information transmission cournot and bertrand equilibria we examine how incentives for two duopolists to honestly share information change depending upon the nature of competition cournot or bertrand and the nature of the information structure while in earlier papers uncertainty is about an unknown common demand intercept in the present paper uncertainty is about unknown private costs the different information structure reverses the incentives to share information while with unknown common demand sharing is a dominant strategy with bertrand competition and concealing is a dominant strategy with cournot competition with unknown private costs sharing is a dominant strategy with cournot competition and concealing is a dominant strategy with bertrand competition

trade policy of a free trade agreement in the presence of foreign lobbying abstract this paper studies the effect of foreign lobbies on trade policy of a country which is a member of a free trade agreement fta it uses a monopolistically competitive political economy model in which the government determines external tariffs endogenously the effect of foreign lobbying under the fta is examined empirically using canadian industry level trade data that allow differentiating of lobby groups by the country of origin the analysis suggests that the presence of foreign lobbying has a significant effect on the domestic trade policy the heterogeneity of foreign lobbies is also important the presence of an organized lobbying group in an fta partner country tends to raise trade barriers while an organized lobbying group of exporters from outside of the fta is associated with less protection

is protection for sale evidence on the grossman helpman theory of endogenous protection grossman and helpman 1994 present a theory of endogenous protection by explicitly modeling government industry interactions for which mere black box models previously existed they obtain a ramsey pricing type solution to the provision of protection which emphasizes the role of inverse import penetration ratios and import elasticities on the lobbying side the model makes predictions about lobbying competition and lobbying spending according to deadweight costs from protection the model not only makes for richer theory in terms of rigor and elegance but its predictions are directly testable whether the grossman helman model stands up to real world data is investigated in this paper predictions from both the protection side and lobbying side are tested using cross sectional u s nontariff barrier data we also compare the second generation grossman helpman model with a more traditional specification our results call for serious consideration of this model in the political economy literature

endogenous free trade agreements and the multilateral trading system i evaluate in this paper the impact of free trade areas ftas on the world trading system i use an oligopolistic political economy model where the external tariffs of fta members as well as the decision to form ftas are endogenously determined in this context i show that ftas are primarily beneficial to the multilateral trading system this conclusion is based first upon the finding that ftas induce their member governments to lower their external tariffs and to do so deeply enough to enhance trade even between fta members and non members while this ensures gains for the latter in general fta members may not gain i show however that governments will endorse only welfare improving arrangements in spite of their political motivations as a result fta members benefit from ratified arrangements as well finally i find that ftas by reducing the role of special interests criteria in governments trade regime decisions also tend to enhance support for further liberalization at the multilateral level

pricing and the news vendor problem a review with extensions in the newsvendor problem a decision maker facing random demand for a perishable product decides how much of it to stock for a single selling period this simple problem with its intuitively appealing solution is a crucial building block of stochastic inventory theory which comprises a vast literature focusing on operational efficiency typically in this literature market parameters such as demand and selling price are exogenous however incorporating these factors into the mode l can provide an excellent vehicle for examining how operational problems interact with marketing issues to influence decision making at the firm level in this paper we examine an extension of the newsvendor problem in which stocking quantity and selling price are set simultaneously we provide a comprehensive review that synthesizes existing results for the single period problem and develop additional results to enrich the existing knowledge base we also review and develop insight into a dynamic inventory extension of this problem and motivate the applicability of such models

foreign lobbies and us trade policy abstract in popular discussion much has been made of the susceptibility of government policies to lobbying by foreigners the general presumption being that this is harmful to the home economy however in a trade policy context this may not be the case if the policy outcome absent any foreign lobbying is characterized by welfare reducing trade barriers foreign lobbying may reduce such barriers and possibly raise welfare using a new data set on foreign political activity in the united states this paper investigates this question empirically tariffs and nontariff barriers are both found to be negatively related with foreign lobbying activity

the strategic peril of information sharing in a vertical nash supply chain a note abstract conventional wisdom suggests that information sharing benefits at least one of the participants however we find that information sharing can be strategically detrimental to both members in a vertical nash supply chain comparative statics show that each supply chain member s beneficial areas are smaller when its information source becomes more variable and larger as its signal is less accurate furthermore the pareto inferior areas in which both supply chain members get worse are non monotonic in exogenous parameters

information time option pricing theory and empirical evidence abstract with a stochastic time change from calendar time to information time we derive a parsimonious option pricing formula with stochastic volatility as a risk neutral poisson sum of merton s 1973 prices over the option s information time maturity domain the formula contains two unobservable parameters information arrival intensity and information time asset volatility with stochastic volatility induced by random information arrival when the information arrival rate intensifies the option price increases and vice versa we test the formula in pricing hedging and excess profits capture empirically using currency and the s p 500 futures options transaction data

dollar vs percentage markup pricing schemes under a dominant retailer abstract we investigate two very common pricing schemes for a stackelberg dominant retailer percentage markup and dollar markup we show that when a dominant retailer switches from dollar to percentage markup the channel s overall pie and the retailer s pie piece are both enlarged in contrast the manufacturer will be forced to levy a lower wholesale price thus receiving a smaller pie piece despite the larger pie the preceding statements hold regardless of whether the demand is deterministic or stochastic however the effects of switching to percentage markup on the retail price and sales volume will depend not only on whether the demand is stochastic but also on the assumed demand curve shape and on whether demand stochasticity is additive or multiplicative besides presenting a comprehensive set of answers on the comparative performance of dollar and percentagemarkups our results also highlight the often overlooked importance of choosing between i dollar and percentage markup and ii the formats of the assumed stochasticity and demand curves

managing channel profits a channel of distribution consists of different channel members each having his own decision variables however each channel member s decisions do affect the other channel members profits and as a consequence actions a lack of coordination of these decisions can lead to undesirable consequences for example in the simple manufacturer retailer consumer channel uncoordinated and independent channel members decisions over margins result in a higher price paid by the consumer than if those decisions were coordinated in addition the ensuing suboptimal volume leads to lower profits for both the manufacturer and the retailer this paper explores the problems inherent in channel coordination we address the following questions what is the effect of channel coordination what causes a lack of coordination in the channel how difficult is it to achieve channel coordination what mechanisms exist which can achieve channel coordination what are the strengths and weaknesses of these mechanism what is the role of nonprice variables e g manufacturer advertising retailer shelf space in coordination does the lack of coordination affect normative implications from in store experimentation can quantity discounts be a coordination mechanism are some marketing practices actually disguised quantity discounts we review the literature and present a simple formulation illustrating the roots of the coordination problem we then derive the form of the quantity discount schedule that results in optimum channel profits this article was originally published in marketing science volume 2 issue 3 pages 239 272 in 1983

the effects of information transparency on suppliers manufacturers and consumers in online markets this paper looks into the effects of information transparency on market participants in an online trading environment we study these effects in business to business electronic markets with firms competing in both upstream and downstream industries the prior literature generally assumes that either the downstream firm buyer or the upstream firm seller is a monopoly it is not clear whether information transparency would still create value if both buyers and sellers face oligopolistic competition where the benefits of information transparency could be competed away to answer this question we first develop a simple two echelon e market model and then extend the model to more general settings we find that information transparency can create value for the overall e market yet it affects buyers and sellers very differently one side will be hurt depending on the competition mode cournot or bertrand in the downstream this suggests that a manufacturer owned a supplier owned and a neutral e market will have different preferences for information transparency finally we find that information transparency can hurt consumers when the downstream industry engages in bertrand competition this is a surprising result given the expectation that online markets create substantial value for consumers

preferential versus multilateral trade liberalization and the role of political economy abstract in this paper we analyze the effect of the freedom to pursue preferential trade liberalization permitted by article xxiv of the gatt on country s incentives to participate in multilateral negotiations and on feasibility of global free trade we present a model in which countries choose whether to participate in preferential or multilateral trade agreements under political pressures from domestic special interest groups we show that heterogeneity in political preferences across countries plays an important role in determining the relative merits of preferential and multilateral approaches to trade liberalization on one hand the opportunity to liberalize preferentially may be necessary to induce countries with strong political motivations to participate in multilateral free trade negotiations on the other hand when countries share similar political preferences multilateral free trade that would have been politically supported otherwise becomes unattainable if countries can pursue preferential liberalization

asymmetric wholesale pricing theory and evidence asymmetric pricing or asymmetric price adjustment is the phenomenon where prices rise more readily than they fall we offer and provide empirical support for a new theory of asymmetric pricing in wholesale prices wholesale prices may adjust asymmetrically in the small but symmetrically in the large when retailers face cost of price adjustment such retailers will not adjust prices for small changes in their costs manufacturers then see a region of inelastic demand where small wholesale price changes do not translate into commensurate retail price changes the implication is asymmetrica small wholesale price increase is more profitable because manufacturers will not lose customers from higher retail prices yet a small decrease is less profitable because it will not lower retail prices hence there is no extra revenue from greater sales for larger changes this asymmetry in the behavior of wholesale price vanishes as the price adjustment cost is compensated by the increase in retailers revenue resulting from correspondingly large retail price changes we present a formal economic model of a channel with forward looking retailers and cost of price adjustment test the derived propositions on the behavior of manufacturer prices using a large supermarket scanner data set and find that the results are consistent with the predictions of our theory we then discuss the implications for asymmetric pricing channels and cost of price adjustment literatures as well as public policy

short term interest rates as subordinated diffusions in this article we cbaracterize and estimate the process for short term interest rates using federal funds interest rate data we presume that we are observing a discrete time sample of a stationary scalar diffusion we concentrate on a class of models in whicb the local volatility elasticity is constant and the drift has aflexible specufication to accommodate missing observations and to break the link between economic time and calendar time we model the sampling scheme as an increasing process that is not directly observed we propose and implement two new methods for estimation we find evidence for a volatility elasticity between one and onehalf and two when interest rates are high local mean reversion is smaul and the mechanism for inducing stationarity is the increased volatility of the diffusion process

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

cheap talk and bogus network externalities in the emerging technology market many emerging technologies exhibit path dependent demands driven by positive network feedback such network effects profoundly impact marketing strategists thinking in today s network economy however the significant network externalities expected by many people often fail to materialize in the emerging technology market we analyze this phenomenon in the context of a technology distribution channel by studying cheap talk strategies under information asymmetry we show that incentive compatible contracts are essential for achieving credible information transmission in our model the better informed technology vendor has an incentive to inflate the retailer s ex ante belief of network externalities when a wholesale price contract is adopted when properly termed revenue sharing contracts are implemented there are information efficient cheap talk equilibria where truthful information transmission is mutually beneficial when the vendor s information is imperfect even revenue sharing contracts cannot guarantee credible information transmission if there is significant prior belief disparity between the vendor and the retailer this study demonstrates how information inefficient equilibria e g information blockage arise because of the conflict of interest or the conflict of opinion among channel members it also explores the role of cheap talk in facilitating channel coordination

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

a bargaining theory of distribution channels abstract a critical factor in channel relationships between manufacturers and retailers is the relative bargaining power of both parties in this article the authors develop a framework to examine bargaining between channel members and demonstrate that the bargaining process actually affects the degree of coordination and that two part tariffs will not be part of the market contract even in a simple one manufacturer one retailer channel to establish the institutional and theoretical bases for these results the authors relax the conventional assumption that the product being exchanged is completely specifiable in a contract they show that the institution of bargaining has force and it affects channel coordination when the complexity of nonspecifiability of the product exchange is present the authors find that greater retailer power promotes channel coordination thus there are conditions in which the presence of a powerful retailer might actually be beneficial to all channel members the authors rec

a comparison of optimal tariffs and welfare under no lobbying domestic lobbying and domestic foreign lobbying whether and what type of the lobbying induced trade policies can improve the domestic welfare we show that as compared to the case of no lobbying and the case of domestic lobbying the domestic foreign lobbying may achieve the lowest tariff and may also realise the highest welfare for the domestic country our finding provides a theoretical explanation to the prevalent lobbying competition between asian firms and us firms in usa recently we argue that the domestic foreign lobbying may contribute to a freer trade in the domestic country and lobbying competition may be one of the strongest forces pushing for trade liberalisation

rent destruction and the political viability of free trade agreements this paper studies the political viability of free trade agreements ftas the key element of the analysis is the rent destruction that these arrangements induce by eliminating intrabloc trade barriers an fta lowers the incentives of import competing industries to lobby for higher external tariffs thereby inducing a reduction of the rents created in the lobbying process using a conventional competitive model i show that the prospect of rent destruction can critically undermine and in some cases rule out entirely the political viability of welfarereducing ftas this result contrasts sharply with findings from the earlier regionalism literature

information distortion in a supply chain the bullwhip effect this article originally appeared in management science april 1997 volume 43 number 4 pp 546 558 published by the institute of management sciences consider a series of companies in a supply chain each of whom orders from its immediate upstream member in this setting inbound orders from a downstream member serve as a valuable informational input to upstream production and inventory decisions this paper claims that the information transferred in the form of orders tends to be distorted and can misguide upstream members in their inventory and production decisions in particular the variance of orders may be larger than that of sales and distortion tends to increase as one moves upstream a phenomenon termed bullwhip effect this paper analyzes four sources of the bullwhip effect demand signal processing rationing game order batching and price variations actions that can be taken to mitigate the detrimental impact of this distortion are also discussed

multilateral tariff cooperation during the formation of free trade areas we consider the impact of the formation of free trade agreements on multilateral tariff cooperation we assume that countries are limited to selfenforcing multilateral arrangements that balance the gains from deviating against the costs of an ensuing trade war we find that the emergence of free trade areas will be accompanied by a temporary retreat from liberal multilateral trade policies as the initial balance supporting multilateral cooperation is upset eventually however as the full impact of the emerging free trade agreement on multilateral trade patterns is felt this initial balance tends to reemerge and liberal multilateral trade policies can be restored

research note vertical information sharing in a volatile market when demand is uncertain manufacturers and retailers often have private information on future demand and such information asymmetry impacts strategic interaction in distribution channels in this paper we investigate a channel consisting of a manufacturer and a downstream retailer facing a product market characterized by short product life uncertain demand and price rigidity assuming the firms have asymmetric information about the demand volatility we examine the potential benefits of sharing information and contracts that facilitate such cooperation we conclude that under a wholesale price regime information sharing might not improve channel profits when the retailer underestimates the demand volatility but the manufacturer does not although information sharing is always beneficial under a two part tariff regime it is in general not sufficient to achieve sharing and additional contractual arrangements are necessary the contract types we consider to facilitate sharing are profit sharing and buyback contracts

managers investors and crises mutual fund strategies in emerging markets the authors address the trading strategies of mutual funds in emerging markets the data set they develop permits analyses of these strategies at the level of individual portfolios a methodologically novel feature of their analysis they disentangle the behavior of fund managers from that of investors for both managers and investors they strongly reject the null hypothesis of no momentum trading funds momentum trading is positive they systematically buy winners and sell losers contemporaneous momentum trading buying current winners and selling current losers is stronger during crises and stronger for fund investors than for fund managers lagged momentum trading buying past winners and selling past losers is stronger during noncrises and stronger for fund managers investors also engage in contagion trading selling assets from one country when asset prices fall in another these findings are based on data about mutual funds that represent only 10 percent of the market capitalization in the countries considered were it a larger share of the market finding counterparties for their trades the investors who buy when they sell and sell when they buy would be difficult and the premise that funds respond to contemporaneous returns rather than causing them would become tenuous

manufacturer s return policies and retail competition manufacturers returns policies are a common feature in the distribution of many products the obvious rationale for returns policies is insurance practitioners not surprisingly have a different perspective and view returns as a cost of doing business in this paper we study the strategic effect of returns policies on retail competition and highlight its profitability implications for a manufacturer the setting for our research is the distribution of products with uncertain demand limited shelf lives and retail competition our objective is to provide a better understanding of when manufacturers should adopt returns policies the insights are obtained with a model based on the economics of strategy and decision making under uncertainty we show that when retailing is competitive and there is no uncertainty in demand a returns policy subtly induces retailers to compete more intensely the provision of a returns policy reduces retail prices without affecting wholesale prices thereby reducing retailer margins and improving manufacturer profitability the intuition is that with a returns policy cournot like levels of retail stocks cannot be sustained each retailer will order stocks so that it will not be constrained by stocks and so intensifying retail competition when however demand is uncertain and there is a single retailer a returns policy encourages the retailer to over stock and so decreases upstream manufacturer profits while the provision of a returns policy leads to lower retail margins the optimality of returns policy depends on the overall uncertainty and marginal cost a returns policy reduces the dispersion in retail prices between the high and low states of demand and the range of retail prices in the returns case is contained within the range of retail prices for the no returns case in the general setting when there are competing retailers and demand is uncertain there is a trade off for the manufacturer between the benefits more intense retail competition and the costs excessive stocking of a returns policy we find that a manufacturer should accept returns when the marginal production cost is sufficiently low and demand uncertainty is not too great to validate the results of our theory we conduct an empirical test with data from a major u s retailer the tests confirm our prediction that a returns policy intensifies retail competition and reduces retailer margins our theory and empirical test should interest practitioners and researchers in distribution especially those concerned with managing retail competition

structural analysis of manufacturer pricing in the presence of a strategic retailer consumer goods manufacturers usually sell their brands to consumers through common independent retailers theoretical research on such channel structures has analyzed the optimal behavior of channel members under alternative assumptions of manufacturer retailer interaction vertical strategic interaction research in empirical industrial organization has focused on analyzing the competitive interactions between manufacturers horizontal strategic interaction decision support systems have made various assumptions about retailer pricing rules e g constant markup category profit maximization the appropriateness of such assumptions about strategic behavior for any specific market however is an empirical question this paper therefore empirically infers 1 the vertical strategic interaction vsi between manufacturers and retailer 2 the horizontal strategic interaction hsi between manufacturers simultaneously with the vsi and 3 the pricing rule used by a retailer the approach is particularly appealing because it can be used with widely available scanner data where there is no information on wholesale prices researchers usually have no access to wholesale prices even manufacturers who have access to their own wholesale prices usually have limited information on competitors wholesale prices in the absence of wholesale prices we derive formulae for wholesale prices using game theoretic solution techniques under the specific assumptions of vertical and horizontal strategic interaction and retailer pricing rules we then embed the formulae for wholesale prices into the estimation equations while our empirical illustration is using scanner data without wholesale prices the model itself can be applied when wholesale prices are available early research on the inference of hsi among manufacturers in setting wholesale prices using scanner data e g kadiyali et al 1996 1999 made the simplifying assumption that retailers charge a constant margin this assumption enabled them to infer wholesale prices and analyze competitive interactions between manufacturers in this paper we show that this model is econometrically identical to a model that measures retail price coordination across brands hence the inferred cooperation among manufacturers could be exaggerated by the coordinated pricing category management done by the retailer we find empirical support for this argument this highlights the need to properly model and infer vsi simultaneously to accurately estimate the hsi when using data at the retail level functional forms of demand have been evaluated in terms of the fit of the model to sales data but recent theoretical research on channels lee and staelin 1997 tyagi 1999 has shown that the functional form has serious implications for strategic behavior such as retail passthrough while the logit and linear model implies equilibrium passthrough of less than 100 lee and staelin call this vertical strategic substitute vss the multiplicative model implies optimal passthrough of greater than 100 vertical strategic complement vsc because passthrough rates on promotions have been found to be below or above 100 chevalier and curhan 1976 armstrong 1991 we empirically test the appropriateness of the logit vss and the multiplicative vsc functional form for the data we perform our analysis in the yogurt and peanut butter categories for the two biggest stores in a local market we found that the vss implications of the logit fit the data better than the multiplicative model we also find that for both categories the best fitting model is one in which 1 the retailer maximizes category profits 2 the vsi is manufacturer stackelberg and 3 manufacturer pricing hsi is tacitly collusive the fact that the retailer maximizes category profits is consistent with theoretical expectations the inference that the vsi is manufacturer stackelberg reflects the institutional reality of the timing of the game retailers set their retail prices after manufacturers set their wholesale prices note that in the stores and product categories that we analyze the two manufacturers own the dominant brands with combined market shares of about 82 in the yogurt market and 65 in the peanut butter market the result is also consistent with a balance of power argument in the literature the finding that manufacturer pricing is tacitly collusive is consistent with the argument that firms involved in long term competition in concentrated markets can achieve tacit collusion managers use decision support systems for promotion planning that routinely make assumptions about vsi hsi and the functional form the results from our analysis are of substantive import in judging the appropriateness of assumptions made in such decision support systems

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

duopoly information equilibrium cournot and bertrand abstract in a duopoly model where firms have private information about an uncertain linear demand it is shown that if the goods are substitutes not to share information is a dominant strategy for each firm in bertrand cournot competition if the goods are complements the result is reversed furthermore the following welfare results are obtained 1 i with substitutes in cournot competition the market outcome is never optimal with respect to information sharing but it may be optimal in bertrand competition if the products are good substitutes with complements the market outcome is always optimal 2 ii bertrand competition is more efficient than cournot competition 3 iii the private value of information to the firms is always positive but the social value of information is positive in cournot and negative in bertrand competition

an industry equilibrium analysis of downstream vertical integration this paper investigates the effect of product substitutability on nash equilibrium distribution structures in a duopoly where each manufacturer distributes its goods through a single exclusive retailer which may be either a franchised outlet or a factory store static linear demand and cost functions are assumed and a number of rules about players expectations of competitors behavior are examined it is found that for most specifications product substitutability does influence the equilibrium distribution structure for low degrees of substitutability each manufacturer will distribute its product through a company store for more highly competitive goods manufacturers will be more likely to use a decentralized distribution system this article was originally published in marketing science volume 2 issue 2 pages 161 191 in 1983

protection for sale with imperfect rent capturing we extend the protection for sale framework to non tari barriers introducing partial rent capturing leads to a testable specification that bridges the gap between the grossman and helpman 1994 model and its empirical implementation where coverage ratios have been used to measure protection the econometric analysis supports our augmented specification and leads to more realistic estimates for the structural parameters of the model jel classification f13

vertical strategic interaction implications for channel pricing strategy this paper examines two strategic pricing decisions within channels using foresight i e price leadership and considering category implications i e product line pricing are price leadership and product line pricing always the best pricing strategies for a channel member if not when does this occur and why by investigating these questions we address some major concerns of both marketing practitioners and scholars interested in channel management issues in addition this study provides an indepth discussion on why previous analytic studies produced answers to these questions that depend upon the choice of the form of demand functions as such this study should significantly resolve the debate among analytic marketing modelers about the right demand specification at the core of our discussion lies the concept of vertical strategic interaction which is defined in terms of the direction of a channel member s reaction to the actions of its channel partner within a given demand structure specifically if a channel member s best reaction is to reduce its margin when its channel partner increases its margin the type of vertical strategic interaction is referred to as vertical strategic substitutability vss if the best reaction is to increase the margin the environment is referred to as vertical strategic complementarity vsc if the best reaction is no margin change it is referred to as vertical strategic independence vsi using a game theoretic approach we demonstrate that these three types of vertical strategic interactions represent a key driving force for optimal decisions on channel price leadership and product line pricing our investigation involves mathematical analyses of an industry model composed of two manufacturers selling competing products both carried by two competing retailers as such the model allows for retailer product line pricing as well as manufacturer and retailer level competition in addition this general model can be used to analyze three more restrictive industry settings often found in the channels literature i e a bilateral monopoly jeuland and shugan jeuland abel steven m shugan 1983 managing channel profits marketing sci 2summer 239 72 two competing manufacturers selling through competing franchised retailers mcguire and staelin mcguire timothy w richard staelin 1983 an industry equilibrium analysis of downstream vertical integration marketing sci 2spring 161 92 and two competing manufacturers selling through one common retailer using product line pricing choi choi s chan 1991 price competition in a channel structure with a common retailer marketing sci 10fall 271 96 unlike many other channel studies most of our analyses are performed without assuming particular functional forms of demand curves thus this paper provides greater assurance that the insights from this stream of research are broadly applicable not only across industry structures but also across demand conditions the paper starts out by defining three different rules for how prices are set the manufacturer uses foresight the retailer uses foresight and neither channel member uses foresight we then show a one to one mapping between the type of vertical strategic interaction and the optimality of channel price leadership specifically a channel member finds it profitable to be a price leader for vss but prefers to be a follower for vsc for vsi channel members are indifferent to the channel price leadership issue as it has no effect on channel member profits we also show that there exist conditions under which a retailer might see a reduction in profits when it changes its policy from non product line pricing to product line pricing such conditions arise when the retailer is not a price leader and the environment is characterized by vss or vsc at a more general level this study suggests not only the value but also the cost to a firm for using superior knowledge i e foresight and or product line pricing in making strategic marketing decisions in this way ignorance can be bliss we also explore the link between demand characteristics and the three types of vertical strategic interaction we show that the type of vertical strategic interaction present in a given environment is closely related with the convexity of the demand curve and the level of demand for a given price interestingly we find that linearity of demand is not a necessary condition for any of the three types of vertical strategic demand function consequently in evaluating the robustness of analytic analyses it may be more important to determine the type of vertical strategic interaction assumed instead of whether the demand is linear or nonlinear finally our results are limited to situations where the channels are not coordinated and the retailer s precommitment to particular pricing policy and decision is credible although such situations still capture a significant portion of reality we acknowledge that the insights from this study might not be applicable in all situations

price discrimination in competitive markets we present models in which price discrimination in the context of a two part price can occur in some competitive markets purchases take place in groups which choose which firms to patronize while firms are perfectly competitive with respect to groups they have some market power over individual consumers who are constrained by their groups choices we find that firms will charge an entry fee that is below marginal cost and the second part of the price is marked up above marginal cost the markup not only is positive but increases with the quality of the product

sleeping with the enemy should competitors share the same advertising agency the possibility of account conflicts is generally regarded as a very serious problem in the advertising industry the problem is that once an advertising agency works for a firm it learns private information which it can use strategically i e make available to the firm s competitors but in oligopolistic situations knowing more about a competitor may not necessarily be beneficial because the competitor may react to this knowledge similarly allowing the competitor to have more information may not necessarily be detrimental in fact the decision of whether to share the same agency depends on three effects which are identified here 1 the decision making framework effect 2 the strategic effect and 3 the uncertainty effect the first effect always favors sharing the same gency the direction of the latter two effects is ambiguous this ambiguity is resolved against the sharing of agencies when 1 the competitor s reaction to the firm s situation is especially harmful in that particular situation strategic effect and 2 the competitor s actions are increasingly harmful uncertainty effect

international capital markets and foreign exchange risk author s brennan michael j xia yihong abstract the relation between the volatilities of pricing kernels associated with di erent currencies and the volatility of the exchange rate between the currencies is derived under the assumption of integrated capital markets and the volatilities of the pricing kernels are related to the foreign exchange risk premium time series of pricing kernel volatilities are estimated from panel data on bond yields for five major currencies using a parsimonious term structure model that allows for time varying pricing kernel volatilities the resulting estimates are used to test hypotheses about the relation between the volatilities of the pricing kernels in di erent currencies and the volatility of the exchange rate as predicted time variation in foreign exchange risk premia is found to be related to time variation in both the volatility of the pricing kernels and the volatility of exchange rates the estimated pricing kernel volatilities can account for the forward premium puzzle in an average sense across exchange rates

competition and cooperation in marketing channel choice theory and application this paper discusses the problem of choosing a vertical marketing channel in a product differentiated duopolistic market firms choose product price and the form of the marketing channel to maximize profits it is shown that integration of the marketing function results in greater price competition and lower prices than does the use of independent marketing middlemen the profitability of reducing price competition by using such middlemen is investigated two hypotheses that integration is negatively associated with the products substitutability and that symmetric channel structures are stable are tested in a preliminary way and supported with survey data from the international semiconductor industry

note the role of returns policies in pricing and inventory decisions for catalogue goods manufacturers often use returns policies to encourage retailers to stock and price items more aggressively we focus on the effect that such policies have on both a retailer s and a manufacturer s profits when the retailer must commit prior to the selling season to both a stocking quantity and a price at which to sell an item such a commitment is often necessary for retailers who sell primarily through catalogues

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

a class of asset pricing models governed by subordinate processes that signal economic shocks abstract we consider a mean reverting risk neutral short rate process model with a vector of subordinated drift processes that accounts for the random effect of the arrival of new information it is assumed that the market is efficient with no arbitrage opportunities closed form expressions for the price in nominal and in real terms of a discount bond are obtained we define a risk neutral exchange rate model with correlated subordinated drift and volatility processes that reflect the effect of the arrival of new information pertaining to the countries involved the cases of complete and incomplete exchange markets with no arbitrage opportunities are considered

a strategic and welfare theoretic analysis of free trade areas abstract we construct a three country model to determine how the formation of free trade areas ftas affects optimal tariffs and welfare we find that at constant rest of the world row tariffs the adoption of internal free trade induces union members to reduce their external tariffs below the kemp wan j int econom 6 1976 95 97 level and causes row s terms of trade to improve and its welfare to rise when row also behaves optimally its policy response to the formation of the fta is to raise tariffs generally fta members prefer to liberalize internal trade partially and find regional integration appealing only if their collective size is sufficiently large we also demonstrate how ftas may undermine the attainment of global free trade

trade diversion and declining tariffs evidence from mercosur abstract this paper empirically examines the alternative posed by richardson j intern econ 34 1993 39 to the traditional view that trade integration may exacerbate inefficiencies richardson s hypothesis boldly predicts that trade diversion and trade creation may actually cause tariffs to decline the hypothesis is fundamentally attributable to the presence of a political component in the governments objective functions a cross sectionally rich data set on trade and tariffs from the mercosur pact countries primarily argentina is used the evidence yields surprising conclusions about the validity of endogenous tariff determination in models of trade integration

simulated likelihood estimation of diffusions with an application to exchange rate dynamics in incomplete markets abstract we present an econometric method for estimating the parameters of a diffusion model from discretely sampled data the estimator is transparent adaptive and inherits the asymptotic properties of the generally unattainable maximum likelihood estimator we use this method to estimate a new continuous time model of the joint dynamics of interest rates in two countries and the exchange rate between the two currencies the model allows financial markets to be incomplete and specifies the degree of incompleteness as a stochastic process our empirical results offer several new insights into the dynamics of exchange rates

optimal quality and quantity provisions for centralized vs decentralized distribution market size uncertainty effects abstract we provide insights on how market size uncertainty affects the optimal quality quantity provision in distribution channels when consumers are heterogeneous in their willingness to pay for product quality in this context we denote the difference between the manufacturer s optimal quality quantity provision for a centralized channel and its optimal analog for a decentralized channel as the quality quantity differential we find that market size uncertainty creates or increases the quantity differential but it does not affect the differential s polarity in contrast market size uncertainty decreases the quality differential and it does so to the extent that depending on the level of consumer heterogeneity it reverses the differential s polarity moreover we find that the higher the inherent uncertainty level the more pronounced are the effects we likewise find that the effects of market size uncertainty are amplified if the notion of consumer heterogeneity is replaced with retail level competition