on the benefits of currency reform abstract money allows agents to achieve allocations that are not possible without it however currency in most economies is a uniform object and there may be incentive compatible allocations that cannot be implemented with a uniform currency we show that currency reform i e changing the monetary base by replacing one currency with another is a powerful tool that can enable a monetary authority to achieve a desired allocation our monetary mechanism with currency reform is anonymous and features a nonlinear exchange rate between currencies and a monotone value of money these results help interpret the characteristics of currency reforms observed in practice

frictionless commerce a comparison of internet and conventional retailers there have been many claims that the internet represents a new nearly frictionless market our research empirically analyzes the characteristics of the internet as a channel for two categories of homogeneous products books and cds using a data set of over 8 500 price observations collected over a period of 15 months we compare pricing behavior at 41 internet and conventional retail outlets we find that prices on the internet are 9 16 lower than prices in conventional outlets depending on whether taxes shipping and shopping costs are included in the price additionally we find that internet retailers price adjustments over time are up to 100 times smaller than conventional retailers price adjustments presumably reflecting lower menu costs in internet channels we also find that levels of price dispersion depend importantly on the measures employed when we compare the prices posted by different internet retailers we find substantial dispersion internet retailer prices differ by an average of 33 for books and 25 for cds however when we weight these prices by proxies for market share we find dispersion is lower in internet channels than in conventional channels reflecting the dominance of certain heavily branded retailers we conclude that while there is lower friction in many dimensions of internet competition branding awareness and trust remain important sources of heterogeneity among internet retailers

buyer initiated vs seller initiated information revelation sales presentations are the core of the selling process where salespeople provide information to prospects one challenge is that the amount of information available to be potentially communicated may exceed salespeople s ability to communicate or customers ability to process there is limited bandwidth between the firm and customers one important decision then is which information should customers see what the firm chooses to tell customers may be informative in itself when constrained to a seller initiated information revelation format where the firm chooses which feature to show the firm never finds it optimal to offer more features than it is able to inform customers about consequently customers never find credible a claim that the product has all features the important implication is that price alone cannot serve as a signal of quality in this setting in contrast a buyer initiated information revelation format where customers decide which information to receive increases the probability of a sale and also results in the production of higher quality products in a competitive setting by adopting buyer initiated information revelation firms are able to attain positive profits this is due to the fact that customers infer the product s quality from the price along with the information revelation format customers know that at some prices firms find it profitable to produce high quality products and at other lower prices this is not the case thus customer empowerment leads to higher profits

buyer search costs and endogenous product design buyer search costs for price are changing in many markets through a model of buyer and seller behavior i consider the effects of changing search costs on prices both when product differentiation is fixed and when it is endogenously determined in equilibrium if firms cannot change product design lower buyer search costs for price lead to increased price competition however if product design is a decision variable lower search costs for price may also lead to higher product differentiation which decreases price competition in this case the overall effect of lower buyer search costs for price may even be higher prices lower social welfare and higher industry profits the result is especially interesting because recent technological changes such as internet shopping can affect the market structure through lowering buyer search costs

competition and the number of firms in a market are duopolies more competitive than atomistic markets this paper uses a variant of the standard search model to examine market equilibrium and the consequences for market equilibrium of an increase in the number of firms if marginal search costs increase with the number of searches then the demand curve facing any firm will be kinked with the elasticity of demand with respect to price decreases being less than with respect to price increases prices may not change in response to changes in marginal costs as the number of firms increases the maximum price that is consistent with equilibrium increases to the monopoly price but the minimum price decreases on the other hand if marginal search costs decrease with the number of searches equilibrium if it exists is characterized by a

product and price competition in a duopoly this paper examines the role of consumer preferences costs and price competition in determining the competitive product strategy of a firm in the model studied here there are two identical firms competing on product quality and price they face consumers who prefer a higher quality product to a lower quality product but differ in how much they are willing to pay for quality the consumers can also choose a substitute if they don t like the product price offerings of the two firms for the firms a higher quality product costs more to produce than a lower quality product the paper shows that the equilibrium strategy for each firm should be to differentiate its product from its competitor with the firm choosing the higher quality choosing the higher margin as well this differentiation however is not efficient that is it is possible to choose two other products and offer them at prices that cover their marginal cost and still satisfy consumers needs better in the aggregate a monopolist by contrast would differentiate his product line efficiently this suggests that cannibalization has different effects on product strategy than competition the paper also shows that if one firm enters the market first then it can defend itself from later entrants and gain a first mover advantage by preempting the most desirable product position

deviations from purchasing power parity in the long run this paper demonstrates that deviations from purchasing power parity reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible rate periods for a wide variety of countries and in both monthly and annual data since this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper proposes an alternative explanation which instead relies on financial arbitrage in bonds as the underlying mechanism this paper will demonstrate that deviations from purchasing power parity ppp reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible exchange rate periods for a wide variety of countries and in both monthly and annual data this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper therefore proposes an alternative explanation which does not presuppose free trade in goods but which instead relies on financial arbitrage in bonds as the underlying mechanism the major implication of the theory and the results is that ppp is as likely to be violated in the long as in the short run as an empirical matter deviations from ppp can be observed for most currencies at any instant see kravis et al 21 stockman 37 and genberg 15 among others these deviations are typically both cumulative and persistent the real exchange rate can remain on either side of parity for lengthy but variable time intervals of a year or more as a consequence the current consensus shared

a two country natrex model for the euro dollar this paper develops a natrex natural real exchange rate model for two large economies the eurozone and the united states the natrex approach has already been adopted to explain the medium long term dynamics of the real exchange rate in a number of industrial countries so far however it has been applied to a one country framework where the rest of the world is treated as given in this paper we build a natrex model where the two economies are fully specified and allowed to interact our theoretical model offers the basis for empirical estimation of the euro dollar equilibrium exchange rate that will be carried out in future research jel classification f31 f36 f47

a search cost model of obfuscation this article develops models in which obfuscation is individually rational for oligopolistic firms firms sell a homogeneous good to rational consumers who incur search costs to learn prices search costs are endogenized by allowing obfuscation firms have an unobservable action that increases the time needed to learn their price one model involves search costs convex in shopping time we show that slight convexity can dramatically alter the equilibrium price distribution a second model examines an informational linkage between current and future search costs consumers are uncertain about a component of search costs here a signal jamming mechanism can lead to equilibrium obfuscation

some theoretical and empirical issues relating to economic stabilization in developing countries abstract this paper surveys some issues relating to economic stabilization in developing countries section 2 examines the contributions of terms of trade deterioration and real exchange rate appreciation to payments imbalances in non oil developing countries during the 1970s section 3 distinguishes between demand side and supply side policies and discusses their respective roles in stabilization programmes the effects of exchange rate changes are considered within this framework in section 4 the effects of alternative stabilization policies on output prices and the balance of payments are illustrated using simulations of a model that incorporates the major relationships relevant to a typical programme section 5 summarizes the conclusions

on the simple economics of advertising marketing and product design we propose a framework for analyzing transformations of demand such transformations frequently stem from changes in the dispersion of consumers valuations which lead to rotations of the demand curve in many settings profits are a u shaped function of dispersion high dispersion is complemented by niche production and low dispersion is complemented by mass market supply we investigate numerous applications including product design advertising marketing and sales advice and the construction of quality differentiated product lines we also suggest a new taxonomy of advertising distinguishing between hype which shifts demand and real information which rotates demand

recent developments in international finance a guide to research abstract this is a critical evaluation of the state of the art in international finance several points of reference are selected the mundell fleming branson mfp paradigm the monetary model with purchasing power parity ppp as a long run anchor the representative agent approach and the natural real exchange rate natrex model their strengths and weaknesses are identified from both a theoretical and empirical point of view we conclude with a suggestion of what is a fruitful explanation of medium to longer run movements in the real exchange rate and the current account

one or two monies abstract the set of incentive feasible allocations is examined in a dynamic quasi linear environment where agents lack commitment and have private information over their idiosyncratic characteristics when record keeping is available the first best allocation is implementable in a set of sufficiently patient economies when record keeping is limited to one money this set is strictly smaller except when private information is absent when record keeping is expanded but limited to two monies the set of economies for which the first best is implementable corresponds to that of record keeping even when private information is present we further demonstrate that two monies are a perfect substitute for record keeping

the principle of minimum differentiation holds under sufficient heterogeneity the so called principle of minimum differentiation stated by hotelling has been challenged by many authors this paper restores the principle by showing that n firms locate at the center of the market and charge prices higher than the marginal cost of production when heterogeneity in consumers tastes is large enough

a fuzzy set model of search and consideration with an application to an online market several two stage choice models consideration stage plus choice stage have been proposed in the marketing literature we extend this literature by developing a more general model that incorporates how consumer search influences the degree to which they consider various brands to test the validity and value of our model we operationalized it with data obtained from peapod an online grocer where we tracked consumers search processes we demonstrate that our model performs better than competing models on all the key criteria new choice models such as the ones proposed here are necessary for deriving managerially relevant understanding of choice behavior in online markets our empirical results suggest that consumers search both their internal memory and external information at the store to determine the degree to which they consider various brands consumers are also heterogeneous with respect to their capability to process external information for some consumers external information search dramatically increases the degree to which they consider various brands but for others it has little impact on their consideration we also find that certain features e g personal lists reduce consideration set sizes whereas other features e g sort increase consideration set sizes

dollarization and currency exchange abstract we use a dual currency money search model to study dollarization agents hold portfolios consisting of two currencies one of which is risky we use numerical methods to solve for the steady state distributions of currency portfolios transaction patterns and value functions as risk increases agents increasingly use the safe currency as a medium of exchange dollarization occurs furthermore the safe currency trades for multiple units of the risky currency this type of currency exchange and the corresponding nominal exchange rate are often observed in black market or unofficial currency exchange markets in developing countries due to decentralized trading a distribution of exchange rates arises whose mean and variance change in predictable ways when currency risk increases

currency boards and debt traps evidence from argentina and relevance for estonia this paper analyses the november 2000 liquidity crisis that brought argentina near default on its foreign debt the main purpose of this paper is to assess whether this crisis may be taken as a warning signal for estonia given the similar exchange rate system shared by the two countries it seems that with a low level of public debt and a balanced budget estonia will not face a similar liquidity crisis as its latin american counterpart which remained heavily reliant on foreign borrowings but the substantial real exchangerate appreciation of the kroon under the currency board arrangement has resulted into serious external imbalances which will need to be corrected to avoid balance of payments pressure and reduce estonia s high dependency on the level of foreign direct investments

export subsidies and trade policy the experience of kenya abstract this paper finds that manufacturing firms in kenya have responded poorly to the availability of export subsidies it is argued that this has resulted from the delays and uncertainty surrounding disbursement procedures and from the limited extent to which the subsidy lessened the anti export bias of a policy structure which has emphasized import substitution it is further argued that a budgetary constraint makes it impossible to offset the anti export bias with export subsidies at existing levels of domestic market protection and that what is required is the lowering and standardization of domestic market protection levels which can be most appropriately achieved through a combination of devaluation and trade tax subsidy changes

testing for the fundamental determinants of the long run real exchange rate abstract the methods of cointegration and error correction are used to test three models of the long run real exchange rate between the us and other g 10 countries the models are as proposed by the theory of purchasing power parity by the hypothesis of fisher open rational expectations and by the analysis described in allen and stein 1989 the dynamics of the real exchange rate capital intensity and foreign debt brown university working paper the results show that none of the models satisfactorily explain the dynamics of the real exchange rate however there is some evidence that the fundamental determinants of the real exchange rate include variables such as productivity the terms of trade and real domestic and foreign interest rates

search bargaining money and prices the goal of this paper is to extend existing search theoretic models of fiat money which until now have assumed that the price level is exogenous by explicitly incorporating bilateral bargaining this allows us to determine the price level endogenously and leads to additional insights concerning the role of money for example we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner s problem although the difference can become small as the discount rate or search friction vanishes we also find that there exist nonstationary inflationary equilibria

the foreign exchange market a random walk with a dragging anchor this paper explores some anomalies in the foreign exchange market it is hard to find evidence of either short term overshooting or of longer term reversion to an equilibrium the forward exchange rate contains virtually no information on future spot rates discussions with practitioners indicate that longer term speculation based on fundamentals is strictly limited and survey data and other evidence suggest that expectations and speculation are based on a variety of models the interplay between speculation based on fundamentals and on a random walk or chartist approach influences the outcome this endorses the prior model of j a frankel and k a froot copyright 1988 by the london school of economics and political science

systematic movements in real exchange rates in the g 5 evidence on theintegration of internal and external markets abstract many recent studies have documented the random behavior of real exchange rates this paper shows that real exchange rates defined for different sectors of an economy move closely together with one another even though each of the sectoral real exchange rates taken alone has a large random component the sectoral real exchange rates are tied together by internal price links due to factor mobility within each national economy any differences between real exchange rates which develop moreover can be explained almost entirely by productivity differentials at least in the long run this paper contrasts the strong ties which bind together prices from different sectors internally with ties that bind the prices of goods from the same sector internationally prices are shown to be much more highly correlated internally than externally because flexible exchange rates disrupt normal pricing relationships between goods from different countries

external debt and real exchange rates adjustment in the euro area new evidence from a non linear natrex model in this paper we revisit medium to long run real exchange rate determination within the euro area focusing on the role of external debt accordingly we rely on the natrex approach which provides an explicit framework of the external debt real exchange rates nexus in particular given the indebtedness levels reached by the euro area economies we investigate potential non linearity in real exchange rates dynamics according to the level of the external debt our results evidence that during the monetary union gross and net external debt positions of the euro area countries have exerted pressures on real exchange rate dynamics within the area moreover we find that beyond a threshold reached by the external debt euro area countries are found to be in a vulnerable position leading to an unavoidable adjustment process nevertheless the adjustment process while effective is found to be low and occurs slowly

the tobin tax in a continuous time non linear dynamic model of the exchange rate starting from a new continuous time non linear dynamic model of the exchange rate we formally show that the introduction of a tobin tax reduces speculators profit and influences the dynamics of the system making it more stable and less prone to chaotic motion

do nominal devaluations lead to real devaluations in ldcs abstract devaluation or depreciation of nominal exchange rate is a policy to boost exports however since any favorable effects of devaluation could be offset by its inflationary effects one must consider real devaluation this note investigates whether nominal devaluation leads to real devaluation by employing a relatively new method of cointegration and error correction modeling

balance of payments output and prices in tanzania abstract this paper examines the relationship between changes in international reserves and changes in output prices and monetary balances in tanzania using annual data for 1962 86 a short run macroeconomic model of the balance of payments is formulated and estimated in which output and prices are endogenized and the behaviors of the monetary and fiscal authorities are explicitly modeled the estimation results are used to examine the relative effectiveness of alternative policy instruments on the key macroeconomic variables of the model the monetary variables appear to have played a relatively significant role in the development of prices but they were only marginally significant in the process of balance of payments adjustment the simulation results indicate that a tradeoff existed between faster economic growth and better balance of payments performance

sources of fluctuations in real and nominal exchange rates this paper attempts to distinguish empirically real versus nominal sources of fluctuations in real and nominal exchange rates the distinction is obtained by imposing the following restriction on the bivariate vector autoregression of real and nominal exchange rates over the current flexible rate period nominal shocks are required to have no permanent effect on the level of the real exchange rate given this identification scheme the author analyzes the dynamic effects and relative importance of real and nominal shocks with regards to exchange rates the findings indicate that real shocks dominate nominal shocks for both exchange rate series over short and long frequencies copyright 1992 by mit press

toward a theory of international currency we use the framework of random matching games and develop a two country model of the world economy in which two national currencies compete and may be circulated as media of exchange there are multiple equilibria which differ in the areas of circulation of the two currencies in one equilibrium the two national currencies are circulated only locally in another one currency is circulated as an international currency there is also an equilibrium in which both currencies are accepted internationally we also find an equilibrium in which the two currencies are directly exchanged we first characterize the existence conditions of these equilibria in terms of the relative country size and the degree of economic integration and then use an evolutionary approach to equilibrium selection to explain the evolution of the international currency as the two economies become more integrated some welfare implications are also discussed for example a country can improve its national welfare by letting its own currency circulate internationally provided the domestic circulation is controlled for when the total supply is fixed however a resulting currency shortage may reduce the national welfare

the euro dollar exchange rate chaotic or non chaotic a continuous time model with heterogeneous beliefs abstract the aim of this paper is to develop a continuous time exchange rate model that allows for heterogeneity of the agents beliefs in order to explore non linearities and possible chaotic behaviour the theoretical model contains an intrinsic non linearity that gives rise to a jerk differential equation which is in principle capable of generating chaos the model is econometrically estimated in continuous time with euro dollar data and examined for the possible presence of chaotic motion our results indicate that the possibility of chaotic dynamics in our model is rejected

selling formats for search goods the paper offers a comparative analysis of different ways to sell products selling formats when buyers incur evaluation costs since these costs are sunk at the moment of trade buyers may refrain from incurring them for fear of later opportunism on the part of sellers it is found that the use of many common selling formats can be explained in terms of their ability to alleviate this problem specifically i explain price advertising seller colocation and bargaining the theory explains much of the divergence in retail trading institutions and leads to several testable predictions

information gathering externalities for a multi attribute good most goods and services vary in numerous dimensions customers choose to acquire information to assess some characteristics and not others their choices affect firms incentives to invest in quality and so lead to indirect externalities in consumers choices we characterize a model in which a monopolist invests in the quality of a product with two characteristics and consumers are heterogeneous ex ante consumers do not internalize their influence on the firm s investment incentives when choosing which information to acquire cheaper information affects consumers information gathering and thereby firm investment this can paradoxically reduce consumer surplus profits and welfare

the value of public information in monopoly the logic of the linkage principle of milgrom and weber 1982 extends to price discrimination a non linear pricing monopolist who sells to a single buyer always prefers to commit to publicly reveal information a liated to the valuation of the buyer

optimal search for product information consumers often need to search for product information before making purchase decisions we consider a tractable continuous time model of gradual learning in which consumers incur search costs to learn further product information and update their expected utility of the product at each search occasion we characterize the optimal stopping rules for either purchase or no purchase as a function of search costs and of the importance informativeness of each attribute this paper also characterizes how the likelihood of purchase changes with the ex ante expected utility search costs and the importance informativeness of each attribute we discuss optimal pricing the impact of consumer search on profits and social welfare and how the seller chooses its price to strategically affect the extent of the consumers search behavior we show that lower search costs can hurt the consumer because the seller may then choose to charge higher prices discounting creates asymmetry in the purchase and no purchase search thresholds and may lead to lower prices if search occurs in equilibrium or higher prices if there is no search in equilibrium this paper also considers searching for signals of the value of the product heterogeneous importance of attributes endogenous intensity of search and social learning this paper was accepted by pradeep chintagunta marketing

the real exchange rate abstract this essay concerns the real value of the u s relative to the g 10 i what are the dynamics of the fundamental determinants of the real exchange rate and its steady state value ii to what extent are the observed movements in the exchange rate from 1973 to 1988 due to the fundamentals iii how integrated are international capital markets iv how does the real exchange rate respond to a changes in the cyclically adjusted government budget deficit and to b changes in the marginal efficiency of investment

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

agricultural price policy in tanzania abstract this paper examines agricultural price policy implementation and its strategic impact in tanzania over the period 1969 1980 trends in producer prices and the rural urban terms of trade are analysed by constructing weighted price and income indices for major categories of crops marketed through official channels the results indicate a substantial deterioration of real prices and incomes from crop sales during the 1970s when taken in conjunction with a concomitant deterioration in the efficiency of agricultural marketing the analysis suggests that price policy has had a major adverse impact both on peasant living standards and on the economic performance of tanzania since the mid 1960s

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

exchange rate determination single equation or economy wide models a test against the random walk abstract we first give a brief presentation of the existing single equation structural models of exchange rate determination and a survey of how the exchange rate is modelled in the main economy wide macroeconometric models we then show with respect to the lira exchange rate that the out of sample predictive performance of the single equation models is inferior to that of the simple random walk model this confirms the thesis that only by moving away from these single equation semi reduced form models towards suitable economy wide macroeconometric models can one hope to beat the random walk following this course we finally show that the mark v version of our continuous time macroeconometric model of the italian economy outperforms both the existing structural models and the random walk process in out of sample forecasting tests concerning the lira exchange rate

supplying information to facilitate price discrimination the authors examine the incentive of a seller to allow potential buyers to acquire private information about their tastes for the seller s product improved private information for buyers enables the seller to segment the market and charge higher prices to high value buyers however improved information can also provide rents to buyers in a variety of settings this tradeoff is optimally resolved at one of two extremes either buyers are supplied with the best available knowledge of their tastes or no information is supplied by the seller copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the concomitants of exchange rate depreciation less developed countries 1971 1973 this study shows what happens when less developed countries ldcs revalue their currencies with these findings we aim to provide evidence toward improving their currency valuation policies a background presumption and justification for the inquiry is that disequilibrium exchange rates can be an important cause of serious injury to economic performance against which the costs of shifting toward equilibrium rates can be measured but whether or not this presumption is valid exchange rate variation is a phenomenon with potential major effects which should be known more accurately so that policy can be better guided exchange rate revaluation is taken to mean a substantial alteration in the average rate at which transactions are effected between domestic and foreign currencies this concept implies three problems the exchange rate shift must be a certain size for it to be counted one country has current and capital transactions with a number of other countries and transactions may be carried out at both official and free black market rates section i below addresses these problems

international monetary trade and the law of one price abstract we endogenize circulation of currencies and price formation in a decentralized trading environment with two countries and two currencies in equilibrium sellers of homogeneous goods may post prices in the national or also in the foreign currency given unobservable buyers valuations we prove that under different monetary regimes the absence of well integrated international goods markets doesn t necessarily imply a violation of the law of one price we also illustrate the behavior of prices across regimes characterized by different degrees of monetary integration

competitive promotional strategies this article analyzes the equilibrium pricing strategies of brands engaged in a pricing game each brand has a monopoly market loyal consumers and competes with others in a common market called brand switchers in the case of a duopoly it is shown that the behavior of the brand switchers characterizes the equilibrium behavior of the duopolists this article focuses on two key comparative statics namely the depth of discounts away from a regular high price and the probability of giving a deal or the frequency of deals how these properties vary with the size of the loyal markets and the behavior of the brand switching population is discussed copyright 1988 by the university of chicago

capital flow management there is a wide variety in the capital account policies of emerging markets and developing economies some countries such as brazil have recently experimented with prudential controls on capital inflows whereas others such as china have continued to maintain tight controls this paper reviews the recent theoretical literature explaining the motivations behind capital account policies and whether there is a case for international coordination in this area

exchange rate management under floating exchange rates abstract the purpose of this paper is to analyze the swiss approach to exchange rate management a number of difficulties are identified that have plagued the swiss national bank s efforts to reconcile its ultimate objective of a stable price level with its desire to moderate extreme exchange rate swings these difficulties are in turn analyzed within a rational expectations model of exchange rate determination although the model does not account for all these difficulties it does throw light on two important issues 1 the impact of a given change in the monetary base on the exchange rate is highly sensitive to the type of money supply strategy pursued by the bank 2 the objective of price stability is bound to conflict with the desire to stabilize the exchange rate the stronger the bank s commitment to price stability the weaker is the impact of temporary changes in the monetary base on the exchange rate

the economics of clear advice and extreme options i study a principal agent model in which the agent collects information and then chooses a verifiable action i show that the principal can find it desirable to constrain the agent s action set even though there is no disagreement about the ranking of actions ex post the elimination or penalization of intermediate actions which are optimal when information is poor improves incentives for information collection i characterize optimal action sets when the agent is infinitely risk averse with respect to income shocks and optimal incentive schemes when the agent is risk neutral copyright 2005 wiley blackwell

contextual inference in markets on the informational content of product lines context can influence decisions this malleability of choice is usually invoked as evidence that people do not maximize stable preference orderings in a market equilibrium however context conveys payoff relevant information to consumers consequently these consumers rationally violate naive formulations of standard choice theoretic principles i identify informational asymmetries under which apparently anomalous behaviors namely the compromise effect and choice overload arise as market equilibria firms respond to consumers contextual inference in case of the compromise effect a firm may introduce premium loss leaders expensive goods of overly high quality that increase the demand for other goods

price matching guarantees as a direct signal of low prices if consumers believe that stores offering price matching guarantees pmgs charge low prices high search cost consumers will purchase from pmg stores this leads pmg stores demand to be less pric

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

pricing product diversity and search costs a bertrand chamberlin diamond model we study price competition in the presence of search costs and product differentiation the limit cases of the model are the bertrand paradox the diamond paradox and chamberlinian monopolistic competition market prices rise with search costs and decrease with the number of firms prices may initially fall with the degree of product differentiation because more diversity leads to more search and more competition equilibrium diversity rises with search costs while the optimum level falls so entry is excessive the market failure is most pronounced for low preference for variety and high search costs

threshold cointegration and causality relationship between energy use and growth in seven african countries abstract the paper investigates the long run and the causality relationship between energy consumption and economic growth for seven sub saharan african countries during the period 1970 2007 using the gregory and hansen 1996a 1996b testing approach to threshold cointegration we find that energy consumption is cointegrated with economic growth in cameroon cote d ivoire ghana nigeria and south africa moreover this test suggests that economic growth has a significant positive long run impact on energy consumption in these countries before 1988 and this effect becomes negative after 1988 in ghana and south africa furthermore causality tests suggest bidirectional causality between energy consumption and real gdp in cote d ivoire and unidirectional causality running from real gdp to energy usage in the case of congo and ghana

partial repeat bidding in the name your own price channel this paper presents an initial examination of an emerging business model the name your own price nyop channel as popularized by priceline com focusing on how to optimally structure such market interactions i ask whether it is more profitable to restrict individuals to a single bid as is currently done by priceline or conversely to allow consumers to continue bidding if the previous offer was rejected i find that both market structures yield the same expected profit in practice a single bid policy may not be perfectly enforceable especially in the internet environment because a sophisticated user can circumvent such a policy by camouflaging one s identity or otherwise manipulating the bidding procedure thus priceline s single bid restriction is likely to result in partial repeat bidding the case in which some consumers are limited to a single bid while other sophisticated users may rebid i ask whether such surreptitious bidding is detrimental to the nyop firm and find that profits are lower than if such opportunistic behavior were absent surprisingly i find that the impact of the number of repeat bidders on profits is not monotonic thus if it is prohibitively costly or logistically infeasible for the nyop firm to eliminate surreptitious rebidding behavior the firm may in fact benefit from encouraging rather than discouraging users to rebid the direction that increases profits depends on the percentage of sophisticated bidders

the two money theorem in this article i consider environments in which all shocks have finite support and any transfer of resources is ex post voluntary consider an allocation that is achievable when potential trading partners know each others histories the one money theorem says that the allocation is achievable using only one money if that money is divisible and money holdings are observable the two money theorem says that the allocation is achievable using two divisible monies even if money holdings are concealable copyright economics department of the university of pennsylvania and the osaka university institute of social and economic research association

search design and market structure the internet has made consumer search easier with consequences for prices industry structure and the kinds of products oered we explore these conse quences in a rich but tractable model that allows for strategic design choices a polarized market structure results where some rms choose designs aimed at broad based audiences while others target narrow niches such an industry structure can arise even when all rms and consumers are ex ante identical we analyze the eect of reduced search costs and nd results consistent with the reported prevalence of niche goods and the long tail and superstar phe nomena in particular the model suggests that long tail eects arise when there is a wide range of potential designs relative to vertical heterogeneity among rms

incomplete pass through and the welfare effects of exchange rate variability abstract this paper considers the implications of incomplete exchange rate pass through for optimal monetary and exchange rate policy a two country model is presented which allows an explicit derivation of welfare functions in terms of a weighted sum of the second moments of producer prices and the nominal exchange rate from a single country perspective the optimal exchange rate variance depends on the degree of pass through the size and openness of the economy the elasticity of labour supply and the volatility of foreign producer prices welfare may be decreasing or increasing in the volatility of the exchange rate

currency competition in a fundamental model of money abstract we study how two fiat monies one safe and one risky compete in a decentralized trading environment the currencies equilibrium values their transaction velocities and agents spending patterns are endogenously determined we derive conditions under which agents holding diversified currency portfolios spend the safe currency first and hold the risky one for later purchases we also examine when the reverse spending pattern is optimal traders generally favor dealing in the safe currency unless trade frictions and the currency risk is low as risk increases or trading becomes more difficult the transaction velocity and value of the safe money increases

prominence and consumer search this article examines the implications of prominence in search markets we model prominence by supposing that the prominent firm will be sampled first by all consumers if there are no systematic quality differences among firms we find that the prominent firm will charge a lower price than its less prominent rivals making a firm prominent will typically lead to higher industry profit but lower consumer surplus and welfare the model is extended by introducing heterogeneous product qualities in which case the firm with the highest quality product has the greatest incentive to become prominent and making it prominent will boost industry profit consumer surplus and welfare

purchasing power parity price indices and exchange rate forcasts abstract this paper addresses the issue of using aggregate price indices for purchasing power parity ppp tests and the fitness of ppp as a model for exchange rate forecasting compared with consumer price index cpi and wholesale price index wpi the price index of traded goods tpi appears to be a more appropriate price index for both ppp tests and exchange rate forecasting it performs better in the tests and provides superior exchange rate forecasts both within and out of sample while the half life of the estimated deviations from ppp is about two years for the cpi and wpi based real exchange rates it is only one year for the tpi based real exchange rates

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

money is memory abstract this paper examines the sets of feasible allocations in a large class of economic environments in which commitment is impossible following myerson 8 the standard definition of feasibility is adapted to take account of the lack of commitment the environments feature either memory or money memory is defined as knowledge on the part of an agent of the full histories of all agents with whom he has had direct or indirect contact in the past money is defined as an object that does not enter utility or production functions and is available in fixed supply the main proposition is that any allocation that is feasible in an environment with money is also feasible in the same environment with memory depending on the environment the converse may or may not be true hence from a technological point of view money is equivalent to a primitive form of memory journal of economic literature classification numbers e40 c73 d82

price dispersion and differentiation in online travel an empirical investigation previous research has examined whether price dispersion exists in theoretically highly efficient internet markets however much of the previous work has been focused on industries with low cost and undifferentiated products in this paper we examine the presence of price dispersion and product differentiation using data on the airline ticket offerings of online travel agents otas we find that different otas offer tickets with substantially different prices and characteristics when given the same customer request some of this variation appears to be due to product differentiation different otas specialize by systematically offering different trade offs between ticket price and ticket quality minimizing the number of connections matching requested departure and return time however even after accounting for differences in ticket quality ticket prices vary by as much as 18 across otas in addition otas return tickets that are strictly inferior to the ticket offered by another ota for the same request between 2 2 and 28 of the time overall this suggests the presence of both price dispersion and product differentiation in the online travel market

too much information information provision and search costs a seller often needs to determine the amount of product information to provide to consumers we model costly consumer information search in the presence of limited information we derive the consumer s optimal stopping rule for the search process we find that in general there is an intermediate amount of information that maximizes the likelihood of purchase if too much information is provided some of it is not as useful for the purchase decision the average informativeness per search occasion is too low and consumers end up choosing not to purchase the product if too little information is provided consumers may end up not having sufficient information to decide to purchase the product the optimal amount of information increases with the consumer s ex ante valuation of the product because with greater ex ante valuation by the consumer the firm wants to offer sufficient information for the consumer to be less likely to run out of information to check one can also show that there is an intermedi

when more alternatives lead to less choice this paper shows that when the alternatives offered to consumers span the preference space as it would be chosen by a firm search or evaluation costs may lead consumers not to search and not to choose if too many or too few alternatives are offered if too many alternatives are offered then the consumer may have to engage in many searches or evaluations to find a satisfactory fit this may be too costly and result in the consumer avoiding making a choice altogether if too few alternatives are offered then the consumer may not search or choose fearing that an acceptable choice is unlikely these two forces result in the existence of a finite optimal number of alternatives that maximizes the probability of choice

balance of payments adjustment in low income developing countries the experiences of kenya and tanzania in the 1970s abstract in the wake of the oil price shock of the mid 1970s the two low income economies of kenya and tanzania adopted growth oriented adjustment strategies the oil shock also coincided with drought which affected tanzania much more adversely by the end of the 1970s the glaring failures in the two countries adjustment performance was in relation to balance of payments and in particular to export growth pricing policies in agriculture were actively applied in the two countries the results of these policies continue to underline the importance of a farmer rewarding price policy but also indicate a strong possibility of crop substitution problems in low income economies special measures were applied to promote manufactured exports subsidies in kenya and primary export processing in tanzania but they were a conspicuous failure policy lessons from these experiences are briefly indicated

real exchange rates and structural breaks cointegration tests often fail to detect the existence of long term relationships such as purchasing power parity for two reasons i these tests have low power and ii structural shocks can alter the long run real exchange rate in this paper the long run movements of five exchange rates relative to the us dollar and five european exchange rates relative to the deutsche mark are investigated in particular corrected cointegration tests are applied which take into account the possibility of a structural break at an unknown date empirical evidence is found that structural changes can be responsible for most exchange rate deviations from their equilibrium defined by purchasing power parity or a generic monetary model

measuring exchange rate misalignment inflation differentials and domestic relative prices abstract empirical studies of exchange rate misalignment generally use crosscountry differences in overall inflation as proxy measures for a country s real exchange rate rer this paper shows that using such differential inflation proxies introduces two systematic biases in model results understatement of rer movements and a spurious trend towards depreciation these biases can be corrected only with disaggregated data on domestic relative prices of tradable and nontradable products using a standard model with disaggregated data for zimbabwe it is found that proxy based results understate misalignment by almost 25 and exaggerate depreciation by 4 per year

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process

price uncertainty and consumer search a structural model of consideration set formation we offer an econometric framework that models consumer s consideration set formation as an outcome of her costly information search behavior because frequently purchased products are characterized by frequent price promotions of varying depths of discounts a consumer faces significant uncertainty about the prices of the brands the consumers engage in a fixed sample search strategy that results in their discovering the posted prices of a subset of the available brands this subset is referred to as the consumer s consideration set the proposed model is estimated using the scanner data set for liquid detergents our key empirical results are i consumers zincur significant search costs to discover the posted prices of the brands ii whereas in store displays and feature ads do not influence consumers quality perceptions of the brands they significantly reduce search costs for observing the prices of the brands iii per capita income of consumer s household significantly increases her search costs and iv the consumers price sensitivity is seriously underestimated if we were to assume that consumers get to know all the posted prices at zero cost the proposed model is also estimated for the ketchup category to enable us to do cross category comparisons of consumers price search behavior

information gatekeepers on the internet and the competitiveness of homogeneous product markets we examine the equilibrium interaction between a market for price information controlled by a gatekeeper and the homogenous product market it serves the gatekeeper charges fees to firms that advertise prices on its internet site and to consumers who access the list of advertised prices gatekeeper profits are maximized in an equilibrium where a the product market exhibits price dispersion b access fees are sufficiently low that all consumers subscribe c advertising fees exceed socially optimal levels thus inducing partial firm participation and d advertised prices are below unadvertised prices introducing the market for information has ambiguous social welfare effects

adjustment policies and the real exchange rate in kenya since 1975 abstract we show using several proxies that the real exchange rate in kenya has moved in accordance with the dependent economy model since 1975 the adjustment policy supported by the international monetary fund imf in the first half of the 1980s led to a rise in the kenyan real exchange rate and an improvement of its external position macroeconomic policy since 1986 however has resulted in a deterioration of the external position and is likely to result in a reduction in the real exchange rate in the near future

anticipated regret and product innovation when a firm introduces a product with new features some consumers may find it difficult to assess their valuations for these new attributes their purchase decisions made under such uncertainty may lead to postpurchase regret it has been experimentally shown that consumers may anticipate their potential postpurchase regret and make their current choices to mitigate or minimize it that is a consumer s anticipated regret can significantly impact his purchase decision given the trend that firms in various markets invoke regret to stimulate sales this paper analytically explores whether and how anticipated regret affects competing firms profits and product innovation our analyses reveal that the presence of anticipated regret can increase or decrease firms profits and foster or hinder product innovation depending on whether it makes the consumer segments more or less polarized in other words anticipated regret has a nonmonotonic effect on firms profits and the entrant s optimal quality therefore