidence from a panel gravity model the estimated coefficient of distance on the volume of trade is generally found to increase rather than decrease through time using the traditional gravity model of trade this distance puzzle proved robust to several ad hoc versions of the model using data for 1962 96 for a large sample of 130 countries the introduction of an augmented barrier to trade function removes the paradox yielding a decline in the estimate of the elasticity of trade to distance of about 11 percent over the 35 year period for the whole sample however the death of distance is shown to be largely confined to bilateral trade between rich countries with poor countries becoming marginalized

global dynamic inefficiency in the absence of international policy coordination a north south case abstract this paper demonstrates that decentralized behavior reflected in non coordinated resource pricing and investment strategies may lead to global dynamic inefficiency it is shown that in a north south world capital accumulation in the north reduces the social cost associated with the presence of labor market imperfections of the lewis type in the south whereas resource pricing in the south affects investment decisions in the north thus international policy coordination is required for attaining global dynamic efficiency

spatial competition uniform pricing and transportation efficiency in the california processing tomato industry this study examines the role of spatial pricing in the allocation of processing tomatoes from farms to the thirty two processing facilities located in northern and central california a simple theoretical model illustrates that the industry s uniform pricing policy encourages market overlap and excessive transportation costs relative to fob pricing a nonlinear mathematical programming model is developed to determine the optimal allocation of processing tomatoes this allocation is then compared to the estimated actual allocation the analysis reveals foregone profits of only 1 9 from inefficient product allocation simulation results reveal significant competition among processors despite their separation in many cases by long distances

demand signalling under unobservable effort in franchising linear and nonlinear price contracts we study the signalling strategy of a principal who is privately informed about its high demand potential to an uninformed risk neutral agent we analyze the model in the context of a contract between a franchisor and a franchisee we examine the distortions of a two part pricing scheme necessary to credibly inform the franchisee agent we also study whether the inability of the franchisor principal to observe the agent s effort moderates or exaggerates the distortions from the first best two part pricing scheme a surprising outcome is that even though the principal incurs greater signalling cost the magnitude of distortion in the two part scheme is smaller when service is unobservable than when it is not thus a signalling strategy employing the fixed and variable fees is harder to detect under moral hazard empirical studies failing to control for moral hazard may incorrectly conclude that signalling strategy does not occur we later consider a three part scheme to verify whether or not the schem

lowering customer evaluation costs product differentiation and price competition when match uncertainty is resolved via costly evaluation the first product sampled by a customer is more likely to make the sale this prompts firms to lower their products evaluation costs to attract customers to sample their products first such efforts by firms are called customer learning investment cli when product quality is freely observable but horizontal match is not we examine how cli choices interact with quality and price competition in a duopoly cli has a competition effect in that a higher cli of a firm increases its demand but decreases that of its rivals in the market covered duopoly both qualities will decrease increase when the high end low end firm invests more in customer learning and remain unchanged when they invest equally relative to when neither firm invests we further show that the firm with a higher relative production efficiency invests more in customer learning than the competitor in the market not covered duopoly cli by the low end firm also creates a market

an economic theory of vertical restraints vertical restraints imposed by manufacturers on the prices locations and sales of retail firms represent a puzzling departure from the simple price mediated exchange of conventional markets in this article we analyze the theoretical basis for these restraints in a setting where retailers inform consumers and are imperfectly competitive and where a manufacturer has some monopoly power we identify three potential externalities affecting retailers decisions these externalities lead to the failure of simple uniform price contracts to coordinate the incentives of retailers with the objective of maximizing combined manufacturer and retailer profits we identify the packages of vertical restraints that are minimally sufficient under various conditions to neutralize the externalities and to achieve the joint profit maximum

on stackelberg games in a homogeneous product market abstract in a homogeneous product duopoly with concave demand and strictly convex costs we bring together all the standard results of quantity stackelberg games provide some new results with price stackelberg games and compare the equilibrium configuration of the quantity games with the price games in the price stackelberg game we show there is a unique spne where the leader chooses a lower price than the follower but both get equal payoffs we prove that generally quantity stackelberg games are less competitive than price stackelberg games however we also demonstrate the possibility of a reversal of this result

implications of reduced search cost and free riding in e commerce this paper examines a market where the provision of information service is costly but information service has the characteristics of a public good consumers on the other hand can use the information service to make an informed purchase decision and derive higher utility from consuming their ideal product however after receiving the information service from an information service provider consumers can easily free ride by purchasing at low price sellers who do not provide any information service the paper examines the competition where sellers compete by providing information service for horizontally differentiated products and where technology reduces consumers search cost it is found that in this market a seller needs to establish itself as an information service provider in order to make positive profits even when there is free riding a seller however cannot make positive profits by free riding all the time also with an increase in competition in the information service market sellers have reduced incentives to provide information service it is also found that in this market a decrease in search cost may increase or decrease social welfare

market integration efficiency of arbitrage and imperfect competition methodology and application to u s celery this paper develops and applies a methodology to test for efficiency of interregional commodity arbitrage application of the methodology requires only time series data on prices for alternative cities regions countries or product forms yet the approach is capable of generating evidence on a number of market parameters including market integration arbitrage efficiency the magnitude of marketing margins product substitutability and competitiveness of markets estimation is based on a switching regression model with three regimes efficient arbitrage relative shortage and relative glut results from application of the model to u s celery marketing indicated significant departures from efficient arbitrage for both california and florida celery

freight transportation costs and the thickening of the us mexico border border regulatory requirements and administrative practices changed subsequent to the september 11 2001 9 11 terrorist attacks in the united states research in this study examines the manners in which transportation cost data for merchandise imports from mexico behaved before and after 2001 evidence is obtained that confirms results earlier tabulated for imports from canada empirical results further indicate that beyond freight cost changes growth in the value of imports from mexico was disrupted by events associated with the aftermath of 9 11

note on self restraint as an online entry deterrence strategy we develop a game theoretical model to show that in the markets where price consistency across channels is critical an incumbent brick and mortar retailer can deter the online entry of a pure play e tailer by strategically refraining from entering online in the markets where price consistency is not a constraint we find that the incumbent can deter the e tailer s entry only if it enters online and credibly operates the online channel as an independent profit center in other words the incumbent must be willing to cannibalize its own brick and mortar business by charging a low online price we also discuss some social welfare implications of retail online entry and the managerial insights of our analysis

endogenous pricing to market and financing costs abstract this paper explains why relative ppp should hold more tightly in emerging markets and why pricing to market would be observed more frequently in the oecd countries it studies the endogenous determination of pricing to market in a real option model with time dependent transportation costs where the future terms of trade are random allowing time dependent transportation costs adds a dimension of investment to the pre buying of imports implying that financial considerations determine the frequency of pricing to market and the deviations from relative ppp if the expected discounted cost of last minute delivery is higher than pre buying one exercises the option of spot market imports if the realized terms of trade are favorable enough pricing to market is observed in countries characterized by low terms of trade volatility and low financing costs in these circumstances imports are pre bought and the spot market for imports is inactive in countries where the financing costs and the terms of trade volatility are high few imports are pre bought the price of imports is determined by the realized real exchange rate and a version of relative ppp holds with an intermediate level of terms of trade volatility and of financing costs a mixed regime is observed if the realized real exchange rate is weak pricing to market would prevail increasing consumers welfare by shielding them from the adverse purchasing power consequences of weak terms of trade if the realized real exchange rate is favorable enough more imports are purchased in the spot market and the relative ppp would hold higher financing costs increase the cost of pre buying imports reducing thereby the frequency of pricing to market increasing the expected relative price of imports reducing the expected deviations from relative ppp and reducing welfare

delivered pricing fob pricing and collusion in spatial markets in this situation the choice variable for the firm is a price system that specifies a price per unit of product at each location each firm must choose a function p x where x is the distance between the location of the consumer and the location of the firm in practice different industries use different types of pricing systems p x and this suggests that the prevailing pricing system depends on the structural elements of the market when the pricing policy is fob consumers can pick up the product at the mill paying the mill price p and incurring the transportation cost from the producer s to the consumer s location i e p x p t x or the seller may deliver the good to the buyer s location as long as it charges mill price plus transportation costs delivered pricing policies are pricing rules p x that are not based on consumers picking up the product at the mill the firm delivers the product at the consumer s location in a perfectly competitive world with a continuum of firms an fob pricing system would be expected p x c t x where c is the marginal cost of production in the case of a market with two firms located at the

research note consumer heterogeneity and competitive price matching guarantees price matching guarantees are widely used in consumer and industrial markets previous studies argue that they are a marketing tactic that facilitates implicit price collusion this is because once a store adopts this marketing tactic its rivals can no longer steal its customers by undercutting its price and hence they have little incentive to initiate price cuts while a store with price matching guarantees has no fear of losing customers to rivals price cuts it has every incentive to raise its own price to charge a higher price to its loyal consumers a growing body of legal literature uses this argument today to justify calls for antitrust actions against stores employing this marketing tactic however this theoretical conclusion baffles practitioners and industry experts in practice sellers typically embrace this marketing tactic in response to heavier competition and a growing bargain consciousness among shoppers the introduction of price matching guarantees by a store is frequently interpreted by industry observers as the initiation of a price war rather than a signal of price collusion this assertion is supported in many instances by the fact that stores that introduce price matching guarantees also roll back their prices and typically suffer subsequent loss of profits most ironically the favorite examples used by researchers to illustrate how price matching guarantees can enforce price collusion crazy eddie and nobody beats the wiz have subsequently either gone bankrupt or filed for federal bankruptcy protection in this study we show that price matching guarantees can indeed facilitate competition the expected prices and profits can be strictly lower when all stores adopt price matching guarantees than when they are not allowed to this is because the adoption of price matching guarantees generates not only a competition dampening effect which has been recognized in the literature but also a competition enhancing effect this latter effect comes from the fact that price matching guarantees encourage price search by those consumers who prefer to shop at a particular store but are mindful of saving opportunities these consumers will have incentives to obtain the rival store s price when their favorite store offers price matching guarantees to avail themselves of the lowest possible price at their favorite store as a result price matching guarantees reduce the number of purchases at the store from those consumers who would have paid the full price and thus prompt a store to price more aggressively to bid for more incremental sales this competition enhancing effect can more than offset the competition dampening effect in markets where consumers differ in their price search costs and store loyalty thus our study casts doubt on the advisability of blanket prohibition on price matching guarantees our argument relies only on consumer segmentation and on the phenomenon of periodic sales both of which are common in retail markets we arrive at our conclusion by incorporating bargain shoppers and opportunistic loyals into the standard sales promotion models in contrast the past literature on price matching guarantees ignores the ubiquitous phenomenon of sales in retail markets and overlooks those consumers who prefer to shop at a particular store but are alert to saving opportunities as a result it is troubled by two awkward conclusions on the one hand price matching guarantees simply remove rivals incentives to undercut in price and hence also their incentives to run sales this implies that the adoption of price matching guarantees in a market will eliminate the phenomenon of sales which is obviously counterfactual on the other hand in equilibrium no consumer actually invokes price matching guarantees as each player has incentives to close any price gap in the market this is obviously false based on our casual observations and our conversations with store managers theoretical research on the subject thus far has been overwhelmingly one sided and empirical or experimental studies are conspicuously lacking we hope that our conclusion will spark further research in both directions a healthy debate will broaden our perspective on an issue of great importance in formulating public policies and in managerial decision making