are judges leading economic theory sunk costs the threat of entry and the competitive process in this paper we attempt to bring theoretical form to a particular entry argument that has found favor in the courts we suggest that sunk costs may not be a major impediment to entry when a group of customers can commit to an entry enhancing strategy buyers have strong incentives to adopt such strategies because they benefit directly from the resulting lower prices the simplest example involves a large buyer that is able to guarantee an entrant a market for its product long term contracts or even informal purchase commitments backed by customer reputation may also allow the entrant to obtain a guarantee of sufficient business to make the entry profitable once entry is thought likely to occur the existing competitors may be unwilling to attempt a price increase of any magnitude thus the threat of entry can maintain competitive prices even in the presence of sunk costs in section ii we motivate the analysis by discussing the current controversy over the role entry conditions play in an antitrust merger review then we discuss the necessary assumptions for a model of how the threat of entry can deter any price increase in the presence of sunk costs we note that these conditions are different from those commonly used in the economic literature

measuring the impacts of teachers i evaluating bias in teacher value added estimates are teachers impacts on students test scores value added a good measure of their quality one reason this question has sparked debate is disagreement about whether value added va measures provide unbiased estimates of teachers causal impacts on student achievement we test for bias in va using previously unobserved parent characteristics and a quasi experimental design based on changes in teaching sta using school district and tax records for more than one million children we nd that va models which control for a student s prior test scores exhibit little bias in forecasting teachers impacts on student achievement although teachers have substantial impacts

market performance in an open developing economy technical and allocative efficiencies of korean industries this paper first examines determinants of technical efficiency in terms of competition and government regulation including protection in korean industries relying heavily upon the concepts of x efficiency and rentseeking activities allocative efficiency measured as profitability is then considered with technical efficiency as a determinant the outcome of the regression shows that both the sheltering of industries from international competition and the financial market distortions strongly affect technical efficiency and that technical efficiency as well as effective protection rate are important determinants of profitability

a real options approach to the valuation of a forestry investment abstract the theory of real options is used to model the optimal tree harvesting decision the value of the option to harvest is estimated using a dynamic programming approach and a general numerical solution technique suitable for any type of stochastic process for prices the conditions under which the optimal harvest time is independent of price are examined in addition the impact of assuming future lumber prices are mean reverting is considered it is found that option value and optimal cutting time are significantly different under the mean reversion assumption compared to geometric brownian motion

endogenous sequential entry in a spatial model in this paper we simulate a sequential entry of firms in a differentiated industry a la hotelling firms select a product location once for all they are aware of the unique price equilibrium that will take place after entry has occurred and take into account the behaviour of subsequent entrants it is found that early entrants will systematically locate around the centre but in such a way as not to induce later competitors to locate in between them location choices are also investigated as an instrument for entry deterrence which is feasible because of a fixed cost we identify several ranges of fixed cost for which entry is innocently deterred corresponding to a natural monopoly duopoly triopoly entry deterrence is then typically used to stretch the range of fixed cost for which a given number of firms can be sustained deterrence strategies are consistently such that firms locate at more regular intervals

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

a dynamic model of advertising and market shares this paper presents a model of strategic advertising and the battle for market shares between incumbents and entrants the lagged impact of advertising allows incumbents strategically to use preentry advertising to effect the postentry equilibrium solution however because the advantages to advertising are erodable by counter persuasive advertising strategies of entrants the threat of entry may cause incumbents to take retreative or aggressive strategies the incumbants retreative or aggressive posture depends crucially on the erosion impact on their advertising

advertising sunk costs and barriers to entry this paper tests hypotheses about the entry deterring effects of advertising the model isolates three separate effects of advertising on entry the effect on the irrecoverable costs of entry the effect on the uncertainty underlying the entry environment and the effect on the measured rates of profit we find that advertising impedes entry since necessary advertising expenditures give rise to a sunk cost which raises the risk of entry however we also find a countervailing force due to advertising in that the entrant perceives a greater likelihood of success in markets where advertising is important our analysis shows that the overall impact of advertising on entry is positive

location choice product proliferation and entry deterrence within a slightly modified version of hotelling s model we reconsider the claim that the threat of entry induces existing firms to produce a larger number of products than they would otherwise we show that entry deterrence although optimal need not be achieved through product proliferation in some cases the incumbent monopolist resorts to an entry deterring strategy based on location choice rather than product proliferation we also show that in some cases the number of products chosen by the incumbent facing the threat of entry is strictly greater than the minimum number required to deter entry

contestability queues and governmental entry deterrence this paper demonstrates that a perverse kind of entry deterrence can result when government subsidized production is combined with non price rationing in the form of queuing even though queuing leads to a total cost to the consumer not including the tax cost that is higher than the cost of an unsubsidized private supplier and even though the government s money price is rigid the market is not contestable the key to the result is that the waiting cost portion of the consumer s acquisition cost declines immediately upon entry and losses would be forced upon the entrant privatization would negate the entry deterrence thus leading to entry increased output at lower full prices lower average production costs decreased waiting costs increased profits and increased consumer surplus

noncooperative behavior by a cartel as an entry deterring signal recent work has investigated the effect of a potential entrant s uncertainty about postentry profits on the likelihood of his entering the market it has always been assumed that the potential entrant knows the type of postentry solution but lacks information on cost or as to whether the postentry solution will be cooperative or noncooperative we find that entry is more likely the greater is the preentry profit rate in equilibrium the threat of entry then forces the incumbent firms to act more competitively to deter entry

resource allocation to defensive marketing and manufacturing strategies abstract in this paper we investigate the coordinated use of marketing and manufacturing strategies to formulate a defensive business strategy for an incumbent firm upon market entry while defensive marketing strategies have been researched extensively little has been done on defensive manufacturing strategies and even less on coordinating these two we propose a formulation for the joint formation of a defensive strategy by the marketing and production functions under budget constraint considerations the incumbent firm may allocate its resourcesto advertising and distribution expenditures as well as to manufacturing investments to reduce the unit production cost the incumbent firm has also the option of simply allocating all of its resources purely to advertising and distribution we show that while there exist cases where the optimal reaction to entry involves investments in manufacturing improvements there are also cases where defense is in marketing strategies alone we identify the market conditions that promote such reactions to entry and also provide sensitivity analysis

productivity returns to experience in the teacher labor market methodological challenges and new evidence on long term career improvement abstract we present new evidence on the relationship between teacher productivity and job experience econometric challenges require identifying assumptions to model the within teacher returns to experience with teacher fixed effects we describe the identifying assumptions used in past models and in a new approach that we propose and we demonstrate how violations of these assumptions can lead to substantial bias consistent with past research we find that teachers experience rapid productivity improvement early in their careers however we also find evidence of returns to experience later in the career indicating that teachers continue to build human capital beyond these first years

advertising and economies of scale critical comments on the evidence the general issue to be discussed in this review article is does the advertising cost per dollar of sales increase as increases in total advertising expenditures occur stated in this fashion however the question of economies of scale and increasing returns to advertising is vague and equivocal the difficulty of formulating the question in a rigorous enough fashion is the root cause of much of the controversy and confusion about the efficiency of advertising at various levels of advertising expenditures or other forms of advertising input regardless of the formidable theoretical and methodological problems involved the economies of scale in advertising remain an important issue more often than not antitrust measures and public regulation of the marketplace are based on or legitimized by assumptions of substantial scale economies enabling established large corporations to maintain market power keeping competitors out and prices up the purpose of this article is critically to review the most important empirical evidence relating to economies of scale in advertising the article

excess capacity and entry some empirical evidence recent articles by spence i977 dixit i979 and schmalensee i98i have elaborated on wenders i97i1 proposition that excess capacity can act as a barrier to entry the intent of all of these treatments is to suggest that firms may rationally invest in excess capacity with the expectation that excess capacity will be seen by potential entrants either as a signal of aggressive intent or as a credible threat 2 when excess capacity does not lead to creation of a credible threat it may still act as a barrier to entry by shifting the risk return perceptions of potential entrants enough to divert the potential entrants investments into other industries 3 alternatively investment in excess capacity by incumbent firms may reduce the prospects of an active market for the used equipment of a defunct entrant and thereby help to convert fixed costs into sunk costs consequently raising entry barriers 4 this paper represents an exploratory effort to investigate empirically the prevalence and efficiency of excess capacity in deterring entry first a simple and traditional model of entry is presented this is followed by the description of the data used to explore the excess capacity investment concept a combined results and comments section follows the description of the data

a real options model to evaluate the effect of environmental policies on the oil sands rate of expansion abstract canadian oil sands hold the third largest recognized oil deposit in the world while the rapidly expanding oil sands industry in western canada has driven economic growth the extraction of the oil comes at a significant environmental cost it is believed that the government policies have failed to keep up with the rapid oil sands expansion creating serious challenges in managing the environmental impacts this paper presents a practical yet financially sound real options model to evaluate the rate of oil sands expansion under different environmental cost scenarios resulting from governmental policies while accounting for oil price uncertainty and managerial flexibilities our model considers a multi plant multi agent setting in which labor costs increase for all agents and impact their optimal strategies as new plants come online our results show that a stricter environmental cost scenario delays investment but leads to a higher rate of expansion once investment begins once constructed a plant is highly unlikely to shut down our model can be used by government policy makers to gauge the impact of policy strategies on the oil sands expansion rate and by oil companies to evaluate expansion strategies based on assumptions regarding market and taxation costs

teacher training teacher quality and student achievement abstract we study the effects of various types of education and training on the productivity of teachers in promoting student achievement previous studies on the subject have been hampered by inadequate measures of teacher training and difficulties in addressing the non random selection of teachers to students and of teachers to training we address these issues by estimating models that include detailed measures of pre service and in service training a rich set of time varying covariates and student teacher and school fixed effects we find that elementary and middle school teacher productivity increases with experience informal on the job training the largest gains from experience occur in the first few years but we find continuing gains beyond the first five years of a teacher s career in contrast we do not find a consistent relationship between formal professional development training and teacher productivity however this may be partly driven by estimation issues as we find more significant positive effects of formal training in the subject grade combination where estimates should be most precise middle school math there is no evidence that teachers pre service undergraduate training or college entrance exam scores are related to productivity

short term variations and long term dynamics in commodity prices in this article we develop a two factor model of commodity prices that allows meanreversion in short term prices and uncertainty in the equilibrium level to which prices revert although these two factors are not directly observable they may be estimated from spot and futures prices intuitively movements in prices for long maturity futures contracts provide information about the equilibrium price level and differences between the prices for the short and long term contracts provide information about short term variations in prices we show that although this model does not explicitly consider changes in convenience yields over time this short term long term model is equivalent to the stochastic convenience yield model developed in gibson and schwartz 1990 we estimate the parameters of the model using prices for oil futures contracts and apply the model to some hypothetical oil linked assets to demonstrate its use and some of its advantages over the gibson schwartz model

limit price entry prevention when complete information is lacking abstract this paper extends an earlier paper by the author in which there were two economic agents an established firm and a potential entrant operating under complete information each agent being assumed to know the profit functions of both firms the present paper extends some of the results of the earlier work to a model in which it is not known with certainty to either agent what the profit functions would be after the entrant would come into the market

advertising expenditure and consumer prices this paper studies the effect of a change in the marginal costs of advertising on advertising expenditures of firms and on consumer prices i make use of a policy change in austria that involved an increase of the taxation of advertising in parts of the country and a simultaneous decrease in other parts i show that advertising expenditures of firms move quickly in the opposite direction of the marginal costs of advertising consumer prices increase with advertising in some industries and decrease in others this effect correlates with informational differences in advertisements across industries

strategic entry deterrence in analyzing deterrence of large scale entry two classes of entry barriers may be distinguished an innocent entry barrier is unintentionally erected as a side effect of innocent profit maximization in contrast a strategic entry barrier is purposely erected to reduce the possibility of entry two types of innocent barriers may also be distinguished a postentry absolute advantage has the property that if entry did occur the established firm would be at a profit advantage over the entrant examples are superior technology or product design patents and lower input prices a preentry asymmetry advantage arises from the fundamental preentry asymmetry between established firm and potential entrant before the entrant makes his entry decision the established firm has already committed resources this prior existence gives first move advantages the preentry asymmetry is independent of symmetry or asymmetry in the rules the equilibrium concept of the postentry game that might ensue even if the postentry game will be played according to nash cournot or entrant as leader rules the preentry leadership

would hotelling kill the electric car in this paper we show that the potential for endogenous technological change in alternative energy sources may alter the behaviour of resource owning firms when technological progress in an alternative energy source can occur through learning by doing resource owners face competing incentives to extract rents from the resource and to prevent expansion of the new technology we show that in such a context it is not necessarily the case that scarcity driven higher traditional energy prices over time will induce alternative energy supply as resources are exhausted rather we show that as we increase the learning potential in the substitute technology lower equilibrium energy prices prevail and there may be increased resource extraction and greenhouse gas emissions we show that the effectiveness and the incidence of emissions reduction policies may be altered by increased potential for technological change our results suggest that treating finite resource rents as endogenous consequences of both technological progress and policy changes will be important for the accurate assessment of climate change policy

action characteristics as predictors of competitive responses a central question in competitive dynamics is whether a competitive response can be predicted this study links various characteristics of actions with the total number and the time lag of competitors responses the hypothesized relationships were tested with a sample of competitive moves among u s airlines the results suggested that responses are influenced by the characteristics of the actions that evoked them specifically the total number of competitors affected by an action and the importance to these competitors of the markets under attack by the action increase the number of competitive responses strategic as opposed to tactical actions or actions which require substantial implementation efforts reduce the number and delay the timing of rivals counteractions finally contrary to prediction competitors who have a high stake in the markets under attack by a competitive move react slowly

the impact of spatial price differences on oil sands investments abstract in this article a two factor real options model is developed to examine the impact spatial price differences have on the value of an oil sands project and the incentive to invest large volatile price differences between locations can emerge when demand to ship exceeds capacity limits this may have a significant impact on production investment and policy in exporting regions here we assume the price difference between two locations follows a stationary process implying crude oil markets are integrated as oil prices in different locations move together the investment decision is formulated as a linear complementarity problem that is solved numerically using a fully implicit finite difference method results show the value of an oil sands project and the incentive to invest in a new project will increase when the mean price difference decreases surprisingly the standard deviation of the price difference has very little impact on project value or the incentive to invest

option valuation of claims on real assets the case of offshore petroleum leases this paper extends financial option theory by developing a methodology for the valuation of claims on a real asset an offshore petroleum lease several theoretical and practical problems not present in applying option pricing theory to financial assets are addressed most importantly we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset petroleum reserves the advantages of this approach over conventional discounted cash flow techniques are emphasized the methodological development provides important insights for both company behavior and government policy promising empirical results are reported

alternative approaches to evaluation in empirical microeconomics four alternative but related approaches to empirical evaluation of policy interventions are studied social experiments natural experiments matching methods and instrumental variables in each case the necessary assumptions and the data requirements are considered for estimation of a number of key parameters of interest these key parameters include the average treatment effect the treatment on the treated and the local average treatment effect some issues of implementation and interpretation are discussed drawing on the labour market programme evaluation literature

the valuation of forestry resources under stochastic prices and inventories a contingent claims approach to capital budgeting may be preferable to traditional methods where uncertainty and managers strategic reactions to changing conditions are impor tant as an example of such a case we solve the classical problem of the duration of an investment in forestry resources i e when to cut down the trees in the general case of stochastic output prices and stochastic natural growth rate and timber inventories a con tingent claims approach is used to value the forestry resources as a function of 1 sto chastic prices and inventories and 2 an asymmetric optimal production policy that incorporates the option to halt timber production temporarily i introduction classical capital budgeting techniques are based on the assumption that fu ture cash flows follow a rigid pattern and can be accurately predicted far into the future on the basis of such cash flow predictions the project is either accepted or rejected the uncertainty in the project and management s strategic reactions to changing conditions are dealt with only superficially at best a risk adjusted interest rate is employed and various deterministic scenarios are plotted out in situations where uncertainty and management s strategic reactions to it are im portant the classical technique is apt to lead to wrong decisions the technology needed to deal with such problems more accurately is becoming available the purpose of this paper is to present a stylized example of how it can be used our example is a general solution to the classical duration problem of the optimal control of a long term renewable resource investment such as forestry resources i e when to chop down a tree 1 if the prices and the natural growth rate of the inventory of forest timber are assumed to be deterministic the optimal control is very simple to derive but when both the price and inventory of timber are stochastic the problem becomes both stochastic and asymmetric the asym

the role of potential competition in industrial organization potential competition has been recognized as a mechanism to control the exploitation of market power at least since the work of j b clark 1902 but it was not until 50 years later that economists most notably joe bain and paolo sylos labini refocused attention on the idea with inputs from the theories of imperfect competition optimal control and dynamic games their work evolved into ever more sophisticated models of the reactions of existing competitors to the threat of new competition although the most appropriate models of competitive interaction are those which begin with a specific industry a number of theories have been proposed which attempt to develop more general conclusions my purpose in this paper is to develop an understanding of the strengths and limitations of these alternative theories by examining the available theoretical empirical and institutional knowledge rather than attempt the sisyphean task of recounting every model which relates conditions of entry and market performance i have partitioned the analysis into four major schools of thought according to their most central propositions these are the traditional model of limit pricing dynamic limit pricing the theory of contestable markets and the market efficiency model traditional limit pricing models rest on the assumption that firms respond to entry but are able to earn persistent profits when the structural characteristics of markets make entry difficult dynamic limit pricing is similar but emphasizes that markets can only be temporarily protected from entry contestability theory in its pure form asserts that potential competition is as effective as actual competition in controlling market performance the efficient markets hypothesis broadly interpreted states that markets are workably competitive and that the market structure reflects differential efficiency not strategic behavior while one can construct many other hypotheses about potential competition these classifications

strategic behaviour of incumbent firms in the uk abstract the main purpose of this paper is to examine the incidence of strategic behaviour in the uk by means of a questionnaire study performed across three broad manufacturing industries food electrical engineering and chemicals of the strategies which have received substantial theoretical attention r d and advertising appear widely used patenting pricing and excess capacity much less so vertical instruments such as purchasing policy also stand out as important but possibly only a minority of firms in our sample actively pursue strategic instruments

caveat innovator strategic and structural characteristics of new product introductions abstract the assumptions underlying models of strategic behavior by incumbents are evaluated using a case study of a ground coffee product introduction the assumption underlying earlier strategic models that the entrant does not know the incumbent s payoffs after strategic have been tested does not appear to apply instead strategic behavior is observed to hinge on ex ante uncertainty about the structure of the payoff matrix and the incremental decision making which this uncertainty spawns in this environment strategies which create noise can slow learning and delay entry

fixed costs sunk costs entry barriers and sustainability of monopoly this paper shows that i fixed costs of sufficient magnitude assure the existence of a vector of sustainable prices for the products of a natural monopolist prices making him invulnerable against entry ii nevertheless fixed costs do not constitute barriers to entry that is they need not have undesirable welfare consequences iii indeed in market forms that we call perfectly contestable large fixed costs are completely compatible with many desirable attributes of competitive equilibrium iv sunk costs do however constitute barriers to entry and v finally the profit and welfare consequences of entry barriers are described formally in this paper it is shown that i fixed costs of sufficient magnitude assure the existence of a vector of sustainable prices a set of product prices that make a natural monopolist invulnerable against successful entry ii nevertheless costs that are truly fixed do not constitute barriers to entry that is they do not have the welfare consequences normally attributed to barriers to entry iii indeed there are markets of a form which we call perfectly contestable markets and whose properties may be approximated in practice in which large fixed costs are completely compatible with many if not most of the desirable attributes of competitive equilibrium iv sunk costs do however constitute barriers to entry and v finally the resource allocation problems that stem from fixed costs are formally identical with those that accompany public goods both their sources and their character are the same thus the rationale for public supply of public goods may be no different from that pertaining to nationalization of natural monopolies

the trade off between child quantity and quality an empirical investigation of trade offs between number of children and their scholastic performance confirms that family size directly affects children s achievement though parents show no favori

simultaneous equations models of the structure performance paradigm abstract this paper is concerned with determining the dimension of the simultaneous equations model surrounding the basic profits concentration relationship a very general model is considered and then simplified using a simple test for exogeneity and it is concluded that the model is nonlinear in concentration and that simultaneous interaction occurs between profits and foreign competition variables

teacher characteristics and their effects on student test scores a systematic review it has become widely accepted that teachers are important in facilitating student learning hundreds of empirical studies have tried to explain differences in student performance by evaluating the impact of particular teacher characteristics yet this topic has not been the subject of a systematic review for more than 10 years even though most of the empirical evidence has emerged over the past decade this study provides an up to date review drawing on empirical findings from several countries and distinguishing between acquired and sociodemographic teacher characteristics this review confirms the existing consensus that subject related degrees and knowledge and not general teacher certifications are positively related to student performance and particularly so for master s degrees in math and science a new insight is that recent findings point out that teacher experience continues to contribute to student test scores throughout a teacher s career instead of merely the first few years an important future research avenue would be to examine which mechanisms can explain these teacher characteristic effects

the dynamics of crude oil price differentials abstract crude oil price differentials are modelled as a two regime threshold autoregressive tar process using the method proposed by caner and hansen caner m hansen b e threshold autoregression with a unit root econometrica 2001 69 1555 1596 while standard unit root tests suggest that the prices of crude oil of different varieties move closely together such that their price differential is stationary the tar results indicate strong evidence of threshold effects in the adjustment process to the long run equilibrium these findings suggest that crude oil prices are linked and thus at the very general level the oil market is one great pool adelman m a international oil agreements the energy journal 1984 5 1 9 however differences in the dynamics of adjustment suggest that within this one pool oil markets are not necessarily integrated in every time period and hence the dynamics of crude oil price differentials may not follow a stationary process at all times although the development of a liquid futures market around the crude oil benchmarks has helped make some distant markets more unified arbitrage is not costless or risk free and temporary breakdowns in the benchmarks can lead to decoupling of crude oil prices

on solving the multirotational timber harvesting problem with stochastic prices a linear complementarity formulation this article develops a two factor real options model of the harvesting decision over infinite rotations assuming a known stochastic price process and using a rigorous hamilton jacobi bellman methodology the harvesting problem is formulated as a linear complementarity problem that is solved numerically using a fully implicit finite difference method this approach is contrasted with the markov decision process models commonly used in the literature the model is used to estimate the value of a representative stand in ontario s boreal forest both when there is complete flexibility regarding harvesting time and when regulations dictate the harvesting date

the persistence of monopoly an investigation of the effectiveness of the united kingdom monopolies commission a sample of twenty eight markets investigated by the uk monopolies and mergers commission is taken and market share changes are analysed for subsequent erosion of dominance the evidence points to a modest erosion for leading firms but only rarely to a loss of leadership although there is no significant difference between the rates of decline for leading firms in the mmc sample and a control group the achievement of some erosion of dominance in markets where entry barriers were reduced may represent some limited success for competition policy