behavioral demand effects when buyers anticipate inventory shortages abstract firms often worry about how buyers will react when there is an inventory shortage but the anticipation of facing a shortage may also impact buyer behavior in this paper we use a combination of theoretical modeling computational methods and laboratory experiments to understand buyers search behavior in markets where there is potential for either a costly or costless inventory shortage when inventory shortages are costly to buyers we find their equilibrium purchasing strategy generates a newsvendor problem among the firms in turn experimental data suggests buyer behavior can be explained by prospect theory better than by standard assumptions of fully rational expected utility maximizing agents indicating that potential inventory shortages generate loss aversion among buyers and there is systematic mis identification of the probability with which they will be able to procure an item using computational methods we find firms are able to extract more surplus from behavioral buyers via higher prices than would be predicted by the standard model on the other hand when inventory shortages are not costly to buyers the effect of behavioral biases on the part of buyers is not relevant but in this case there can be a benefit to reducing inventory via a reduction in price competition

loss aversion and rationality in the newsvendor problem under recourse option abstract risk neutral assumption in the newsvendor problem under recourse option predicts the order quantity insensitive to the selling price and risk aversion modeled through common utility functions gives decreasing order quantity with increasing selling price in this paper we consider loss aversion to model the choice preference of the decision maker in the newsvendor problem under recourse option and prove that loss aversion predicts the rational ordering behavior of the newsvendor with respect to the changes in price and cost parameters further we find that loss aversion can significantly improve the performance of utility function based models in predicting the rational behavior we extend the analysis to a supply chain setting and establish coordinating contract between a loss averse retailer facing a newsvendor problem and a risk neutral supplier under recourse option we find that the contract parameter does not depend on the loss aversion hence the same contract can be implemented with retailers with different levels of loss aversion

behavioral causes of the bullwhip effect and the observed value of inventory information the tendency of orders to increase in variability as one moves up a supply chain is commonly known as the bullwhip effect we study this phenomenon from a behavioral perspective in the context of a simple serial supply chain subject to information lags and stochastic demand we conduct two experiments on two different sets of participants in the first we find the bullwhip effect still exists when normal operational causes e g batching price fluctuations demand estimation etc are removed the persistence of the bullwhip effect is explained to some extent by evidence that decision makers consistently underweight the supply line when making order decisions in the second experiment we find that the bullwhip and the underlying tendency of underweighting remains when information on inventory levels is shared however we observe that inventory information helps somewhat to alleviate the bullwhip effect by helping upstream chain members better anticipate and prepare for fluctuations in inventory needs downstream these experimental results support the theoretically suggested notion that upstream chain members stand to gain the most from information sharing initiatives

newsvendor demand chasing revisited existing research on newsvendor behavior asserts that individuals engage in demand chasing adjusting their order quantities towards prior demand several metrics have been used to identify this heuristic by simulation current metrics are shown to yield excessive false positives indicating demand chasing when the true order generating process is independent of prior demand a simple correlation measure does not suffer from this problem and is proposed here as an alternative to some of the more commonly used measures this paper was accepted by martin lariviere operations management

optimal dynamic pricing for deteriorating items with reference price effects when inventories stimulate demand abstract in this paper we incorporate reference price effects into a deteriorating inventory problem when the demand rate depends on displayed stock level and selling price simultaneously reference price effects are formed empirically by customers to adjust current price perception on the basis of past purchases the market demand is assumed to be responsive to the difference between the current selling price and the reference price which is perceived as a loss or a gain we consider three scenarios of market demand loss neutrality loss aversion and loss seeking an optimal dynamic pricing model is established to determine a pricing strategy maximizing the discounted total profit over an infinite time horizon theoretical results are derived to demonstrate the existence of the optimal solutions and to explore the relationships between optimal pricing decisions and an initial reference price based on mild assumptions numerical example and sensitivity analysis are presented to illustrate the theoretical results and managerial insights finally concluding remarks are offered

the welfare implications of trade liberalisation between the southern mediterranean and the eu the impact on the southern mediterranean countries smc of the current process of trade liberalization with the european union is explored the methodology is that of computable general equilibrium modelling under imperfect competition and the model includes ten countries and 11 sectors this allows for both a cross country and cross sectoral analysis of the results the experiments considered are the full liberalization of tariffs as well as changes in market access and trade induced changes in productivity a key feature of the paper is that the phased introduction of tariff reductions is allowed for as explicitly envisaged in the agreements the results show that the process of liberalization may have a substantial though non monotonic impact on the smc economies in terms of both changes in production and through this on welfare the welfare impact is potentially very high in particular for the high tariff economies the sources of the welfare gain tend to derive from perfectly competitive explanat

the risk averse newsvendor problem under spectral risk measures a classification with extensions abstract we study the risk averse newsvendor problem by defining the objective function as a spectral risk measure we analyze the problem under different types of return formulations focusing on the impact of risk aversion and cost parameters on the optimal ordering decision we show that the monotonicity of the return function with respect to random demand determines the structural properties of the problem when the return function is monotone in demand realization optimal order quantity does not depend on the return margin but only on the overage and underage costs and it has a monotone relation to risk aversion however if return is non monotone in demand impact of risk aversion depends on the specific setting and it can also be non monotone additionally it is non increasing in the margin which leads to varying impact of selling price under distinct settings

the exchange rate and the balance of trade the turkish experience in this article we examine the responsiveness of turkey s trade balance to devaluation accompanied by trade liberalisation our results show that the trade balance was responsive to changes in the exchange rate that were brought about by the economic reforms introduced in the 1980s suggesting that exchange rate policy was able to create and maintain a satisfactory balance of trade position in the 1980s and early 1990s

on turkey s trade policy is a customs union with europe enough abstract turkey has decided to harmonize its tarification structure with that of the european union for the country s authorities this move to a customs union is only meant to be the first step toward integration in the european union there are signs however that political opposition to the government s procompetitive stance may be strong enough to block any further move toward fuller trade liberalization we show using applied intertemporal ge analysis that to be welfare improving the trade reform would have to be pursued further and nontariff barriers on european trade removed failure to do so could be more detrimental to domestic welfare than no reform at all

trade reform in the partially liberalized economy of turkey recent reforms in trade policy in turkey have produced a foreign trade regime that exhibits very little antiexport bias on average a quantitative multisectoral general equilibrium model of the turkish economy shows that piecemeal trade policy reform based on first best rationales that are appropriate for highly distorted economies would not now be appropriate further tariff reductions must be coordinated with export subsidy reductions to attain significant welfare benefits the dispersion of distortions especially export subsidies is more important than their level a policy of harmonizing tariffs to the common external tariff of the european community has virtually no effect on welfare

bertrand equilibrium with capacity constraints and restricted mobility this paper considers price competition among firms when there are capacity constraints and buyers have limited ability to visit firms a natural method of allocating buyers among firms arises in the equilibrium of the buyers search game sufficient conditions are given under which the buyers equilibrium varies continuously with the prices charged by firms capacity constraints are used to guarantee that this ensures existence of mixed strategy equilibria for the pricing game played by sellers we show that natural pure strategy equilibria arise when the game is made large in appropriate ways since bertrand s criticism of cournot it has been known that models where sellers compete with prices may have undesirable properties when the commodities traded are homogenous in the simplest models with constant marginal costs price may be driven down to the competitive level even when there are only two firms more problematic if sellers are subject to capacity constraints nash in prices equilibrium may not exist at all these problems all arise because of a discontinuity in firms profit functions that arises when the prices of two or more firms are equal there have been many attempts to resolve this problem the simplest is to constrain sellers prices to be equal and to force them to compete in quantities this is the basis of most of the literature on monopolistic competi

currency elasticity and banking panics theory and evidence existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not a monetary model is constructed where seasonal variations in the demand for liquidity and credit play a critical role in generating banking panics these panics occur when there are restrictions on the issue of currency in private banks but they do not occur if banks are unrestricted empirical evidence from canada and the united states for the period 1880 1910 is largely consistent with the predictions of the model

economic organization with limited communication this paper presents formal stylized representations of communication accounting systems oral assignment portable object written message and telecommunication systems are considered the environments that allow this formalization are characterized by spatial separation private information and a need to keep track of past actions transfers and shocks in environments that have spatial separation and private information beneficial multilateral arrangements can depend critically on agents ability to communicate to one another values of contemporary shocks and to keep track of histories of past transfers or past announced shocks this paper formalizes this idea and focuses on com

monetary policy and the transaction role of money in the us the declining importance of money in transactions can explain the well known fact that u s interest rate policy was passive in the pre volcker period and active after 1982 we generalise a standard cashless new keynesian model woodford2003 by incorporating an explicit transaction role for money in the pre volcker period we estimate that money did play an important role and determinacy required a passive interest rate policy however after 1982 money no longer played an important role in facilitating transactions correspondingly the conventional view prevails and an active policy ensured equilibrium determinacy

economic growth financial evolution and the long run behavior of velocity a general equilibrium model is presented in which buyers and sellers find it increasingly difficult to make private credit arrangements as economic activity spreads into new markets hence the demand for money increases as the structure of production and trade becomes more complex at the same time however financial innovations allow agents to economize on their cash balances together these effects of technological progress account for two empirical regularities the u shaped pattern in velocity and the ever increasing share of productive resources devoted to the private financial sector that are associated with the process of real economic growth

money banking and capital formation we consider a monetary growth model in which banks arise to provide liquidity in addition there is a government that issues not only money but interest bearing bonds these bonds compete with capital in private portfolios when the government fixes a constant growth rate for the money stock we show that there can exist multiple nontrivial monetary steady states one of these steady states is a saddle while the other can be a sink moreover paths approaching a steady state can display damped endogenous fluctuations and development trap phenomena are common across different steady states low capital stocks are associated with high nominal interest rates the latter signal the comparative inefficiency of the financial system also increases in the steady state inflation rate can easily reduce the steady state capital stock journal of economic literatureclassification numbers e13 e44 e50 g20 o16

the effects of open market operations in a model of intermediation and growth we examine an otherwise standard model of capital accumulation to which spatial separation and limited communication create a role for money and shocks to portfolio needs create a role for banks in this context we examine the existence multiplicity and dynamical properties of monetary equilibria with positive nominal interest rates moderate levels of risk aversion can lead to the existence of multiple monetary steady states all of which can be approached from a given set of initial conditions in addition even if there is a unique monetary steady state monetary equilibria can be indeterminate and oscillatory equilibrium paths can be observed thus financial market frictions are a potential source of both indeterminacies and endogenously arising economic volatility we also consider the consequences of monetary policy actions that rearrange the composition of government liabilities contractionary monetary policy activities can have complicated consequences depending especially on the nature of the steady state equilibrium that obtains when there are multiple steady states under plausible conditions however a permanent contractionary change in monetary policy raises both the nominal rate of interest and the rate of inflation and reduces long run output levels thus liquidity provision by a central bank just as by the banking system as a whole can be growth promoting loose monetary policy also is conducive to avoiding development trap phenomena

joint trade liberalization and tax reform in a small open economy the case of egypt abstract we develop a cge model of the egyptian economy to analyze the impact of various trade liberalization scenarios allowing distortionary domestic taxes to vary endogenously in order to satisfy a fixed real government revenue target we decompose computed welfare gains into effects from tax reform trade reform and their interaction scenarios include removal or unification of the consumption tax capital tax or both and tariff unification a free trade agreement with the european union and unilateral tariff elimination welfare effects depend critically on the type of revenue replacement tax while both are important neither trade policy reform nor tax reform dominates

on some properties of a trade closure widely used in numerical modelling abstract armington trade models with price taking behaviour and cet and ces functions may have perverse offer curves and nash equilibria in tariff games may not exist in the two country case

explicit solutions of optimization models and differential games with nonsmooth asymmetric reference price effects models in marketing with asymmetric reference effects lead to nonsmooth optimization problems and differential games which cannot be solved using standard methods in this study we introduce a new method for calculating explicitly optimal strategies open loop equilibria and closed loop equilibria of such nonsmooth problems application of this method to the case of asymmetric reference price effects with loss aversive consumers leads to the following conclusions 1 when the planning horizon is infinite after an introductory stage the optimal price stabilizes at a steady state price which is slightly below the optimal price in the absence of reference price effects 2 the optimal strategy is the same as in the symmetric case but with the loss parameter determined by the initial reference price 3 competition does not change the qualitative behavior of the optimal strategy 4 adopting an appropriate constant price strategy results in a minute decline in profits

equilibrium price dispersion under demand uncertainty the roles of costly capacity and market structure when capacity is costly and prices are set in advance firms facing uncertain demand will sell output at multiple prices and limit the quantity available at each price i show that the optimal price strategy of a monopolist and the unique pure strategy nash equilibria of oligopolists both exhibit intrafirm price dispersion moreover as the market becomes more competitive prices become more dispersed a pattern documented in the airline industry while generating similar predictions the model differs from the revenue management literature because it disregards market segmentation and fare restrictions that screen customers

global dynamics in macroeconomics an overlapping generations example abstract in this paper we present some techniques used in the dynamical systems literature that let us characterize the stable and unstable manifolds of a given dynamical system as a result we can study how an economy behaves as it moves far away from the steady state in an environment where economic agents do not face uncertainty the underlying idea behind these methods is to compute the manifolds nonlocally by exploiting an invariance condition that analytically describes these manifolds in order to illustrate these techniques we present a general equilibrium model under two different policy regimes demonstrating that local and global dynamics of an economic system can be substantially different

equilibrium play in large group market entry games coordination behavior is studied experimentally in a class of noncooperative market entry games featuring symmetric players complete information zero entry costs and several randomly presented values of the market capacity once the market capacity becomes publicly known each player must decide privately whether to enter the market and receive a payoff which increases linearly in the difference between the market capacity and the number of entrants or stay out payoffs for staying out are either positive giving rise to the domain of gains or negative giving rise to the domain of losses the major findings are substantial individual differences that do not diminish with practice aggregate behavior that is organized extremely well in both the domains of gains and losses by the nash equilibrium solution and variations in the population action strategies with repeated play of the stage game that are accounted for by a variant of an adaptive learning model due to roth and erev 1995

welfare enhancing export subsidies this paper shows that export subsidies on marginal goods and those on nonmarginal goods have opposite welfare effects for the country imposing these subsidies where marginal goods are the ones that would be exported by only a small amount or not at all under free trade but whose export can be promoted considerably by export subsidies the former enhances the imposing country s welfare while the latter worsens it the paper also throws light on related issues such as industrial targeting policy

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

reference dependence in multilocation newsvendor models a structural analysis we propose a behavioral theory to predict actual ordering behavior in multilocation inventory systems the theory rests on a well known stylized fact of human behavior people s preferences are reference dependent we incorporate reference dependence into the newsvendor framework by assuming that there are psychological costs of leftovers and stockouts we also hypothesize that the psychological aversion to leftovers is greater than the disutility for stockouts we then experimentally test the proposed theory in both the centralized and decentralized inventory structures using subjects motivated by substantial financial incentives consistent with the proposed theory actual orders exhibit the so called pull to center bias and the degree of bias is greater in the high profit margin than in the low profit margin condition these systematic biases are shown to eliminate the risk pooling benefit when the demands across store locations are strongly correlated because the proposed model nests the standard inventory and ex post inventory error minimization theories as special cases one can systematically evaluate the predictive power of each alternative using the generalized likelihood principle we structurally estimate all three theories using the experimental data and the estimation results strongly suggest that the proposed behavioral theory captures actual orders and profits better we also conduct two experiments to validate the behavioral model by manipulating the relative salience of the psychological costs of leftovers versus that of stockouts to alleviate the pull to center bias

the evolution of cash transactions some implications for monetary policy this paper considers the implications for monetary policy of a decreasing demand for outside money it finds that even perpetual declines in the demand for base money pose no threat to the traditional methods employed for conducting monetary policy the effects of such reductions in the demand for central bank liabilities however do depend on how monetary policy is conducted four monetary policy regimes are analyzed with a policy of nominal interest rate targeting a secular decline in the volume of cash transactions unambiguously leads to accelerating inflation a policy of maintaining a fixed composition of government liabilities leads to accelerating decelerating inflation if agents have sufficiently high low levels of risk aversion inflation targeting produces falling nominal and real interest rates while a policy of fixing the rate of money growth can easily lead to indeterminacy and endogenous oscillation in interest rates it is argued that a policy of fixing the composition of government liabilities has several advantages if it is known that agents are not too risk averse and that the asymptotic demand for base money is small if this information is not known then interest rate or inflation targeting have an advantage because their consequences are not sensitive to such environmental features

stocking and pricing decisions under endogenous demand and reference point effects abstract in this paper we study the newsvendor s pricing and stocking decisions under reference point effects the demand faced by the newsvendor is endogenous and the customers may also decide to procure the product from an outside option we characterize the firm s optimal pricing and stocking decisions our analysis reveals a threshold policy on the firm s ordering and pricing decisions while considering the impact of reference point effects we also find that as the level of optimism increases the firm s optimal ordering level decreases and optimal price increases we further study the impact of loss aversion on the firm s ordering and pricing decisions

decision bias in the newsvendor problem with a known demand distribution experimental evidence in the newsvendor problem a decision maker orders inventory before a one period selling season with stochastic demand if too much is ordered stock is left over at the end of the period whereas if too little is ordered sales are lost the expected profit maximizing order quantity is well known but little is known about how managers actually make these decisions we describe two experiments that investigate newsvendor decisions across different profit conditions results from these studies demonstrate that choices systematically deviate from those that maximize expected profit subjects order too few of high profit products and too many of low profit products these results are not consistent with risk aversion risk seeking preferences prospect theory preferences waste aversion stockout aversion or the consequences of underestimating opportunity costs two explanations are consistent with the data one subjects behave as if their utility function incorporates a preference to reduce ex post inventory error the absolute difference between the chosen quantity and realized demand two subjects suffer from the anchoring and insufficient adjustment bias feedback and training did not mitigate inventory order errors we suggest techniques to improve decision making

bertrand edgeworth oligopoly in large markets the relation between perfectly competitive and monopolistically competitive equilibria is analysed for a bertrand edgeworth model of a single market in which capacity constrained firms choose prices as strategies the market always has a nash equilibrium in pure or mixed strategies as the number of firms increases the corresponding equilibria converge in distribution to a perfectly competitive price this result provides a justification for perfect competition that is based on an explicit account of price formation however monopoly prices persist with a positive but vanishing probability regularity or well defined inverse demand functions are not required

financial markets in development and the development of financial markets what is the relationship between markets and development it is argued that markets promote growth and that growth in turn encourages the formation of markets two models with endogenous market formation are presented to analyze this issue the first examines the role that financial markets banks and stock markets play in allocating funds to the highest valued use in the economic system it is shown that intermediation will arise under weak conditions the second focuses on the role that markets play in supporting specialization in economic activity the consequences of perfect competition in market formation are highlighted