irreversible investment with regime shifts under the real options approach to investment under uncertainty agents formulate optimal policies under the assumption that firms growth prospects do not vary over time this paper proposes and solves a model of investment decisions in which the growth rate and volatility of the decision variable shift between different states at random times a value maximizing investment policy is derived such that in each regime the firm s investment policy is optimal and recognizes the possibility of a regime shift under this policy investment is intermittent and increases with marginal q moreover investment typically is very small but in some states the capital stock jumps implications for marginal q and the user cost of capital are also examined

evidence on the choice of inventory accounting methods lifo versus fifo in this paper we describe various systematic properties of lifo and fifo firms accounting numbers included are assessments of these properties for firms reported annual numbers and for their as if counterparts obtained by estimating what lifo fifo firms would have reported had they used the fifo lifo inventory method instead our purpose in conducting these assessments is to provide additional evidence on tax and nontax explanations of firms choices of inventory accounting methods in the next subsection we elaborate on these two classes and suggest that the nontax explanations may have attracted adherents partly because existing empirical evidence is not entirely consistent with the tax explanation of lifo fifo choices of inventory accounting methods although data limitations prevent us from performing direct tests of these alternative explanations our empirical results

dynamic conjectural variations in a lanchester oligopoly an approach based on dynamic conjectural variations is advanced for developing dynamic advertising strategies in a lanchester oligopoly differential game the approach allows competitors to anticipate rival reactions to market share state variables and maintains the computational advantage of open loop nash equilibrium strategies in an empirical application to the ready to eat cereal industry it is shown that advertising strategies based on dynamic conjectural variations can better explain the advertising of the cereal competitors than can open loop advertising strategies

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

real options agency conflicts and optimal capital structure abstract we examine the impact of a stockholder bondholder conflict over the timing of the exercise of an investment option on firm value and corporate financial policy we find that an equity maximizing firm exercises the option too early relative to a value maximizing strategy and we show how this problem can be characterized as one of overinvestment in risky investment projects equityholders incentive to overinvest significantly decreases firm value and optimal leverage and significantly increases the credit spread of risky debt numerical solutions illustrate how the agency cost of overinvestment and its effect on corporate financial policy vary with firm and project characteristics

contingent capital with a capital ratio trigger contingent capital in the form of debt that converts to equity when a bank faces financial distress has been proposed as a mechanism to enhance financial stability and avoid costly government rescues specific proposals vary in their choice of conversion trigger and conversion mechanism we analyze the case of contingent capital with a capital ratio trigger and partial and ongoing conversion the capital ratio we use is based on accounting or book values to approximate the regulatory ratios that determine capital requirements for banks the conversion process is partial and ongoing in the sense that each time a bank s capital ratio reaches the minimum threshold just enough debt is converted to equity to meet the capital requirement so long as the contingent capital has not been depleted we derive closed form expressions for the market value of such securities when the firm s asset value is modeled as geometric brownian motion and from these we get formulas for the fair yield spread on the convertible debt a key step in the analysis is an explicit expression for the fraction of equity held by the original shareholders and the fraction held by converted investors in the contingent capital this paper was accepted by gerard p cachon stochastic models and simulation

the effects of inflation and time value of money on an economic order quantity model with a random product life cycle abstract for several decades the economic order quantity eoq model and its variations have received much attention from researchers recently there has been an investigation into an eoq model incorporating a random product life cycle and the concept of time value of money this paper extends the previous research in several areas first we investigate the impact of inflation on the choice of replenishment quantities second the unit cost which has been inadvertently omitted in the previous research is included in the objective function to properly model the problem third we consider the normal distribution as a product life cycle in addition to the exponential distribution fourth we develop a simulation model which can be used for any probability distribution

transfer pricing in a dynamic marketing operations interface abstract a transfer price mechanism is proposed to coordinate the strategies of the marketing and operations functional areas operating in a dynamic interface environment in a decentralized firm marketing and operations are strategic decision makers in a differential game in which marketing has price and advertising and operations has production as control variables and advertising goodwill and production backlog are state variables a constant transfer price is entered into the objective functionals for marketing and operations and subgame perfect feedback strategies are derived for price advertising and production as functions of the state variables the feedback strategies allow a solution for the dynamic system involving goodwill and backlog and the total payoff to the firm the sum of the payoffs to marketing and operations is determined as a function of the transfer price finally for certain parameter conditions an interior maximum of the payoff function is achieved and the optimal transfer price is identified

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

when do banks take equity in debt restructurings this article examines the conditions under which bank lenders make concessions by taking equity in financially distressed firms i show that the role banks play in debt restructurings depends on the financial condition of the firm the existence of public debt in the firm s capital structure and the ability of public debt to be restructured empirically i find that for firms with public debt outstanding banks never make concessions unless public debtholders also restructure their claims when banks do take equity on average they obtain a substantial proportion of the firm s stock and they maintain their position for over two years article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

on modeling the advertising operations interface under asymmetric competition abstract using a market share attraction structure of advertising competition and following a supermodular game approach this article demonstrates for an asymmetric oligopoly the directional impact of changes in model parameters on the marketing controlled variables of all rivals advertising budgets and the operations controlled variables of all rivals ordered quantities importantly the various changes are examined analytically empirically and numerically in both non dominated and dominated asymmetric oligopolies in this regard the results indicate that firms in a dominated oligopoly one firm of market share larger than or equal to 50 behave differently compared to firms in a non dominated oligopoly each firm of market share less than 50 in response to changes in model parameters furthermore changes in model parameters are investigated in terms of their relative influential impact on a variety of equilibrium measures in this regard the findings indicate that for the analyzed model the marketing parameters exert much more influence on the equilibrium measures than the operations parameters additionally a change in the mode of competition from non cooperation oligopoly to cooperation joint ownership dictates that strong asymmetric firms of favorable marketing and operations parameters continue advertising but at lower levels and weak asymmetric firms of less favorable parameters cease advertising altogether

a stochastic inventory model incorporating intra year purchases and accounting tax incentives it has been observed that firms alter year end inventory policies in response to accounting tax incentives this study proposes a stochastic ordering policy model which quantifies these effects an innovative feature is its use of two decision variables an initial order up to level at the beginning of each year and a desired year end inventory level the ability to place a second order after demand has been assessed allows for an explicit consideration of the effects of tax incentives on order quantity decisions separate formulations are developed for the two most widely used inventory accounting methods lifo and fifo the model provides new implications for choices between lifo and fifo the forms of optimal ordering policies under each and for year end inventory levels a procedure is given for calculating the optimal fifo policy calculating optimal lifo policies is very difficult so myopic approximate policies are given which bound the optimal policy

mergers with differentiated products the case of the ready to eat cereal industry traditional merger analysis is difficult to implement when evaluating mergers in industries with differentiated products i discuss an alternative which consists of demand estimation and the use of a model of postmerger conduct to simulate the competitive effects of a merger i estimate a brand level demand system for ready to eat cereal using supermarket scanner data and use the estimates to 1 recover marginal costs 2 simulate postmerger price equilibria and 3 compute welfare effects under a variety of assumptions the methodology is applied to five mergers two of which occurred and for which i compare predicted to actual outcomes

discount pricing decisions in distribution channels with price sensitive demand abstract in this paper we evaluate the effectiveness of quantity discounts and volume discounts as coordination mechanisms in distribution channels with demand that is price sensitive we consider a single vendor single retailer distribution channel demand for the product arises only at the retailer the demand faced by the retailer is assumed to be deterministic but price elastic the retailer in turn buys the product from the vendor the vendor and the retailer act independently and rationally each maximizing their own respective profit the equilibrium point that specifies the vendor s and buyer s inventory and pricing policy is determined by the solution to a stackelberg game we consider the cases when quantity discount and volume discount respectively are offered we develop methods to determine the optimal discount policy for these cases we then consider the case where both volume and quantity discounts are offered simultaneously and develop a method to determine the optimal simultaneous discount offer the relative performance of the alternative discount schemes is then evaluated through a numerical study the results of the study demonstrate that the effectiveness of volume discount as a coordination mechanism is higher when the sensitivity of demand to price changes is higher the effectiveness of quantity discount on the other hand is higher with lower price sensitivity of demand finally the results also demonstrate that perfect coordination is achieved when volume and quantity discounts are offered simultaneously

technical note simplified estimation procedures for mci models structural transformations of the mci model are presented which make the model easily estimated using dummy variables with widely available regression packages the mci model is empirically shown to provide better predictive power than several other models of similar form but ones which do not produce logically consistent market share estimates

valuing commercial mortgages an empirical investigation of the contingent claims approach to pricing risky debt this paper empirically investigates a contingent claims model of commercial mortgage pricing we find that the magnitude of the observed default premia for a sample of nonprepayable fixed rate bullet mortgages can be explained by the contingent claims model in addition the model explains a significant proportion of the period to period changes in the default premia however given an assumed negative correlation between building value changes and interest rate changes the model s risk structure tends to increase less steeply with increasing maturity than the observed risk structure since the seminal work of black and scholes 1973 corporate liabilities have been modeled as options on the total value of the firm this contingent claims approach to bond pricing was refined by merton 1974 to allow for cash dispersals prior to the bonds maturities and by brennan and schwartz 1980 and ingersoll 1987 to allow for interest rate uncertainty although variants of these bond pricing models are currently being used extensively on wall street they have not been tested extensively moreover empirical studies have not successfully accounted for the observed spread between the rates on risky and default free debt jones mason and rosenfeld 1984 empirically investigate a model that assumes a nonstochastic term structure of interest rates while ramaswamy and sundaresan 1986 examine a model with stochastic interest rates to price floating rate notes in both cases the models could not explain the observed default premia the relative lack of empirical analysis is due partly to the complicated nature of corporate bonds major corporations generally have a large number of different bond issues outstanding that have different priorities in the event that the firm goes bankrupt moreover the bonds can have a variety of covenants specifying sinking fund provisions conditions under which technical default will occur and other restrictions that can have an impact on their value although these complications do not preclude pricing various bond issues on a case by case basis they make it difficult to test systematically the accuracy of the pricing model

a conceptual framework for the stock price effects of lifo tax benefits this paper presents a conceptual evaluation of the stock price effects of lifo tax savings in periods of inflation adopting lifo can create cash flow benefits by deferring tax payments whether lifo tax savings are valued by investors has been extensively investigated through examinations of the stock price reaction to initial announcements of lifo adoptions 1 while evidence of positive abnormal returns at announcements of lifo adoptions proportional to the projected nominal lifo tax savings would be viewed as consistent with investors recognizing the expected tax benefits of lifo overall empirical evidence available to date does not indicate that lifo adoption related abnormal returns are positively associated with the size of potential nominal lifo tax savings 2

price induced patterns of competition this research focuses on how price changes influence the observed pattern of brand competition the paper begins with a basic utility model formulation and examines the implications of three major classes of preference distributions on the expected patterns of competition a price tier model is proposed to operationalize the theory and to allow predictive testing the price tier model is estimated on 28 brands across four product categories the results show a specific asymmetric pattern of price competition higher price higher quality brands steal share from other brands in the same price quality tier as well as from brands in the tier below however lower price lower quality brands take sales from their own tier and the tier below brands but do not steal significant share from the tiers above the results are consistent with a bimodal preference distribution with the regular price indifference point being located toward the lower quality end of the preference distribution for the categories analyzed

managing interacting accounting measures to meet multiple objectives a study of lifo firms abstract using a sample of lifo users we examine the strengths and weaknesses of adopting a simultaneous equations approach to study managers adjustments of interacting accounting measures that meet multiple objectives we focus on the importance of considering differences in the costs and the effectiveness of adjusting accounting measures in addition we examine managers objectives in subsequent years and how adjustments reversals affect those objectives although generally consistent with earlier studies of lifo inventory adjustments our results indicate that modelling interacting accounting measures such as other current accruals and depreciation leads to differing conclusions about the role of taxes

on the design of contingent capital with a market trigger contingent capital cc which intends to internalize the costs of too big to fail in the capital structure of large banks has been under intense debate by policy makers and academics we show that cc with a market trigger in which direct stake holders are unable to choose optimal conversion policies does not lead to a unique competitive equilibrium unless value transfer at conversion is not expected ex ante the no value transfer restriction precludes penalizing bank managers for taking excessive risk multiplicity or absence of an equilibrium introduces the potential for price uncertainty market manipulation inecient capital allocation and frequent conversion errors these results point to the need to explore alternative designs of a prudential capital structure for banks jel classication

resolving lifo uncertainty a theoretical and empirical reexamination of 1974 75 lifo adoptions and nonadoptions this study reexamines the lifo adoption decision by focusing on what can be inferred about the sophistication of managers and investors decision making through analyzing the effect on stock prices of the resolution of publicly disclosed uncertainty about the lifo adoption nonadoption decision i establish and test implications of three models of the lifo adoption nonadoption decision the traditional tax benefit model an extension of kang s 1988 real value model and a functional fixation model each model yields distinct predictions about the mean excess stock return when uncertainty about the lifo adoption nonadoption decision is resolved and about the cross sectional relations between individual excess stock returns and several explanatory

linking advertising and quantity decisions in the single period inventory model abstract the single period problem spp also known as the newsboy or news vendor problem is to find the order quantity which maximizes the expected profit in a single period probabilistic demand framework interest in the spp remains unabated and many extensions to it have been proposed in the last decade an important aspect of the spp is the effect of advertising on sales in this paper we extend the spp to a case in which advertising leads to increases in sales we assume that the mean demand is increasing and concave in advertising expenditure and address three cases of demand variance as a function of advertising expenditure 1 demand has constant variance 2 demand has constant coefficient of variation and 3 demand has an increasing coefficient of variation we deal with two objectives a maximizing the expected profit and b maximizing the probability of achieving a target profit we provide closed or near closed form solutions to the problem under uniform exponential and normal demand distributions we illustrate the results using numerical examples and provide some insights into the effect of advertising

real options and contingent convertibles with regime switching abstract we consider a firm with no assets in place but an option to invest in a project the investment is irreversible but delayable in a regime switching economy the firm issues equity straight bonds sbs and contingent convertibles cocos we provide the closed form prices for the firm s securities and the pricing and timing of the option our numerical analyses discover that issuing cocos instead of sbs induces much less agency cost of debt the agency cost is higher in a boom economy than in recession but the difference is small there is a unique cocos conversion ratio such that the agency cost arrives at the minimum value zero the inefficiencies arising from asset substitution and debt overhang are much more significant in recession than in boom only if the conversion ratio is not too small the two inefficiencies disappear during boom periods while the effects of the conversion rate on optimal capital structure and firm value and those of supervision and jump intensity on optimal cocos coupon are ambiguous and weak the stricter the supervision or the longer the economy remains in recession the less the option value and the optimal sbs coupon

debt valuation renegotiation and optimal dividend policy the valuation of debt and equity reorganization boundaries and firm s optimal dividend policies are studied in a framework where we model strategic interactions between debt holders and equity holders in a game theoretic setting which can accommodate varying bargaining powers to the two claimants two formulations of reorganization are presented debt equity swaps and strategic debt service resulting from negotiated debt service reductions we study the effects of bond covenants on payout policies and distinguish liquidity induced defaults from strategic defaults we derive optimal equity issuance and payout policies the debt capacity of the firm and the optimal capital structure are characterized

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

cooperative advertising models in supply chain management a review this paper reviews articles on cooperative advertising a topic which has gained substantial interest in recent years thereby we first briefly distinguish five different definitions of cooperative advertising which can be found in operations research literature after that we concentrate on vertical cooperative advertising which is the most common object of investigation it is understood as a financial agreement where a manufacturer offers to pay a certain share of his retailer s advertising expenditures in total we identified 58 scientific papers considering mathematical modeling of vertical cooperative advertising these articles are then analyzed with regard to their general model setting e g the underlying supply chain structure and design of the cooperative advertising program after that we explain the different demand and cost functions that are employed whereupon we distinguish between static and dynamic models the last dimension of our review is dedicated to the game theoretic concepts which are mostly used to reflect different forms of distribution of power within the channel

theory and evidence on the resolution of financial distress we analyze a financially distressed owner managed project the main results of the model are 1 borrower default is an endogenous response to the anticipated restructuring foreclosure outcome 2 the lender s restructuring foreclosure decision depends critically on the interaction between project value and industry liquidity and 3 the lender waits for the industry to recapitalize before selling assets obtained through foreclosure empirical analysis of a large sample of defaulted commercial real estate loans supports many of the model predictions including restructuring foreclosure outcomes that are consistent with endogenous borrower default and firesale discounts that vary depending on industry market conditions at the time of foreclosure jel g33 copyright 2006 oxford university press

an empirical investigation of advertising strategies in a dynamic duopoly the equilibrium profit maximizing advertising policies of firms operating in a dynamic duopoly are derived by linking in a single framework the econometric estimation of the market response function and the technique of differential games that characterizes dynamic competitive behavior we use the lanchester model of combat to represent the system dynamics that capture the competitive shifts due to investments in advertising by the two market rivals we determine the equilibrium advertising levels using both closed and open loop policies we also compare these equilibrium advertising policies for each firm to those obtained using an optimal control theory formulation wherein the advertising spending levels of the rival are assumed to be known the empirical results obtained by analyzing the advertising rivalry between coke and pepsi for the period 1968 1981 under the above three alternative spending policies provide some interesting insights into the nature of competition between these two market rivals a significant contribution of this paper is to extend the existing literature on advertising competition by integrating theoretical and empirical analyses

a differential game model of the marketing operations interface in the development of their dynamic strategies the marketing and operations functions within a firm have differing objectives and conflict between the two functions is common the strategic interdependence involving marketing and operations decisions is modeled as a noncooperative differential game demand is assumed to be a function of price and advertising goodwill and marketing controls price and advertising to maximize its discounted stream of revenue net of advertising costs backlogging is allowed and operations controls production to minimize its discounted stream of production and backlog costs a feedback nash equilibrium is derived for the game which allows a solution of the system of differential equations for goodwill and backlog and is analyzed to study the nature of the dynamic strategies for price advertising and production

asymmetric competition in choice and the leveraging of competitive disadvantages studies of grocery sales show that consumers of store brands switch to price discounted national brands more than consumers of national brands switch to discounted store brands such asymmetric price competition can be explained with numerous mechanisms proposed here and elsewhere we report a choice experiment that replicates asymmetric price competition favoring higher quality competitors and demonstrates asymmetric quality competition favoring lower quality competitors also demonstrated are multiple mechanisms contributing to competitive asymmetries where dominance involving the otherwise preferred brand is particularly potent e g when a higher quality competitor matches the price of an otherwise preferred lower quality brand the findings implicate modifications to 1 theories of decision making when extended to repeat choice 2 empirical models of secondary purchase data and 3 strategies for positioning and attacking brands whereas improving competitive disadvantages often attracts consumers from competitors more than does improving competitive advantages this benefit must be weighed against the differentiation sacrificed by improving competitive disadvantages improving competitive advantages in contrast increases differentiation

the effect of state foreclosure laws on loan losses evidence from the mortgage insurance industry this paper analyzes the effect of three major provisions of state foreclosure laws procedure redemption period and provision for deficiency judgment on loan losses as reflected in the claims paid by private mortgage insurers and the fha it also explores the significance of the incentive conflict between the lender and the insurer in terms of the presence or absence of a coinsurance relationship and the existence of a deficiency judgment the results demonstrate that foreclosure laws have a significant effect on loan losses and that the existence of a deficiency judgment affects the incentive conflict between lender and insurer copyright 1990 by ohio state university press

an empirical study on the lanchester model of combat for competitive advertising decisions this paper presents an empirical study on the lanchester model of combat for competitive advertising decisions three issues are evaluated i the specification of the market share response model ii the effect of inflation on the estimation of the response model and iii the performance of competitive strategies it is shown that a the square root function that is used in previous studies is often inappropriate to characterize the market share response model b market share variations are more responsive to current advertising expenditures c closed loop nash equilibrium strategies are better competitive advertising strategies for firms to maximize profits than open loop nash equilibrium strategies and d finally general perfect equilibria nash equilibrium strategies developed by case are usually not good competitive advertising strategies for firms to maximize profits

stochastic dynamic market share attraction games abstract a dynamic oligopoly model having a market share attraction form is formulated as a stochastic sequential game market shares evolve randomly over time according to dynamics that incorporate a general lag structure the model incorporates goodwill as a measure of current and past effort decisions qualitative properties of closed loop equilibrium strategies are developed by establishing a relationship between an equilibrium point of the dynamic stochastic game and an associated static one period game journal of economic literature classification number c73

the profit benefits of category management the practice of category management i e empolying a single decision maker who is responsible for a firm s product line has been advocated as a superior alternative to brand management i e in

conflicts of interest and market illiquidity in bankruptcy auctions theory and tests i develop and estimate a model of cash auction bankruptcy using data on 205 swedish firms the results challenge arguments that cash auctions as compared to reorganizations are immune to conflicts of interest between claimholders but lead to inefficient liquidations i show that a sale of the assets back to incumbent management is a common bankruptcy outcome sale backs are more likely when they favor the bank at the expense of other creditors on the other hand inefficient liquidations are frequently avoided through sale backs when markets are illiquid that is when industry indebtedness is high and the firm has few nonspecific assets the problem of designing an efficient bankruptcy law has received considerable attention in the last decade much of the debate has centered around the optimality of two different stylized bankruptcy procedures cash auctions such as the u s chapter 7 code and structured bargaining represented by the u s chapter 11 reorganization code recently several european countries including france germany and great britain have changed their bankruptcy regulation by introducing reorganization procedures similar to chapter 11 at the same time the chapter 11 code has been criticized by academics including baird 1986 emphasizing that the bargaining procedure frequently results in long and wasteful negotiations these critics argue that chapter 11 should instead be replaced with a mandatory auction procedure other researchers such as aghion hart and moore 1992 and shleifer and vishny 1992 have pointed out that a cash auction is likely to suffer from considerable inefficiencies arising from transaction costs and market illiquidity the nature and costs of the chapter 11 procedure are

rationalizability learning and equilibrium in games with strategic complementarities we study a rich class of noncooperative games that includes models of oligopoly competition macroeconomic coordination failures arms races bank runs technology adoption and diffusion r d competition pretrial bargaining coordination in teams and many others for all these games the sets of pure strategy nash equilibria correlated equilibria and rationalizable strategies have identical bounds also for a class of models of dynamic adaptive choice behavior that encompasses both best response dynamics and bayesian learning the players choices lie eventually within the same bounds these bounds are shown to vary monotonically with certain exogenous parameters we study the class of noncooperative supermodular games introduced by topkis 1979 and further analyzed by vives 1985 1989 who also pointed out the importance of these games in industrial economics supermodular games are games in which each player s strategy set is partially ordered the marginal returns to increasing one s strategy rise with increases in the competitors strategies so that the game exhibits strategic complementarity 2 and if a player s strategies are multidimensional marginal returns to any one com ponent of the player s strategy rise with increases in the other components this class turns out to encompass many of the most important economic applications of noncooperative game theory in macroeconomics diamond s 1982 search model and bryant s 1983 1984 rational expectations models can be represented as supermodular games in each of these models more activity by some members of the economy raises the returns to increased levels of activity by others in oligopoly theory some models of bertrand oligopoly with differentiated products qualify as supermodu lar games in these games when a firm s competitors raise their prices the marginal profitability of the firm s own price increase rises a similar structure is present in games of new technology adoption such as those of dybvig and spatt 1983 farrell and saloner 1986 and katz and shapiro 1986 when more users hook into a communication system or more manufacturers adopt an interface standard the marginal return to others of doing the same often rises similarly in some specifications of the bank runs model introduced by diamond and dybvig 1983 when more depositors withdraw their funds from a bank it is more worthwhile for other depositors to do the same in the warrant exercise

on the generalizability of advertising pulsation monopoly results to an oligopoly this paper introduces for the first time an analytical framework for modeling and analyzing sales response to advertising pulsation for competitive markets of mature products in continuous time for discrete piecewise policies that allow unequal cycle lengths employing a nash equilibrium solution concept this study supported with numerical analysis demonstrates that there is an oligopolistic as opposed to a monopolistic justification for advertising at a constant rate in the presence of concave response functions or advertising according to a pulsing policy in the presence of s shaped response functions the article employs a modeling framework whereby each of a set of competitors responses to advertising spending is governed mainly by lanchester type response is used to analyze the game resulting from cyclical advertising policies that are strictly adhered to by all players a non discounted averaged performance is used to assess the purported optimality of different variants of piecewise constant policies

nondiscriminating foreclosure and voluntary liquidating costs since liquidation and bankruptcy are costly researchers have tried to find out why the claimants of a troubled firm do not work out a deal to avoid these costs in this article we show that if a creditor has to deal with multiple borrowers who might default it may be optimal for the creditor to randomly reject requests for a loan workout we further demonstrate that the optimal acceptance rate used by a creditor is positively related to the liquidating cost and negatively related to the default benefit our model is particularly relevant when analyzing the default decisions of mortgage borrowers and small business owners copyright 2002 oxford university press

empirical analysis of closed loop duopoly advertising strategies closed loop perfect equilibria in a lanchester duopoly differential game of advertising competition are used as the basis for empirical investigation two systems of simultaneous nonlinear equations are formed one from a general lanchester model and one from a constrained model two empirical applications are conducted in one involving coca cola and pepsi cola a formal statistical testing procedure is used to detect whether closed loop equilibrium advertising strategies are used by the competitors rather than open loop strategies in the second application involving anheuser busch and miller the general model is estimated results indicate that closed loop equilibria better explain dynamic advertising competition than do open loop equilibria also closed loop equilibrium advertising strategies implied by model estimates show that competitive advertising levels may or may not be monotonic in market share

quality improvement and goodwill accumulation in a dynamic duopoly abstract this paper analyzes optimal advertising and quality improvement decisions by duopolist firms competing in a dynamic setting an extended version of the lanchester model is formulated where conformance quality and goodwill are both involved in competition for market share each competitor s new customer attraction rate depends on its own goodwill while the disloyalty rate for current customers is influenced by the proportion of defective items the search for a non cooperative solution by qualitative as well as numerical means leads to definition of the optimal path for advertising and improvement efforts for each competitor examined under a wide range of configurations