trade and protection in vertically related markets abstract we consider home country tariff and subsidy policies in a setting where a home firm is partially dependent on a foreign vertically integrated firm for supplies of a key input the firms are cournot competitors in the home market for the final product we show that a tariff on final product imports may cause the foreign vertically integrated firm to reduce the price charged for the input under circumstances where a simple monopoly supplier of the input would increase its price supply conditions for the input significantly affect whether imports of the input should be taxed or subsidized

analyzing the welfare impacts of full line forcing contracts theoretical investigations have examined both anti competitive and efficiency inducing rationales for vertical bundling making empirical evidence important to understanding its welfare implications we use an extensive dataset on full line forcing contracts between movie distributors and video retailers to empirically measure the impact of vertical bundling on welfare we identify and measure three primary effects of full line forcing contracts market coverage leverage and efficiency we find that bundling increases market coverage and efficiency but has little impact on one distributor s gaining leverage over another as a result we estimate that full line forcing contracts increased consumer and producer surplus in this application

the competitive effects of vertical agreements for many years there were few distinctions drawn between horizontal and vertical agreements both were considered anticompetitive and subject to per se condemnation under the antitrust laws recently however this approach has come under attack and what was once the conventional wisdom is no longer so indeed there is growing acceptance of the view that vertical agreements can rarely have anticompetitive consequences per se legality would then be the appropriate standard in this paper we investigate the competitive implications of a particular vertical agreement the imposition of exclusive dealing requirements by a manufacturer on his distributors however to maintain the focus of the analysis we do not consider ultimate welfare gains or losses in an early application of economic analysis to this practice aaron director and edward levi 1956 suggest that exclusive dealing would be anticompetitive if it raised entry costs for rivals our object following this conjecture see their p 293 is to examine the market conditions under which exclusive dealing impedes entry howard marvel 1982 dealt with the practice of exclusive dealing he provides an efficiency rationale for exclusive dealing ignores the prospect that anticompetitive effects may follow and concludes that exclusive dealing ought therefore to be treated as legal per se p 25 this paper examines the possible anticompetitive effects neglected by marvel i market conditions for exclusive dealing

vertical control of price and inventory this paper offers a simple approach to the theory of decentralizing inventory and pricing decisions along a supply chain we consider an upstream manufacturer selling to two outlets which compete as differentiated duopolists and face uncertain demand demand spillovers between the outlets arise in the event of stockouts the price mechanism in which each outlet pays a two part price and chooses price and inventory virtually never coordinates incentives efficiently contracts that can elicit first best decisions include resale price floors or buy back policies retailer held options to sell inventory back to the manufacturers

price discrimination copyright law and technological innovation evidence from the introduction of dvds u s copyright law effectively prevents direct price discrimination for copyright holders that sell to different markets in response these firms can engage in indirect price discrimination i derive theoretical predictions about the use of indirect price discrimination and i analyze how optimal pricing strategies differ for different products using data on vhs and dvd movie distribution i find that firms pricing choices are consistent with the predictions of theory and that firms use of indirect price discrimination benefits consumers but harms ancillary retailers finally i examine what optimal pricing strategies might look like in a legal environment that permits direct price discrimination

price dependent profit sharing as a channel coordination device we show how an upstream firm by using a price dependent profit sharing rule can prevent destructive competition between downstream firms that produce relatively close substitutes with this rule the upstream firm induces the retailers to behave as if demand has become less price elastic as a result competing downstream firms will maximize aggregate total channel profit when downstream firms are better informed about demand conditions than the upstream firm the same outcome cannot be achieved by vertical restraints such as resale price maintenance price dependent profit sharing may also ensure that the downstream firms undertake efficient market expanding investments the model is consistent with observations from the market for content commodities distributed by mobile networks

exclusive contracts and protection of investments we consider the effect of a renegotiable exclusive contract restricting a buyer to purchase from only one seller on the levels of noncontractible investments undertaken in their relationship contrary to some informal claims in the literature we find that exclusivity has no effect when all investments are fully specific to the relationship i e are purely internal exclusivity does matter when investments affect the value of the buyer s trade with other sellers i e have external effects we examine the effects of exclusivity on investments and aggregate welfare and the private incentives of the buyer seller coalition to use it

research on the motion picture industry state of the art and new directions off the beaten track away from theatrical release the motion picture industry has been subject of extensive academic research over the last decades however most scholars focused on the u s theatrical motion picture market the number of research activities regarding even more profitable release windows such as home video or television has been substantially lower although international distribution is essential for a motion picture project to break even there has been little significant re search on most other markets this paper aims at summarizing the current state of research on the motion picture industry particularly from marketing and management perspective revealing research gaps and proposing recommendations for future research endeavors therefore a three pillar scheme is developed to systemize previous findings research on intraorganizational decision making contractual relationships between national stakeholders and international market competition are differentiated since these insights are mainly derived from u s theatrical exhibition they can hardly be applied to other markets and exhibition windows thus potential research areas are identified to expand knowledge of posttheatrical and international markets

vertical integration market foreclosure and consumer welfare in the cable television industry i examine the effects of vertical integration between programming and distribution in the cable television industry i assess the effects of ownership structure on program offerings prices and subscriptions and i compare consumer welfare across integrated and unintegrated markets the results of this analysis suggest two general conclusions first integrated operators tend to exclude rival program services suggesting that certain program services cannot gain access to the distribution networks of vertically integrated cable system operators second vertical integration does not harm and may actually benefit consumers because of the associated efficiency gains

vertical contracts in the video rental industry a large body of theoretical work has explored the channels through which vertical contracts can induce efficiency improvements however it is also important to study vertical contracts empirically in order to gain insight into the relative size of different types of efficiency gains in this paper i empirically analyse a contractual innovation in the vertically separated video rental industry prior to 1998 video stores obtained inventory from movie distributors using simple linear pricing contracts in 1998 revenuesharing contracts were widely adopted i investigate the effect of the introduction of revenue sharing contracts on firms profits and consumer welfare i analyse a new panel data set of home video retailers that includes information on individual retailers contract and inventory choices as well as rentals and contract terms for 246 movie titles and 6137 retailers in the u s during each week of 1998 and 1999 and the first half of 2000 a structural econometric model of firms behaviour is developed that describes the nature of firms contract choices estimates from this model indicate that both upstream and downstream profits increase by 10 under the revenue sharing contract for popular titles for less popular titles the effects can be even larger i also estimate that consumers benefit when revenue sharing contracts are adopted

financial market innovation and security design an introduction abstract the article describes in the context of theory and practice this special issue of the journal of economic theory on financial market innovation and security design the main focus is on security design in incomplete financial markets possibly with asymmetrically informed traders we first survey the general equilibrium literature which emphasizes the spanning role of securities we then provide a unified framework encompassing the literature that employs a cara guassian setting to study the impact of financial innovation on risk sharing and information aggregation journal of economic literature classification numbers g10 d52

financial innovations and arbitrage pricing in economies with frictions revisited abstract existing literature points to the role of market frictions in providing motivations for financial innovations in this paper we study the effectiveness of the arbitrage pricing approach and the design and pricing of innovated securities in economies with restrictions on short sales in the process we also define the no arbitrage conditions that is appropriate for such economies the differences between our results and chen s 3 are pointed out when appropriate journal of economic literature classification numbers c61 g10 g12 g20

the impact of repeated interactions on supply chain contracts a laboratory study abstract in this laboratory study we investigate the interactive behaviors that develop over a perceived long term contractual relationship specifically three types of contracts are examined under a two echelon supply chain setting with stochastic demand wholesale price contracts buyback contracts and revenue sharing contracts the supply chain contracting theory has demonstrated that the simple linear price contract is inefficient whereas the latter two contracts can coordinate the channel through risk sharing and they are mathematically equivalent we propose an experimental design that controls for individual decision biases to isolate the behavioral impact of repeated negotiations our experimental results indicate that participants systematically deviate from predictions by the normative model that assumes a one shot interaction between self interested players we find that when future opportunities to punish are available social preferences for fairness and reciprocity are reinforced and reputation building behaviors are motivated to achieve long term economic benefits as a result the performance of the overall supply chain is enhanced moreover we observe that buyback contracts behave differently from revenue sharing contracts by inducing higher order quantities over time

optimal security design how should new securities be designed traditional theories have little to say on this the literature on capital structure and general equilibrium theories with incomplete markets take the securities firms issue as exogenous this paper explicitly incorporates the transaction costs of issuing securities and develops a model where the instruments that are traded are chosen optimally and the economy s market structure is endogenous among other things it is shown that the firm s income stream should be split so that in every state all payoffs are allocated to the security held by the group that values them most this abstract was borrowed from another version of this item

the competitive effects of vertical agreements comment recent economic analyses of vertical restraints and integration emphasize the circumstances under which these arrangements are socially efficient efficiency claims have proven contentious however for exclusive dealing a vertical restraint that prohibits any outlet carrying a manufacturer s product from stocking substitute brands this paper analyzes the impact of exclusive dealing on competition and allocative efficiency opinions expressed on the impact of exclusive dealing range from the extreme view that it is invariably anticompetitive to the view that it is always procompetitive the u s supreme court has concluded that in hundreds if not thousands of communities where there is a single retailer for a product

agency theory and franchising some empirical results this article provides an empirical assessment of various agency theoretic explanations for franchising including risk sharing one sided moral hazard and two sided moral hazard the empirical models use proxies for factors such as risk moral hazard and franchisors need for capital to explain both franchisors decisions about the terms of their contracts royalty rates and up front franchise fees and the extent to which they use franchising in this article i exploit several new sources of data on franchising to construct a cross section of 548 franchisors involved in various business activities in the united states in 1986 the data are most consistent with a model based on two sided moral hazard the empirical models are also more successful at explaining the extent to which franchisors choose to franchise stores than at explaining the terms of franchise contracts finally contrary to the predictions of several theoretical models i find that royalty rates and franchise fees are not negatively related

computer mediated transactions every now and then a set of technologies becomes available that sets off a period of combinatorial innovation think of standardized mechanical parts in the 1800s the gasoline engine in the early 1900s electronics in the 1920s integrated circuits in the 1970s and the internet in the last decade or so the component parts of these technologies can be combined and recombined by innovators to create new devices and applications since these innovators are working in parallel with similar components it is common to see simultaneous invention there are many well known examples such as the electric light the airplane the automobile and the telephone many scholars have described such periods of innovation using terms such as recombinant growth general purpose technologies cumulative synthesis and clusters of innovation the internet and the web are wonderful examples of combinatorial innovation in the last 15 years we have seen a huge proliferation of web applications all built from a basic set of component technologies the internet itself was a rather unlikely innovation i like to describe it as a lab experiment that got loose since the internet arose from the research community rather than the private sector it had no obvious business model other public computer networks such as aol compuserve and minitel generally used a subscription models but were centrally controlled and offered little scope for innovation at the user level the internet won out over these alternatives precisely because it offered a flexible set of component technologies which encouraged combinatorial innovation

institutional markets financial marketing and financial innovation firms and institutions are monitored and controlled through a complex set of implicit and explicit contractual relations because of these agency theoretic relations institu tional behavior in financial markets is not a simple reflection of the preference structures of individuals institutional preferences give rise to a demand for new financial instru ments and innovations even when the returns on these instruments are spanned in the sense of complete pricing the innovations can be thought of as solving moral hazard problems an agency theoretic example serves to illustrate the demand supply and financial marketing of stripped securities in short institutions matter the past two decades have witnessed an explosion of financial innovations the changes are too varied and diffuse to permit an easy taxonomy but broadly they seem to fall into two classes first there are the new securities and their markets beginning with puts and calls we have moved on to euromarkets mortgage pass throughs and cmo s strips straps and swaps putable converti bles primes and scores and s p futures and all of the other instruments that inhibit the financial zoo second there are the dynamic trading strategies that make heavy use of the new instruments basket and program trading the asset pricing theories that now characterize different types of money management and the various incarnations of portfolio insurance have changed financial decision making as dramatically as the available array of instruments has changed along with these changes has come an enormous increase in the demand for the services of financial economists we are called upon not only to value the new instruments and the new strategies but to design them as well like engineers

financial innovation and arbitrage pricing in frictional economies abstract frictional economies are fundamentally different from their frictionless counterparts for example in frictional economies the price function is sublinear and thus there will be incentives to innovate when decomposing existing securities and opening new markets innovators serve important economic functions such as allowing investors to obtain consumption at lower costs enabling investors to achieve better risk sharing and making the fundamental value of more payoffs observable in particular innovators serve these functions even when they introduce redundant securities that are not yet issued furthermore in frictional economies the replication based arbitrage valuation approach tends to overprice certain securities while underpricing others journal of economic literature classification numbers c61 g10 g12 g20

coordination via cost and revenue sharing in manufacturer retailer channels abstract the problem of establishing efficiency in a manufacturer retailer channel channel coordination is extensively discussed in the industrial economics the marketing and the operations research literature however studies considering consumer demand to be simultaneously affected by price and non price variables are scarce one subset of models investigates efficient contracts with non linear tariffs but requires mechanisms which are rarely observed in managerial practice the other subset analyses channel efficiency effects of alternative royalty payments but omits to design an efficient contract we contribute to this literature by investigating a contract of royalty payments that is sufficient for channel coordination based on the analysis of the underlying vertical externalities we show that channel coordination requires cost and revenue sharing via a revenue sharing rate and marketing effort participation rates on both manufacturer and retailer level some surprising findings are highlighted there exists a continuum of efficient contracts efficiency requires a retailer s participation of at least 50 in the manufacturer s cost of marketing effort moreover the elimination of double marginalisation is not necessary for channel coordination manufacturer and retailer can choose an efficient contract via bargaining over the wholesale price the main challenge for managers will be to create acceptance of new types of royalty payments based on a trustful manufacturer retailer relationship we also discuss the cases of the apple iphone market launch and of innovative restaurant franchising to further illustrate and underline the relevance of our results

revenue sharing and vertical control in the video rental industry revenue sharing contracts in which retailers pay a royalty on sales to their suppliers are now widely used in the video rental industry we show that revenue sharing is valuable in vertically separated industries in which demand is either stochastic unpredictable or variable e g systematically declining downstream inventory is chosen before demand is realized and downstream firms engage in intrabrand competition unlike two part tariffs revenue sharing achieves the first best outcome by softening retail price competition without distorting retailers inventory decisions our theories are also consistent with trends in prices and availability following retailers adoption of revenue sharing contracts

supply quality management with wholesale price and revenue sharing contracts under horizontal competition abstract in a number of industries e g the airplane industry aerospace industry auto industry or computer industry certain suppliers essentially have a monopoly on the production technology for key components and inevitably manufacturers in these industries have common suppliers a key part of manufacturers work with suppliers concerns improving the quality of their respective products which gives rise to a collaborative activity usually termed as supply quality management when the manufacturers are competitors they do not wish to see a common supplier dividing his involvement in quality improvement unequally between themselves and their rivals however as the suppliers collaborate with several manufacturers it is highly questionable whether their efforts will be strictly equivalent for each manufacturer in this paper a non cooperative dynamic game is formulated in which a single supplier collaborates with two manufacturers on design quality improvements for their respective products the manufacturers compete for market demand both on price and design quality the paper analyzes how each party should allocate resources for quality improvement over time in order to take into account the potential coordinating power of the compensation scheme adopted in this type of decentralized setting we compare the possible outcomes under a wholesale price contract and a revenue sharing contract

market share constraints and the loss function in choice based conjoint analysis choice based conjoint analysis is a popular marketing research technique to learn about consumers preferences and to make market share forecasts under various scenarios for product offerings managers expect these forecasts to be realistic in terms of being able to replicate market shares at some prespecified or base case scenario frequently there is a discrepancy between the recovered and base case market share this paper presents a bayesian decision theoretic approach to incorporating base case market shares into conjoint analysis via the loss function because defining the base case scenario typically involves a variety of management decisions we treat the market shares as constraints on what are acceptable answers as opposed to informative prior information our approach seeks to minimize the adjustment of parameters by using additive factors from a normal distribution centered at 0 with a variance as small as possible but such that the market share constraints are satisfied we specify an appropriate loss function and all estimates are formally derived via minimizing the posterior expected loss we detail algorithms that provide posterior distributions of constrained and unconstrained parameters and quantities of interest the methods are demonstrated using discrete choice models with simulated data and data from a commercial market research study these studies indicate that the method recovers base case market shares without systematically distorting the preference structure from the conjoint experiment

endogenous matching and the empirical determinants of contract form empirical work on contracts typically regresses contract choice on observed principal and agent characteristics if i some of these characteristics are unobserved or partially observed and ii there are incentives whereby particular types of agents end up contracting with particular types of principals estimated coefficients on the observed characteristics may be misleading we address this endogenous matching problem using a data set on agricultural contracts between landlords and tenants in early renaissance tuscany controlling for endogenous matching has an impact on parameters of interest and tenants risk aversion appears to have influenced contract choice

the effects of a content requirement on a foreign duopsonist abstract this paper considers the operation of a local content requirement in a duopsony between domestic and foreign firms and demonstrates its consequences for the domestic producer of a final good it is shown that content protection may have perverse effects on a foreign firm s profits and may be welfare improving overall shifting profits from the domestic firm to both the foreign firm and domestic input producers

transaction costs and the design of cropshare contracts modern cropshare contracts are explained using a model in which agents are risk neutral and contract rules are chosen to maximize expected joint wealth it is shown that the farmer either bears the entire cost of inputs or shares the costs with the landowner in the same proportion as the output the incentives of altering the cropshare percentage are examined and are used to derive implications about the portion of the crop that will be owned by the farmer the model is tested and supported using data from a 1986 survey offarmers and landowners in nebraska and south dakota

financial innovation the last twenty years and the next the word revolution is entirely appropriate for describing the changes in financial institu tions and instruments that have occurred in the past twenty years the major impulses to successful financial innovations have come from regulations and taxes the outlook for the future is for a slowing down of the rate of financial innovation but much growth and improvement are still in prospect

primes and scores an essay on market imperfections this paper investigates the reported relative mispricing of primes and scores to the underlying stock given transaction costs we establish arbitrage based bounds on prime and score prices we then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds we find that prime and score prices do exceed stock prices and often by a considerable amount we demonstrate that this increased value is most likely due to the score s ability to save on the costs of dynamic hedging we also show how short sale and trust size constraints impede the ability to arbitrage price disparities in an efficient market the price of a security reflects the value of its underlying assets it should not be possible therefore to create value simply by splitting a security into different parts since the underlying assets are unchanged the packaging of the cash flows should not matter the recent introduction of primes and scores suggests that this is not always the case by separating a security s cash flows into a dividend based component the prime and an appreciation or option based component the score developers of these securities have seemingly created two assets whose value separately exceeds that of the original stock since the prime and the score are based on the same underlying asset this raises a puzzling question about the actual efficiency of securities markets this paper investigates this anomaly by examining whether primies and scores are actuauy mispriced and if so why given the costs of transacting in the prime score and stock we establish bounds on prime and score prices that are consistent with no arbitrage opportunities we then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds this nonparametric procedure is designed both to confront the measurement error problems plaguing the literature i e nonobservable bid ask prices and nonsimultaneous prices see phillips and smith 1980 bhattacharya 1983 and bookstaber 1981 and to avoid the estimation of round trip transaction costs commissions we find the surprising result that prime and score prices exceed the price of the underlying stock often by a considerable amount using time series data we de monstrate that significant price differentials exist for each firm in our sample

pass through vertical contracts and bargains abstract this paper analyzes the determinants of pass through that are specific to vertical relationships between wholesalers and retailers the type of vertical agreement firms contract upon as well as their relative bargaining power are identified as major determinants of pass through rates

supply chain contract design under financial constraints and bankruptcy costs we study contract design and coordination of a supply chain with one supplier and one retailer both of which are capital constrained and in need of short term financing for their operations competitively priced bank loans are available and the failure of loan repayment leads to bankruptcy where default costs may include variable proportional to the firm s sales and fixed costs without default costs it is known that simple contracts e g revenue sharing buyback and quantity discount can coordinate and allocate profits arbitrarily in the chain with only variable default costs buyback contracts remain coordinating and equivalent to revenue sharing contracts but are pareto dominated by revenue sharing contracts when fixed default costs are present thus for general bankruptcy costs contracts without buyback terms are of most interest quantity discount contracts fail to coordinate the supply chain since a necessary condition for coordination is to proportionally reallocate debt obligations w

inventory dynamics and supply chain coordination this paper extends the theory of supply chain incentive contracts from the static newsvendor framework of the existing literature to the simplest dynamic setting a manufacturer distributes a product through retailers who compete on both price and fill rates we show that inventory durability is the key factor in determining the underlying nature of incentive distortions and their contractual resolutions when the product is highly perishable retailers are biased toward excessive price competition and inadequate inventories vertical price floors or inventory buybacks subsidies for unsold inventory can coordinate incentives in both pricing and inventory decisions when the product is less perishable the distortion is reversed and vertical price ceilings or inventory penalties can coordinate incentives

double sided moral hazard and the nature of share contracts contractual arrangements involving revenue profit sharing are often based on fairly simple often linear rules in addition in many contexts these contracts are not finely adjusted to the particular circumstances of individual agents or markets nor do they vary over time to the extent current theories based on optimal contracting suggest they should we develop a simple model of such revenue or profit sharing arrangements based on double sided moral hazard and show that this model can account for many of these stylized facts more specifically the model shows that linear contracts can be optimal and that benefits from customizing terms can in some cases be quite limited if not zero

subsidizing and taxing business procurement abstract this paper studies the effect of a subsidy or tax on a market where a downstream manufacturer uses a competitive tender to procure inputs from upstream suppliers subsidizing input production can result in input price decreases that are greater than the effective decrease in marginal costs that is overshifting occurs when the size of the subsidy is not too large the downstream firm can enjoy an increase in profits greater than the government expenditure on the subsidy a relatively weak sufficient condition for these results to hold is that suppliers earn a positive profit margin on the marginal unit sold before taking into account any subsidy payment stronger sufficient conditions tailored to each result are provided

the use of full line forcing contracts in the video rental industry bundling is at the forefront of many policy debates as new technologies allow firms to implement more complex bundling arrangements realistic analyses of bundling particularly between suppliers and retailers require detailed data on both supply arrangements and consumer demand we analyze firms use of bundling as a vertical restraint known as full line forcing using extensive supply and demand data from the video rental industry our model captures key details of the market that determine firms contractual choices and sheds light on the implications of these decisions the empirical approach provides a model for how to analyze bundling when detailed data are available jel d86 l14 l81 l82

empirical evidence on the role of non linear wholesale pricing and vertical restraints on cost pass through abstract how a cost shock is passed through to final consumer prices may relate to nominal price stickiness and rigidities the existence of nonadjustable cost components strategic markup adjustments or other contract terms along the supply distribution chain this paper presents a simple framework to assess the potential role of nonlinear pricing contracts and vertical restraints such as resale price maintenance or wholesale price discrimination in the supply chain in explaining the degree of pass through from upstream cost shocks in the ground coffee category to downstream retail prices we find that resale price maintenance increases pass through rate

coordination of supply chains with a flexible ordering policy under yield and demand uncertainty this paper studies a flexible ordering policy among a manufacturer and a supplier with random yield and demand uncertainty where the order quantity lies between the minimum and the maximum quantity we first determine the optimal flexible ordering policy and the corresponding raw material production quantity that maximize expected profit of the centralized supply chain and find that our flexible ordering policy can significantly enhance the supply chain s expected profit compared to an invariable ordering policy then we analyze the decentralized scenario and propose a revenue sharing policy with an order penalty and rebate opr contract to fully coordinate the supply chain finally numerical examples are given to illustrate the results

the failing firm defense this paper evaluates the welfare consequences of the failing firm defense ffd in the eu and u s merger laws to this end i combine an oligopoly model with an endogenous valuations auction model the ffd is shown to work reasonably well for consumers unless small firms are too small the ffd may however lead to total surplus losses due to a least danger to competition ldc condition which favors small and thus possibly inefficient firms it is also shown that in a multi firm setting the ffd increases the incentive for predation only when the assets are industry specific

contract choice in modern agriculture cash rent versus cropshare e conomists have expended enormous effort examining the rationale for various contractual arrangements in agriculture particularly sharecropping while economists have made considerable theoretical efforts to understand agricultural contracts few empirical studies have been undertaken the dearth of empirical analyses of agricultural contracts is particularly striking for modern western agriculture this is an important omission not only because the existing empirical work tends to focus on the question of efficiency but also because the theoretical models tend to examine contracts that bear little resemblance to those found in the united states today

implementing managerial constraints in model based segmentation extensions of kim fong and desarbo 2012 with an application to heterogeneous perceptions of service quality researchers have recently introduced a finite mixture bayesian regression model to simultaneously identify consumer market segments heterogeneity and determine how such segments differ with respect to active regression coefficients variable selection this article introduces three extensions of this model to incorporate managerial restrictions constraints the authors demonstrate with synthetic data that the new constrained finite mixture bayesian regression models can be used to identify and represent several constrained heterogeneous response patterns commonly encountered in practice in addition they show that the proposed models are more robust against multicollinearity than traditional methods finally to illustrate the proposed models usefulness the authors apply the proposed constrained models in the context of a service quality servperf survey of national insurance company s customers

multi sector model of tradable emission permits this paper presents a multi sector model of tradable emission permits which includes oligopolistic and perfectly competitive industries the firms in oligopolistic industries are assumed to exercise market power in the tradable permit market as well as in the product market specifically we examine the effects of the initial permit allocation on the equilibrium outcomes focusing on the interaction among these product and permit markets it is shown that raising the number of initial permits allocated to one firm in an oligopolistic industry increases the output produced by that firm under certain conditions raising a clean less polluting firm s share of the initial permits can lead to reductions in both the product and permit prices we discuss criteria for the socially optimal allocation of initial permits considering the trade off between production inefficiency and consumer benefit

using revenue sharing to implement flexible prices evidence from movie exhibition contracts movie exhibition contracts entail revenue sharing terms that go down with weeks since release we develop a simple model to show how the form of these contracts can be explained by the distributors desire to set flexible prices we then use detailed data on theater movie contracts in spain where we exploit the information available at the time of contracting for movies previously released in the u s and other movie and theater characteristics to show how the implications of our flexible pricing argument are supported in the data and differentiate our explanation from prior more standard risk sharing and moral hazard explanations

retail contracting theory and practice we summarize a number of regularities that arise in the empirical literature on contractual relationships between manufacturers and their exclusive resellers we do this using studies of traditional and business format franchise relationships as well as studies of salesforce integration decisions some of the patterns that we uncover are consistent with a standard incentive cum insurance theory of organization while others are not we brie y review some theoretical extensions that seem promising in terms of reconciling seeming con icts between theory and practice i introduction manufacturers of retail products must decide whether to sell their products to consumers themselves vertical integration or to sell via independent retailers vertical separation when manufacturers do not perform the sales function internally but want exclusive retailers they usually choose some form of franchising 1 many theories attempt to explain the choice of retail organizational form moreover a considerable body of empirical evidence concerning this choice is accumulating we attempt to evaluate this econometric evidence and relate it to the theories to accomplish this task we assess studies of franchising arrangements as well as studies of sales force organization in industrial settings the paper is organized as follows in the next section we highlight a number of regularities that arise in the empirical literature on retail contracting in particular we nd that i risk is positively related to the use of high powered incentives vertical separation ii the importance of the agent s eiort in production is positively related to the use of high powered incentives

optimal cross licensing arrangements collusion versus entry deterrence this paper analyzes optimal cross licensing arrangements between incumbent firms in the presence of potential entrants the optimal cross licensing royalty rate trades off incentives to sustain a collusive outcome vis a vis incentives to deter entry with the threat of patent litigation we show that a positive cross licensing royalty rate which would otherwise relax competition and sustain a collusive outcome dulls incentives to litigate against entrants our analysis can shed light on the puzzling practice of royalty free cross licensing arrangements between competing firms in the same industry as such arrangements enhance incentives to litigate against any potential entrants and can be used as entry deterrence mechanism

identifying unmet demand brand preferences and marketplace demand are a reflection of the importance of underlying needs of consumers and the efficacy of product attributes for delivering value dog owners for example may look to dog foods to provide specific benefits for their pets e g shiny coats that may not be available from current offerings an analysis of consumer wants for these consumers would reveal weak demand for product attributes resulting from low efficacy despite the presence of strong latent interest the challenge in identifying such unmet demand is in distinguishing it from other reasons for weak preference such as general noninterest in the category and heterogeneous tastes we propose a model for separating out these effects within the context of conjoint analysis and we demonstrate its value with data from a national survey of toothpaste preferences implications for product development and reformulation are explored

frontrunners and laggards the strategy of environmental regulation under uncertainty the extant literature on the political economy of environmental regulation does not provide a unified theoretical explanation for three salient stylized facts first companies voluntarily invest to reduce the environmental burden that they cause under threat of regulation second ex ante estimates of the compliance cost tend to be systematically higher than ex post estimates finally regulators use limited information provided by the industry i construct a game theoretic model of environmental regulation under uncertainty with a benevolent regulator in equilibrium companies undertake voluntary action to induce regulation that raises barriers to entry this profit driven behavior is not always socially detrimental however as the regulator obtains a credible commitment to production and a more accurate estimate of the compliance cost additionally the results provide a selection explanation for the mismatch between ex ante and ex post cost estimates if companies condition compliance on the installation cost only low cost companies install in equilibrium the analysis combines regulatory capture with social welfare maximization to explain the curious combination of voluntary action and low ex post compliance cost without serious information collection by the regulator

a characterization for the negative welfare effects of cost reduction in cournot oligopoly abstract this paper characterizes the welfare effects of cost reductions in a cournot model with linear costs under linear demand a small reduction in a firm s marginal cost reduces welfare if and only if its market share is less than 1 2n 2 or equivalently its marginal cost exceeds a critical level determined by the market a large cost reduction by the firm increases welfare if and only if its magnitude is at least twice the difference between the current marginal cost and its critical value the paper also extends the results to non linear demand but the characterizations become less tractable

empirical analysis of metering price discrimination evidence from concession sales at movie theaters prices for goods such as blades for razors ink for printers and concessions at movies are often set well above cost theory has shown that this could yield a profitable price discrimination strategy often termed metering the idea is that a customer s intensity of demand for aftermarket goods e g the concessions provides a meter of how much the customer is willing to pay for the primary good e g admission if this correlation in tastes for the two goods is positive a high price on the aftermarket good allows firms to extract a greater total price admissions plus concessions from higher type customers this paper develops a simple aggregate model of discrete continuous demand to motivate how this correlation can be tested using simple regression techniques and readily available firm data model simulations illustrate that the regressions can be used to predict whether aftermarket prices should be above below or equal to their marginal cost we then apply the approach to box office and concession data from a chain of spanish theaters and find that high priced concessions do extract more surplus from customers with a greater willingness to pay for the admission ticket

revenue sharing in movie exhibition and the arrival of sound i introduction at least since adam smith economists have been intrigued by share contracts there has been a proliferation of models most of which tend to explain the share contract as resulting from some mix of optimal risk bearing and optimal effort motivation 1 a large number of researchers have attempted to test these models empirically sharecropping contracts not surprisingly are the most intensively examined the bibliography in knoeber 2000 but similar studies have been conducted in many other areas for example martin 1988 and lafontaine 1992 examine franchise arrangements hallagan 1978 investigates contracts used to lease gold claims leffler and rucker 1991 analyze a sample of private timber sale contracts goldberg and erickson 1987 study long term contracts for the sale of petroleum coke aggarwal and samwick 1999 investigate incentive contracts between firms and their executives and chisholm 1997 goldberg 1997 and weinstein 1998 all examine profit sharing contracts between fi lm companies and the talent this article differs in an important respect from most previous studies which analyze a cross section of contracts in an attempt to determine how or whether they vary according to the attributes of the contracting parties or the products being contracted for instead it investigates an area where a sudden technology shock led to the rapid and widespread replacement of one form of contracting by another the industry is the motion picture business and the shock was the arrival of sound during the silent film era the vast majority of first run feature films were rented to cinemas for flat daily or weekly payments within two years of the release of the first sound picture revenue sharing contracts were the norm and they remain the norm to this day 2 my goal is to investigate the degree to which the standard economic concerns moral hazard risk sharing and measurement problems can explain this change because the contracting parties remained the same the question becomes what was altered in the nature of the product or in its provision so as to have altered correspondingly the incentives faced i conclude the following first the advent of sound fundamentally changed the inputs live music and other acts supplied by the exhibitor and central to the show were replaced by a soundtrack and short sound films supplied by the film company the benefit of deterring exhibitor shirking through the use of flat rental fees which made the exhibitor full residual claimant declined accordingly the party whose effort makes the largest contribution to marginal product generally receives the largest proportion of the residual claims and in the decades following the arrival of sound the proportion of residual claims collected by film companies rose steadily in addition average revenue per film increased with sound whereas the cost of ensuring that exhibitors reported attendance revenue honestly done by locating a film company s representative in the theater remained the same the ex post division of revenue necessary for revenue sharing thus became cheaper on a per film basis finally uncertainty ab out the value in terms of expected attendance revenue of the early sound films appears to have raised the cost of negotiating lump sum rental fees and thus promoted experiments with revenue sharing however although this may have contributed initially it cannot explain the practice s persistence uncertainty about film values declined as talking films became better known ii the nature of the problem a film company contracts with an exhibitor so that they may jointly produce the final good a movie presentation 3 to that end each supplies essential inputs the film company provides the movie itself assembled from a variety of inputs and some sort of national advertising support the exhibitor provides the theater which consists of seating projection equipment a refreshment stand and other support activities and some form of local advertising

selective contracts foreclosure and the chicago school view abstract i examine a mechanism by which exclusive supply contracts may inefficiently deter entry into the market in the model the incumbent supplier selectively offers contracts only to some buyers and convinces them to consent by guaranteeing them low prices the contracts strengthen the monopoly position of the incumbent supplier and allow it to extract rents from the remaining buyers that were not offered contracts aside from the favorable contract terms buyers have another reason to consent to the exclusivity scheme the latter raises the input costs of rival buyers that were not offered contracts the model has potential applications to the recent microsoft antitrust case 1994 i define exclusive supply contract as an agreement under which an upstream firm becomes the exclusive supplier of a downstream firm the downstream firm is prohibited from buying from other suppliers

valuation of risky assets in arbitrage free economies with frictions this paper derives a framework for arbitrage models in markets with frictions it generalizes the existence of a valuation operator to such markets as in perfect markets the valuation operator is a linear operator and its existence is implied by the no arbitrage condition in imperfect markets the valuation operator is individual specific and depends on the agent s position in the market the methodology employed in the paper is duality in convex programming

vertical relationships between manufacturers and retailers inference with limited data in this paper different models of vertical relationships between manufacturers and retailers in the supermarket industry are compared demand estimates are used to compute price cost margins for retailers and manufacturers under different supply models when wholesale prices are not observed the purpose is to identify the set of margins compatible with the margins obtained from estimates of cost and to select the model most consistent with the data among non nested competing models the models considered are 1 a simple linear pricing model 2 a vertically integrated model and 3 a variety of alternative strategic supply scenarios that allow for collusion non linear pricing and strategic behaviour with respect to private label products using data on yogurt sold in several stores in a large urban area of the u s the results imply that wholesale prices are close to marginal cost and that retailers have pricing power in the vertical chain this is consistent with non linear pricing by the manufacturers or high bargaining power of the retailers

which business model for e book pricing we characterize and compare equilibrium pricing strategies in a marketing channel in two scenarios in the first scenario the manufacturer chooses the wholesale prices of the two versions of a product i e tangible and digital and the retailer their prices to consumer in the second scenario the players use a revenue sharing contract for only the digital version while the competing version is managed by a wholesale price contract the problem is inspired from a pricing controversy in the e book industry

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

entry and product variety with competing supply chains we study a model where an endogenous number of competing manufacturers located around a circle contract with exclusive retailers who are privately informed about their costs the number of brands in the market determined by the manufacturers zero profit condition depends on the presence of asymmetric information and on the types of contracts between manufacturers and retailers with two part tariffs wholesale prices fully reflect retailers costs with linear contracts wholesale prices are constant and independent of retailers costs the number of brands is lower resp higher with asymmetric information than with complete information when contracts are linear resp with two part tariffs moreover although the number of brands is always higher with linear contracts than with two part tariffs joint profits of manufacturers and retailers are higher with linear prices we also discuss manufacturers incentives to choose different contract forms and analyze the effects of endogenous entry on welfare

liberalizing a distribution system the european car market we quantify the competitive effects of liberalizing the selective and exclusive distribution system in the european car market based on a model of oligopoly pricing with differentiated products we consider two possible competitive effects from liberalization i the creation of international intrabrand competition cross border trade which will result in a reduction of international price discrimination and ii a possible cumulative effect arising from a strengthening of national intrabrand competition which would result in reduced double marginalization we find that the reduction in international price discrimination mainly redistributes consumer gains across countries it has a positive but modest effect on total welfare if liberalization also has the cumulative effect of reducing double marginalization the welfare effects are much higher finally we find that the effects of liberalization on the manufacturers profits are either small or positive this finding implies that international price discrimination and softening competition through a double marginalization mechanism should not be interpreted as main profit motives for the previous distribution system but only as unintended side effects hence the industry rationale for maintaining the previous distribution system should be sought in other areas jel f15 l42

vertical bargaining and retail competition what drives countervailing power this article investigates the effects of changes in market concentration on the equilibrium prices in a supply chain results are derived from a theoretical model of bilateral bargaining between upstream and downstream firms which allows for general forms of demand and retail competition whether countervailing buyer power arises in the form of lower input prices following greater concentration downstream depends on the pass through rate of input prices to retail prices countervailing buyer power generally does not translate into lower retail prices because of heightened market power at the retail level

models for heterogeneous variable selection abstract preference heterogeneity is a major research stream in marketing aimed at quantifying and understanding the diversity of demand for product attributes and attribute levels in experimental settings in which consumers are presented with simple descriptions of product offerings continuous distributions of heterogeneity such as the multivariate normal provide a useful representation of preference however in more complex cases in which respondents have value for only a few of the benefits associated with an offering or cognitive constraints that result in selective attention to a subset of the information available continuous distributions of heterogeneity do not reflect the possibility that a subset of the variables has nonzero effect sizes for different respondents identifying which attributes are used in a brand choice decision is closely related to the statistical procedure of variable selection this article extends variable selection methods to accommodate heterogeneity across consumers

upgrades switching costs and the leverage theory of tying this article investigates the role of product upgrades and consumer switching costs in the tying of complementary products previous analyses have found that a monopolist of one product will not increase its profits and reduce social welfare by tying and leveraging its monopoly position into a complementary market if the initial monopolised product is essential where essential means that all uses of the complementary good require the initial monopolised product we show that this is not true in settings characterised by product upgrades and consumer switching costs we also discuss various extensions including the role of the reversibility of tying

good times bad times and vertical upstream integration abstract we consider a set of downstream firms each of which has a stochastic requirement for a particular input downstream firms can produce the input themselves yet do not trade it upstream firms produce the input to sell it through a walrasian market to downstream firms efficient pooling of capacities requires the input to be produced by upstream firms and traded in the market yet downstream firms will always vertically integrate by producing some of its own input needs a downstream firm cuts down on aggregate input demand thus depressing prices in the market

an empirical investigation of the welfare effects of banning wholesale price discrimination rand 054 rand2007 cls 1994 07 13 v1 2u standard latex document class rand rand 054 dispatch 12 7 2008 ce n a journal msp no no of pages 26 pe sharon rand journal of economics vol 40 no 1 spring 2009 pp 20 45 an empirical investigation of the welfare effects of banning wholesale price discrimination sofia berto villas boas economic theory does not provide sharp predictions on the welfare effects of banning wholesale price discrimination if downstream cost differences exist then discrimination shifts production inefficiently toward high cost retailers so a ban increases welfare if differences in price elasticity of demand across retailers exist discrimination may increase welfare if quantity sold increases so a ban reduces welfare using retail prices and quantities of coffee brands sold by german retailers i estimate a model of demand and supply and separate cost and demand differences simulating a ban on wholesale price discrimination has positive welfare effects in this market and less if downstream cost differences shrink or with less competition introduction wholesale price discrimination means that an upstream firm sets different prices for the same product for various downstream retailers wholesale price discrimination is commonly practiced in many markets examples include markets such as petroleum distribution steel heavy trucking tobacco and pharmaceuticals in several countries milk and other dairy products are sold using government administered or sanctioned discriminatory pricing schemes wholesale price discrimination practices are also used for services such as loans insurance and advertising 1 competition authorities have been concerned with wholesale price discrimination the european union treaty s article 82 c prohibits practices where a dominant firm would place trading partners at a competitive disadvantage the u s robinson patman act forbids discriminat ing in price between different purchasers where the effect may be to lessen competition unless the university of california berkeley sberto are berkeley edu i thank the editor igal hendel and two anonymous referees for many helpful comments and max auffhammer cyndi berck peter berck gal hochman silke januszewski forbes george judge kai uwe k uhn diana lazo mark muendler aviv nevo ariel pakes jeff perloff andrew sweeting miguel villas boas and participants at uc san diego university of michigan the inra idei conference in toulouse and the university of british columbia summer conference in industrial organization for their suggestions i thank daniel klapper for letting me have access to the data support from the giannini foundation and from an aes grant are gratefully appreciated see for gasoline markets texaco v hasbrouck 496 us 543 no 87 2048 1990 and the new york state motor fuel marketing practices act for steel chan hall and rust 2003 for heavy trucking volvo trucks north america inc v reeder simco gmc inc docket no 04 905 for tobacco brooke group ltd v brown and williamson tobacco corp 509 us 209 no 92 466 1993 for wholesale pharmaceuticals see http www datcp state wi us trade business unfair comp drug price jsp for dairy markets see for example gardner 1984 and for services see givens 1983 c 2009 rand copyright

regional free trade and social integration this paper analyzes recent free trade arrangements from a positive political economy perspective in contrast to most other literature which fails to take into account geographical factors it is argued here that proximity and transportation costs play an important role in trade arrangements another important also largely neglected factor is the degree of social cohesion in terms of labor standards among potential trading partners a political support maximizing government will consider these factors when balancing political support from free traders and protectionists

equilibrium incentives for exclusive dealing in a differentiated products oligopoly we consider the incentives for oligopolistic manufacturers to adopt exclusive dealing manufacturers producing differentiated brands can choose to distribute through exclusive retail dealerships or nonexclusive dealerships with nonexclusive dealing manufacturers face an interbrand externality because brand enhancing investments made by one manufacturer may benefit the brands of other manufacturers although exclusive dealing eliminates this externality oligopolistic manufacturers may not choose exclusive dealing exclusive dealing enhances the incentive to invest but the promotional investments are a form of competition between manufacturers thus manufacturers might earn higher profits with nonexclusive dealing making lower promotional investments we find cases in which nonexclusive dealing is a dominant strategy we also find cases in which some but not all manufacturers adopt exclusive dealing moreover even if adoption of exclusive dealing by all manufacturers is the equilibrium it can arise from a prisoner s dilemma in that each manufacturer would prefer nonexclusive dealing

automobile prices in market equilibrium with unobserved price discrimination in markets where sellers are able to price discriminate or the buyers to bargain individuals receive discounts over the posted prices that are usually not observed by the econometrician this paper considers the structural estimation of a demand and supply model a la berry et al 1995 when only posted prices are observed we consider that heterogeneous discounts occur due to price discrimination by firms on observable characteristics of consumers within this framework identification is achieved by assuming that the marginal costs of producing and selling the goods do not depend on the characteristics of the buyers we also require a condition relating the posted prices to the prices actually paid for instance we can assume that at least one group of individuals pays the posted prices under these two conditions the demand and supply parameters as well as the exact discounts corresponding to each type of consumers can be identified we apply our methodology to estimate the demand and supply in the new automobile market in france results suggest that discounting arising from price discrimination is important the average discount is estimated to be 10 5 with large variation depending on the buyers characteristics and cars specifications our results are in line with discounts generally observed in european and american automobile markets

effective securities in arbitrage free markets with bid ask spreads at liquidation a linear programming characterization abstract we consider a securities market with bid ask spreads at any period including liquidation although the minimum cost super replication problem is non linear we introduce an auxiliary problem that allows us to characterize no arbitrage via linear programming techniques we introduce the notion of effective new security and show that effectiveness restricts the no arbitrage bid and ask prices of a new security to the interval defined by the minimum cost problem we discuss in detail the cases in which the boundaries of this interval can be reached without violating no arbitrage

the elementary economics of social dilemmas a social dilemma is in essence a prisoners dilemma in a continuous strategy space i discuss a number of social dilemmas that have caught my attention offer an elementary diagrammatic synthesis of them and discuss some of the economic insights that the diagrams capture including incentives for pre commitment finally i model pre commitment via delegation and link results to the literature on the evolution of preferences l economie elementaire des dilemmes sociaux un dilemme social est essentiellement un dilemme du prisonnier dans un espace continu de strategie l auteur discute d un certain nombre de dilemmes sociaux qui ont retenu son attention il en propose une synthese graphique elementaire et discute certaines des suggestions economiques qui decoulent de ces diagrammes comme par exemple les incitations a se pre engager finalement l auteur construit un modele de pre engagement par delegation et relie ses resultats a la litterature sur l evolution des references

how complex do movie channel contracts need to be the motion picture industry is characterized by a dynamic market environment limited shelf space and product category management and consequently complex channel contracts specifying the split of box office revenue between distributors and exhibitors although such a contracting practice creates a considerable administrative effort and channel conflict it is not clear whether such complexity is necessary for superior channel performance this study investigates this question by analyzing the impact of movie contract structure on movie scheduling and channel member profitability we develop and analyze a game theoretic model using the genetic algorithm approach and a decision support system silverscreener to capture strategic behaviors of channel members in a complex market environment we find that simpler two part tariff or 50 50 split contracts perform as well as the current contracts thus the complexity of the market environment need not be reflected in the complexity of the channel contracts channel contract structure has significant impact on channel member profitability and the exhibitor s movie scheduling behavior in particular our results indicate that the flat rate contract structure represents an attractive alternative to the current practice for distributors