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

globalization and emerging markets with or without crash we analyze the effects of financial and trade globalization on the likelihood of financial crashes in emerging markets while trade globalization always makes crashes less likely financial globalization may make them more likely especially when trade costs are high pessimistic expectations can be self fulfilling and lead to a collapse in demand for goods and assets such a crash comes with a current account reversal and drops in income and investment lower income countries are more prone to such demand based financial crises a quantitative evaluation shows our model is consistent with the main stylized facts of financial crashes in emerging markets

payment card rewards programs and consumer payment choice abstract by using a unique data set that contains detailed information about consumer payment choice and consumers attitudes toward each payment method we estimate the effects of payment card rewards on consumer choice of payment methods our approach allows us to control for consumer heterogeneity we find the effects of rewards to be statistically significant across five retail types our policy experiments suggest that for the sub population who hold both credit and debit cards removing rewards would increase their share of paper based payment methods i e cash and checks measured in terms of in store transactions by no more than 4 percentage points

financial friction in an emerging economy abstract the objective of this study is to evaluate the role of the frictional domestic credit market in an emerging country by using a small open economy dsge model with a banking sector the calibration results show that the financial friction does not significantly influence the macroeconomic effects of the shocks to the domestic productivity foreign interest rate and export demand we also evaluate whether and how the trade and financial openness can influence the effects of the domestic financial shocks that in turn affect the supply of loans in the credit market we show that greater trade and financial openness can reduce the macroeconomic impacts of the domestic financial distress under a more open international capital market the capital outflow caused by the domestic financial shock does not lead to drastic exchange rate variation this helps dampen the adverse effects of the financial distress on the economy

banking and interest rates in monetary policy analysis a quantitative exploration abstract the paper reconsiders the role of money and banking in monetary policy analysis by including a banking sector and money in an optimizing model otherwise of a standard type the model is implemented quantitatively with a calibration based on us data it is reasonably successful in providing an endogenous explanation for substantial steady state differentials between the interbank policy rate and i the collateralized loan rate ii the uncollateralized loan rate iii the t bill rate iv the net marginal product of capital and v a pure intertemporal rate we find a differential of over 3 p a between iii and iv thereby contributing to resolution of the equity premium puzzle dynamic impulse response functions imply pro or counter cyclical movements in an external finance premium that can be of quantitative significance in addition they suggest that a central bank that fails to recognize the distinction between interbank and other short rates could miss its appropriate settings by as much as 4 p a also shocks to banking productivity or collateral effectiveness call for large responses in the policy rate

signaling quality with a money back guarantee the role of transaction costs direct marketing is witnessing explosive growth as consumers increasingly purchase products from their homes their ability to judge the quality of products they buy is significantly reduced in this paper we study how money back guarantees can signal product quality in such environments we interpret product quality broadly to mean both the level of attributes promised as well as the firm s consistency in delivering on those promises key aspects of our formulation are the explicit consideration of transaction costs and alternative signals of product quality transaction costs are the costs the seller or buyer faces when redeeming a money back guarantee we show that money back guarantees signal quality by exploiting the higher probability of returns for a lower quality product and the attendant higher transaction costs however if the seller s transaction costs are very large then there are less costly ways to signal namely charging a high price we compare the signaling performance of 1 price 2 price with uninformative advertising and 3 price with a money back guarantee whereas uninformative advertising does not work at all in our model under certain conditions a money back guarantee is necessary to signal and under other conditions a money back guarantee is a useful supplement to price

digital content provision and optimal copyright protection advances in digital technologies have led to an increasing concern about piracy for providers of digital content e g e books games music software videos yet controversies exist over the influence of copyright protection on firm profitability the objective of this paper is to provide an alternative rationale for the growing anti protection trend and to investigate optimal copyright enforcement and quality provision in a monopoly setting the proposed economic mechanism centers on the influence of copyright protection on consumer search when consumers can get to know the firm s actions e g price quality only after costly search we show that more stringent copyright protection can induce the consumers to rationally expect lower ex post surplus thus exerting a negative strategic effect on the consumers willingness to search this strategic effect may outweigh the positive main effect on the relative attractiveness of the authorized versus the pirated product which can hence explain the opti

a probabilistic choice model for market segmentation and elasticity structure marketing scholars commonly characterize market structure by studying the patterns of substitution implied by brand switching though the approach is useful it typically ignores the destabilizing

cost benefit models for explaining consumer choice and information seeking behavior while it provides excellent descriptions of behavior existing consumer research on information seeking and processing largely fails to explain why consumers engage in various types of activities this paper presents an economic framework for measuring costs benefits of search behavior which can help to resolve these questions this work shows how such a framework can lead to testable hypotheses about information seeking and discusses how operational measures of economic incentives to search can be developed and employed

a two stage disaggregate attribute choice model a two stage disaggregate attribute choice model is proposed and empirically implemented the first stage of the model is attribute processing to screen the number of alternatives down to a lesser number the second stage is brand alternative processing which considers the attributes simultaneously while allowing for tradeoffs among the attributes this two stage approach is then applied to the same real world data set as two single stage disaggregate models logit and maximum likelihood hierarchical mlh which are state of the art models representing the alternative and attribute processing approaches respectively the predictive accuracy of the two stage approach compares favorably to the single stage models in addition it seems to offer diagnostic information that can provide managerial insights not found in the output of the single stage model

structural modeling and policy simulation a primary goal of research in marketing is to evaluate and recommend optimal policies for marketing actions or instruments in the terminology of franses 2005 in this respect marketing is a very policy oriented field and it is ironic that so much published research skirts the issue of policy evaluation franses s article draws much needed attention to the question of what sort of model is usable for policy simulation and evaluation our perspective on what constitutes a valid model for policy evaluation differs from franses s view but we believe our view complements his in many important respects we also strongly believe that marketing has much to contribute to the literature on structural modeling we outline some of what we believe are the advantages for marketing scholars of using structural modeling for policy evaluations and some of the challenges presented by marketing problems franses focuses on a reduced form sales response model in which the outcome variable yt is modeled conditional on marketing variables xt if customers anticipate future marketing actions and take these into account in responding to the environment at time t an additional equation is appended to the system to describe the evolution of the xt variables in franses s view this system can be used for policy simulation if both the y and x equations have timeinvariant parameters that is the lucas critique which implies that parameters of reduced form models change if the policy regime changes does not apply according to franses a model must pass standard diagnostics possess good predictive properties and exhibit parameter stability to be useful for policy simulation we applaud the attention franses is bringing to model diagnostics we believe that structural work in both marketing and economics should pay close attention to the central features of the data increased use of model diagnostics will help ensure that structural models are capable of capturing these features however we do not believe that all the criteria proposed by franses such as out of sample validity and parameter stability are either necessary or sufficient to render a model useful for policy simulation reduced form models can pass all diagnostics including out of sample validation and still provide misleading predictions about the effects of policy changes reduced form

does financial reform raise or reduce saving the effect of financial liberalization on private saving is theoretically ambiguous not only because the link between interest rate levels and saving is itself ambiguous but also because financial liberalization is a multidimensional and phased process sometimes involving reversals using principal components we construct 25 year time series indices of financial liberalization for each of eight developing countries chile ghana indonesia korea malaysia mexico turkey and zimbabwe these are employed in an econometric analysis of private saving in these countries our results cannot offer support for the hypothesis that financial liberalization will increase saving on the contrary the indications are that liberalization overall and in particular those elements that relax liquidity constraints may be associated with a fall in saving

on the recoverability of choice behaviors with random coefficients choice models in the context of limited data and unobserved effects random coefficients choice models are seeing widespread adoption in marketing research partly because of their ability to generate household level parameter estimates with limited data however the power of such models may tempt researchers to trust that they continue to produce reasonable estimates when in fact either model misspecification or insufficient data limits the models ability to recover household level parameters successfully if household level choice behaviors are not recovered successfully managerial decisions such as marketing mix planning and targeting direct marketing segmentation and forecasting may not produce the desired results this study addresses the following questions first can random coefficients choice models correctly identify markets characterized by preference and response heterogeneity state dependence the use of alternative decision heuristics that result in reduced choice sets and combinations of these effects if so how much data is required and is this realistic given the size of data sets typically used in marketing analyses which model selection criteria should be used to identify these markets when there is spurious market identification which parameters contribute to the spurious result an extensive simulation experiment is conducted wherein random coefficients logit models with varying specifications of parameter heterogeneity state dependence effects and choice set heterogeneity are applied to 128 experimental conditions the results show which types of markets can be identified reliably and which cannot based on the results of the simulation the authors develop a model selection heuristic that identifies the correct market in 81 of the experimental conditions in contrast strict application of the best model selection criterion alone results in correct market identification in at most 34 of experimental conditions interestingly we find that the amount of data number of households or number of purchases per household does not affect our ability to identify the correct market type with this heuristic so there is a good chance of identifying the correct market type even when little data is available

modeling multiattribute utility risk and belief dynamics for new consumer durable brand choice this paper proposes a brand choice model to aid in the prelaunch management of a new consumer durable entry in an existing category the model contributes to theory by integrating the critical phenomena of multiattribute preference risk and dynamics in an individual level expected utility framework the integration is based on established theoretical constructs in utility bayesian decision analysis and discrete choice theory measurement and estimation procedures are presented an application is described and the managerial relevance of this work as a planning and forecasting tool is examined

two stage discrete choice models for scanner panel data an assessment of process and assumptions discrete choice models such as the multinomial logit assume that consumers choose from the full set of alternatives available to them however because i consumers may not be able to recall or recognize available brands ii consumers may not have the cognitive capacity or mental energy to process information pertaining to all available brands or iii careful consideration of all available brands might be suboptimal from an economic standpoint given the cost of information search consumers tend to make choices from a relatively small subset of the available brands this study assesses the process assumptions of existing two stage models for scanner panel data and their consistency with the actual processes believed to be used by consumers in forming choice sets after reviewing what is known from two stage models in scanner data applications we highlight issues in need of research

testing models of consumer search using data on web browsing and purchasing behavior using a large data set on web browsing and purchasing behavior we test to what extent consumers are searching in accordance to various classical search models we nd that the benchmark model of sequential search with a known distributions of prices can be rejected based on the recall patterns we observe in the data moreover we show that even if consumers are initially unaware of the price distribution and have to learn the price distribution observed search behavior for given consumers over time is more consistent with non sequential search than sequential search with learning our

high and declining prices signal product quality high and declining prices signal a high quality product high prices are the efficient means of signaling because the consequent loss of sales volume is most damaging for lower cost lower quality products as time passes and the number of informed consumers increases the signaling distortion lessens resulting in a declining price profile the prediction of high and declining prices is robust across a variety of dynamic models and is consistent with recent empirical findings copyright 1991 by american economic association

decision making under uncertainty capturing dynamic brand choice processes in turbulent consumer goods markets we construct two models of the behavior of consumers in an environment where there is uncertainty about brand attributes in our models both usage experience and advertising exposure give consumers noisy signals about brand attributes consumers use these signals to update their expectations of brand attributes in a bayesian manner the two models are 1 a dynamic model with immediate utility maximization and 2 a dynamic forward looking model in which consumers maximize the expected present value of utility over a planning horizon given this theoretical framework we derive from the bayesian learning framework how brand choice probabilities depend on past usage experience and advertising exposures we then form likelihood functions for the models and estimate them on nielsen scanner data for detergent we find that the functional forms for experience and advertising effects that we derive from the bayesian learning framework fit the data very well relative to flexible ad hoc functional forms such as exponential smoothing and also perform better at out of sample prediction another finding is that in the context of consumer learning of product attributes although the forward looking model fits the data statistically better at conventional significance levels both models produce similar parameter estimates and policy implications our estimates indicate that consumers are risk averse with respect to variation in brand attributes which discourages them from buying unfamiliar brands using the estimated behavioral models we perform various scenario evaluations to find how changes in marketing strategy affect brand choice both in the short and long run a key finding obtained from the policy experiments is that advertising intensity has only weak short run effects but a strong cumulative effect in the long run the substantive content of the paper is potentially of interest to academics in marketing economics and decision sciences as well as product managers marketing research managers and analysts interested in studying the effectiveness of marketing mix strategies our paper will be of particular interest to those interested in the long run effects of advertising note that our estimation strategy requires us to specify explicit behavioral models of consumer choice behavior derive the implied relationships among choice probabilities past purchases and marketing mix variables and then estimate the behavioral parameters of each model such an estimation strategy is referred to as structural estimation and econometric models that are based explicitly on the consumer s maximization problem and whose parameters are parameters of the consumers utility functions or of their constraints are referred to as structural models a key benefit of the structural approach is its potential usefulness for policy evaluation the parameters of structural models are invariant to policy that is they do not change due to a change in the policy in contrast the parameters of reduced form brand choice models are in general functions of marketing strategy variables e g consumer response to price may depend on pricing policy as a result the predictions of reduced form models for the outcomes of policy experiments may be unreliable because in making the prediction one must assume that the model parameters are unaffected by the policy change since the agents in our models choose among many alternative brands their choice probabilities take the form of higher order integrals we employ monte carlo methods to approximate these integrals and estimate our models using simulated maximum likelihood estimation of the dynamic forward looking model also requires that a dynamic programming problem be solved in order to form the likelihood function for this we use a new approximation method based on simulation and interpolation techniques these estimation techniques may be of interest to researchers and policy makers in many fields where dynamic choice among discrete alternatives is important such as marketing decision sciences labor and health economics and industrial organization

on the hidden links between financial and trade opening abstract developing countries characterized by high costs of tax collection and enforcement opt to use financial repression as an implicit tax on savings providing the impetus for capital flight a mechanism facilitating illicit capital movements is trade misinvoicing where the effectiveness of capital controls would increase with the resources spent on monitoring and enforcement per one dollar of international trade under these circumstances greater trade openness increases the effective cost of enforcing financial repression thereby reducing the usefulness of financial repression as an implicit tax this in turn implies that financial reforms tend to be the by product of greater trade integration

investigating heterogeneity in brand preferences in logit models for panel data in analyzing panel data the issue of heterogeneity across households is an important consideration if heterogeneity is present but is ignored in the analysis it will result in biased and inconsi

measuring the effects of search costs on equilibrium prices and profits abstract this paper assesses the effects of search costs on equilibrium prices and profits using an estimated model of demand and costs in a laundry detergent market i find that some firms profits initially rise and then fall with search costs overall the magnitude and direction of the search costs effects on prices and profits are heterogeneous this is because search costs create conflicting incentives for a firm to reduce prices to attract the attention of searching consumers yet also raise prices to harvest profit from consumers who are unaware of competing products these effects can vary with the relationship between the firms actual prices and the consumers pre search beliefs about prices

research note structural demand estimation with varying product availability this paper develops a model that extends the traditional aggregate discrete choice based demand model e g berry et al 1995 to account for varying levels of product availability in cases where not all products are available at every consumer shopping trip the observed market share is a convolution of two factors consumer preferences and the availability of the product in stores failing to account for the varying degree of availability would produce incorrect estimates of the demand parameters the proposed model uses information on aggregate availability to simulate the potential assortments that consumers may face in a given shopping trip the model parameters are estimated by simulating potential product assortment vectors by drawing multivariate bernoulli vectors consistent with the observed aggregate level of availability the model is applied to the uk chocolate confectionery market focusing on the convenience store channel we compare the parameter estimates to those obtained from not accounting for varying availability and analyze some of the substantive implications

a model of price promotions with consumer search this paper presents a price discrimination model of price promotions the distinguishing feature of our model is the explicit distinction between regular and promotional prices regular prices are chosen first then promotional prices further while regular prices are always available to everyone promotional prices are only available when offered and only to those who search for them we show that even a monopolist will offer random promotions under these circumstances furthermore as search costs increase the frequency and depth of promotions increase with competition for the promotion oriented consumers the seller becomes more aggressive in his promotional policies even more so as search costs increase the high reservation price consumers however end up worse off with competition

estimating heterogeneous eba and economic screening rule choice models consumer choice in surveys and in the marketplace reflects a complex process of screening and evaluating choice alternatives behavioral and economic models of choice processes are difficult to estimate when using stated and revealed preferences because the underlying process is latent this paper introduces bayesian methods for estimating two behavioral models that eliminate alternatives using specific attribute levels the elimination by aspects theory postulates a sequential elimination of alternatives by attribute levels until a single one the chosen alternative remains in the economic screening rule model respondents screen out alternatives with certain attribute levels and then choose from the remaining alternatives using a compensatory function of all the attributes the economic screening rule model gives an economic justification as to why certain attributes are used to screen alternatives a commercial conjoint study is used to illustrate the methods and assess their performance in this data set the economic screening rule model outperforms the eba and other standard choice models and provides comparable results to an equivalent conjunctive screening rule model

the advertising mix for a search good we extend the persuasion game to bring it squarely into the economics of advertising we model advertising as exciting consumer interest into learning more about the product and determine a firm s equilibrium choice of advertising content over quality information price information and horizontal match information equilibrium is unique whenever advertising is necessary the outcome is a separating equilibrium with quality unravelling lower quality firms need to provide more information for a given quality level as a function of consumer visit costs first quality information is disclosed then price information and then horizontal product information are added to the advertising mix some suggestive evidence is provided from airline ads in newspapers this paper was accepted by j miguel villas boas marketing

currency crises and monetary policy in an economy with credit constraints this paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic firms and the existence of nominal price rigidities the possibility of multiple equilibria including a currency crisis equilibrium with low output and a depreciated domestic currency results from the following mechanism if nominal prices are sticky a currency depreciation leads to an increase in the foreign currency debt repayment obligations of firms and thus to a fall in their profits this reduces firms borrowing capacity and therefore investment and output in a credit constrained economy which in turn reduces the demand for the domestic currency and leads to a depreciation we examine the impact of various shocks including productivity fiscal or expectational shocks we then analyze the optimal monetary policy to prevent or solve currency crises we also argue that currency crises can occur both under fixed and flexible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private firms

estimating a multinomial probit model of brand choice using the method of simulated moments the multinomial probit model of brand choice is theoretically appealing for marketing applications as it is free from the independence of irrelevant alternatives property of the multinomial logit model however difficulties in estimation have restricted its widespread use in marketing this paper presents an application of the method of simulated moments a new methodology that enables easy estimation of probit models with a large number of alternatives in the choice set we describe the theoretical development of the technique and using pseudo simulated data conduct numerical experiments to compare the method with existing techniques for estimating probit models using the scanner panel data on the purchases of catsup we provide an empirical application of the method of simulated moments to the estimation of the parameters of a multinomial probit model estimating the covariance structure associated with the underlying latent variable probit model enables us to identify broad patterns of similarities across alternatives it also enables us to derive a pairwise similarity matrix across choice alternatives which when input into a multi dimensional scaling routine provides us with a graphical representation of competitive structure in the catsup market for completeness we compare the substantive implications for the effects of marketing variables obtained from the multinomial probit model with those obtained from models in the extant marketing literature

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

search costs and adaptive consumers short time delays do not affect choice quality using online price comparison and shopping platforms makes experiencing slow connections lags and waiting times for information an unfortunate reality however little attention has been paid to analyzing the effects of such delayed display of information on product choice behavior this article explores the effect of time delays in a multi attribute choice laboratory experiment by not providing information immediately when requested but after short time delays increasing these waiting times reduced the amount of information looked up but did not affect choice quality higher time delays made decision makers use more deliberate search processes whereas low time delays induced inefficient over searching

banks and macroeconomic disturbances under predetermined exchange rates abstract as the recent mexican crisis vividly illustrates latin american countries often go through boom bust cycles caused by both domestic policies and external shocks such cycles are typically magnified by weak banking systems which intermediate large capital inflows this paper develops a simple optimizing model to analyze how the banking sector affects the propagation of shocks in particular we show how the world business cycle and shocks to the banking system affect output and employment through fluctuations in bank credit we also analyze the countercyclical use of reserve requirements econometric evidence for chile and mexico supports the main predictions of the model

does openness to trade make countries more vulnerable to sudden stops or less using gravity to establish causality openness to trade is one factor that has been identified as determining whether a country is prone to sudden stops in capital inflows several authors have offered empirical evidence that having a large tradable sector reduces the contraction necessary to adjust to a given cut off in funding such studies may however be subject to the problem that trade is endogenous we use the gravity instrument for trade openness which is constructed from geographical determinants of bilateral trade we find that openness indeed makes countries less vulnerable to crises and that the relationship is even stronger when correcting for the endogeneity of trade

modeling multiple sources of heterogeneity in multinomial logit models methodological and managerial issues we offer a framework to specify and estimate various sources of heterogeneity in multinomial logit brand choice models we let each brand specific intercept and each parameter of the explanatory variable vector vary randomly across households in addition we distinguish loyal households from the rest our results suggest that incorporating multiple sources of heterogeneity improves the model fit and suggests higher impact of marketing mix elements on brand choice we highlight the importance of incorporating multiple sources of heterogeneity the model we implement yields valuable managerial insights

relicensing as a secondary market strategy secondary markets in the information technology industry where used or refurbished equipment is traded have been growing steadily for original equipment manufacturers oems in this industry the importance of secondary markets has grown in parallel not only as a source of revenue but also because of their impact on these firms competitive advantage and market strategy recent articles in the press have severely criticized some oems who are perceived to be actively trying to eliminate the secondary market for their products other oems have policies that enhance their secondary markets the goal of this paper is to understand how an oem s incentives and optimal strategies vis a vis the secondary market are shaped contingent on her relative competitive advantage product characteristics and consumer preferences the critical trade off that we examine is whether the indirect benefit from maintaining an active secondary market the resale value effect can outweigh the potentially negative effect of the sales of used products at the expense of new product sales the cannibalization effect to that end we develop a durable good model where the oem can directly affect the resale value of her product through a relicensing fee charged to the buyer of the refurbished equipment we analyze the oem s strategy in both the monopoly and the duopoly cases characterize the optimal relicensing fee set by the oem and draw conclusions on the conditions that favor stimulating or deterring the secondary market this paper was accepted by candace a yano operations and supply chain management

the transforming power of democracy regime type and the distribution of electricity theory on democracy and its consequences turns on how democracy influences behavior among politicians and the citizenry ultimately the literature seeks to determine who benefits under democratic rules this is our concern posed in a context that allows us to address a classic question does democracy favor large but diffuse segments of society over small but concentrated interests we employ sectoral electricity consumption data for a panel of 733 country years to examine democracy s impact on the distribution of electricity across three sectors that represent distinct political interests industry agriculture and residential consumers we find that in poorer countries democratization produces significant increases in the residential share of electricity relative to industry suggesting sectors with less per capita financial clout but a stronger voice in elections benefit under democracy unlike the large literatures on democracy s impact on the amounts of publicly provided goods our results are among the first on the distribution of those goods

paying attention or paying too much in medicare part d we study whether people became less likely to switch medicare prescription drug plans pdps due to more options and more time in part d panel data for a random 20 percent sample of enrollees from 2006 2010 show that 50 percent were not in their original pdps by 2010 individuals switched pdps in response to higher costs of their status quo plans saving them money contrary to choice overload larger choice sets increased switching unless the additional plans were relatively expensive neither switching overall nor responsiveness to costs declined over time and above minimum spending in 2010 remained below the 2006 and 2007 levels

exchange rates and monetary policy in emerging market economies this paper investigates the effects of exchange rate regimes and alternative monetary policy rules for an emerging market economy that is subject to a volatile external environment in the form of shocks to world interest rates and the terms of trade in particular we highlight the impact of financial frictions and the degree of exchange rate pass through in determining the relative performance of alternative regimes in stabilizing the economy in the face of external shocks our results are quite sharp when exchange rate pass through is high a policy of non traded goods inflation targeting does best in stabilizing the economy and is better in welfare terms when exchange rate pass through is low however a policy of strict cpi inflation targeting is better in all cases a fixed exchange rate is undesirable in addition financial frictions have no implications for the ranking of alternative policy rules

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

a framework for investigating habits the hand of the past and heterogeneity in dynamic brand choice in this paper we develop a general class of dynamic brand choice models called lightning bolt lb models which are consistent with the theory of random utility maximization of consumer choice behavior the underlying random utility process is markov and the inter temporal evolution of the utility maximizing brand choice process is also markov the models permit parsimonious parameterizations of the random utility process in brand choices with the resulting switching probabilities being functionally related to explanatory variables the model allows for structural state dependence feedback habit persistence inertia and unobserved heterogeneity the theoretical development shows that several well known stochastic brand choice models can be deduced from random utility maximization theory from a managerial perspective the usefulness of the proposed model stems from its ability to separate out the effects of habits state dependence and heterogeneity strong state dependence effects imply incentives for inducing trial of a brand e g product sampling in contrast with state dependence a strong habit persistence effect may be indicative of buyer behavior where inducement of trial of a different brand may not be sufficient to maintain a sustained defection of the consumer from the habitually purchased brand to the trial brand failure to distinguish between these two effects has important implications for example a model that only accounts for state dependence effects would in the presence of only habit persistence incorrectly attribute it to state dependence based on this the manager could decide to embark on an expensive sampling program that might prove ineffective due to the absence of state dependence it is also important to distinguish between the effects of unobserved heterogeneity and state dependence in the absence of true state dependence failing to account for unobservable variations across households such as differences in price sensitivities results in the temporally persistent unobservable elements showing up as state dependence in the model hence a manager may incorrectly opt for sampling as the appropriate marketing action whereas a couponing or price promotion strategy should have been preferred we estimate the model parameters using the ac nielsen household scanner panel data set on catsup purchases further we investigate empirical techniques for overcoming the initial conditions problem that affects many dynamic models of brand choice through simulation analysis using the estimated parameters we show that the calculated profitability of a promotion must take into account the multi period impact due to state dependence further we demonstrate how ignoring heterogeneity can result in spurious state dependence thereby making marketing tactics such as product sampling appear far more attractive than they actually are specifically the model that accounts only for habit persistence and state dependence effects predicts a share increase of 2 4 points through sampling for one of the brands in the empirical analysis once the effects of unobserved heterogeneity are accounted for however this number drops precipitously to 0 3 while even this low number might fulfill the objectives of the brand manager it ensures that expectations are not eight times that number it is important to note that this paper is a first attempt at analyzing the three fundamental dimensions of dynamic brand choice behavior our formulation represents a reduced form approach as opposed to a structural approach other limitations of the model include our focus on time invariant choice sets extensions of the model to situations where choice sets vary over time are possible but are difficult another limitation is the dependence on multivariate extreme value distributions an alternative would be to use multivariate normal distributions i e a probit like structure which has certain useful properties a comparison of the two approaches would be useful empirical extensions of the model to allow for higher order processes and nested logit type model structures could also be fruitful explicitly incorporating variety seeking behavior in the model would further enrich the theoretical framework proposed in this paper

response to competitive entry a rationale for delayed defensive reaction empirical studies examining responses to new product entries come to the puzzling conclusion that in general an incumbent reacts to a new entrant after a significant delay even easy to implement price cuts are observed after significant lag following entry these findings seem to contradict the existing literature that either implicitly assumes or strongly advocates immediate defensive responses to limit competitive encroachment when a competing firm enters the market consumers may be uncertain about the entering firm s product quality the incumbent firm through rigorous tests may fully know the entrant s quality suppose the incumbent aggressively lowers price this may cause the consumers to wonder if indeed the entrant s quality is high in other words an incumbent s reaction may cause the consumers to make inferences about the entrant s quality such strategic implications of the incumbent s reactions have to be carefully analyzed before determining the optimal response by the incumbent in this paper we propose a conceptual framework for understanding differences in the magnitude and timing of incumbents responses to competitive entries we consider a model in which a monopolist incumbent firm faces competitive entry the incumbent firm knows the true quality of the entrant with certainty although consumers are aware of the incumbent s product quality through their prior experience they are initially uncertain of the entrant s product quality in such a situation a high quality entrant has the incentive to signal her true quality through her strategic price choice however the uncertainty about the entrant s quality is favorable to the incumbent in the sense that consumers believe with a high probability that the entrant s quality is low as a result the strategic incentives facing the incumbent and the entrant oppose each other while the entrant wants to signal her high quality the incumbent wants to prevent her from doing so we demonstrate that one way the incumbent can prevent the quality signaling is to select a higher than his optimal competitive duopoly price in other words the incumbent can prevent or jam the entrant s quality signaling by choosing a price higher than his optimal competitive price when consumers are fully informed about the entrant s true quality though the signal jamming price is lower than the monopoly price the price is substantially higher than the competitive price this marginal reduction in the incumbent s price from the pre entry monopolistic price represents a muted or lack of response by the incumbent to the competitive entry however once the entrant s quality gets revealed in subsequent periods through consumer usage and word of mouth the entrant has no incentive to engage in quality signaling and the incumbent has no incentive to jam it therefore the market reverts to the complete information competitive prices and the incumbent lowers his price considerably this temporal pattern of muted price reduction in the first period followed by a sharp price reduction in the second period corresponds to a delayed defensive reaction in our model although the empirical studies suggest that the delayed reaction may arise due to factors such as managerial inertia or indecision we demonstrate that such a behavior is indeed an optimal strategy for a profit maximizing firm thus our model reconciles empirical results with the equilibrium outcome of a strategic analytical framework furthermore in an experimental setting we test the predictive power of our framework and establish that consumers indeed form conjectures about the entrant s quality based on the incumbent s reactions in the first experimental study we find strong support for the notion that the incumbent s price reaction may indicate entrant s quality in a follow up study we observe that whenever the incumbent lowers prices respondents judge the quality of the entrant to be higher as compared to the case when prices are the same or increased the managerial implication of this paper is that well established incumbent firms should be cautious in the implementation of their defensive responses to product introductions of uncertain quality by competitors of particular concern are situations where the reactions are easily observable by consumers a strong reaction may suggest that the incumbent takes the competitive threat seriously leading consumers to believe in the quality of the competitor s product

informative price advertising in a sequential search model the purpose of this paper is to study the role and implications of price advertising when shopping trips are costly to consumers to do so we introduce advertising into an optimal sequential search model information about prices is both gathered by consumers and disseminated by firms consumers search sequentially and stores advertise with various intensity when it is in their interest to do so our model has a unique equilibrium exhibiting priee dispersion the model generates predictions about the shape of the price distribution and firms advertising behavior we explore the effects of entry and find that when initial advertising costs at zero level of effort are precisely zero entry drives the equilibrium to the perfectly competitive outcome however when initial marginal advertising costs are positive entry drives prices higher and while the informed consumers almost surely locate competitive prices welfare does not necessarily increase finally we compare the effectiveness of the two informational channels when advertising costs shrink prices become competitive however when search costs shrink prices remain bounded above marginal production costs

informing transforming and persuading disentangling the multiple effects of advertising on brand choice decisions prior behavioral research has suggested that advertising can influence a consumer s quality evaluation through informative and transformative effects the informative effect acts directly to inform a consumer of product attributes and hence shapes her evaluations of brand quality the transformative effect affects the consumer s evaluation of brand quality by enhancing her assessment of her subsequent consumption experience in addition advertising may influence a consumer s utility directly even without providing any explicit information this is the persuasive effect in this paper we propose a framework that formally models the processes through which all three effects of advertisements impact consumers brand evaluations and their subsequent brand choice decisions in particular we model source credibility confirmatory bias and bounded rationality on the part of consumers by appropriately modifying the standard bayesian learning approach our model conforms closely to prior behavioral literature and the experimental findings therein in our empirical analysis we get significant estimates of both informative and transformative effects across brands we find interesting temporal patterns across the effects for instance the importance of transformative effects seem to grow over time while that of informative effects diminishes finally we conduct policy experiments to examine the impact of increased ad intensity on advertising effects as well as the role played by consumption ambiguity

choice set heterogeneity and the role of advertising an analysis with micro and macro data abstract the authors show how to use microlevel survey data from a tracking study on brand awareness in conjunction with data on sales and advertising expenditures to improve the specification estimation and interpretation of aggregate discrete choice models of demand in a departure from the commonly made full information assumption they incorporate limited information in the form of choice sets to reflect that consumers may not be aware of all available brands at purchase time they find that both the estimated brand constants and the price coefficient are biased downward when consumer heterogeneity in choice sets is ignored these biased estimates can lead firms to make costly price setting mistakes in addition the tracking data enable the authors to identify separately two processes by which advertising influences market shares they find that advertising has a direct effect on brand awareness inclusion in choice set in addition to its effect on consumer preferences increase in utility this

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

an integrated choice model incorporating alternative mechanisms for consumers reactions to in store display and feature advertising the marketing literature has suggested two prominent decision mechanisms through which in store display and feature advertising can affect brand choice which i call the price cut proxy effect and the consideration set formation effect the primary objective of this study is to propose an integrated brand choice model that incorporates these two possible behavioral mechanisms which have been shown to work by previous research the model allows consumers to use various combinations of the decision mechanisms with different probabilities and thus enables one to jointly assess the extent to which each effect might occur in actual purchase data and to investigate how consumers might differ in their tendencies to engage in these decision processes by incorporating these likely behavioral mechanisms the proposed model alleviates the problems caused by multicollinearity and produces sensible parameter estimates for the joint effects of promotion vehicles in store display feature ad and price discount which contributes to better managerial decision making

the external wealth of nations measures of foreign assets and liabilities for industrial and developing countries abstract although capital flows are closely monitored surprisingly little is known about the accumulated stocks of foreign assets and liabilities held by various countries especially in the developing world this paper constructs estimates of foreign assets and liabilities and their equity and debt subcomponents for a sample of 67 industrial and developing countries it characterizes the stylized facts of international balance sheets and asks whether there are trends in net foreign asset positions and shifts in debt equity ratios over time finally it explores the sensitivity of estimated stock positions to the treatment of valuation effects not captured in balance of payments data

estimating the impact of consumer expectations of coupons on purchase behavior a dynamic structural model we examine the basic premise that consumers may anticipate future promotions and adjust their purchase behavior accordingly we develop a structural model of households who make purchase decisions to minimize their expenditure over a finite period the model allows for future expectations of promotions to enter the purchase decision households with adequate inventory of the product may face a trade off of buying in the current period with a coupon or defer the purchase until next period given their expectations of future promotions thus we provide a framework for examining the impact of consumer expectations on choice behavior the target audiences for our paper are a empirical researchers who intend to make structural models part of their applied research agenda and b managers who value and seek to understand the impact of consumers coupon expectations on current purchase behavior our research objective is to provide an empirical framework to examine whether and to what extent consumers anticipate future coupon promotions and adjust purchase behavior the central premise of our approach is that a rational consumer minimizes the present discounted value of the cost of a purchase where cost in a single period consists of purchase price inventory holding cost gains from coupons and potential stockout cost we aim to test whether our hypotheses regarding the various elements of the cost structure are supported and that whether consumers take into account future discounted cost when making current purchase decisions the research methodology we adopt is relatively new in econometrics and known as the estimable stochastic structural dynamic programming method the methodology amounts to incorporating a maximum likelihood routine embedded in a dynamic programming problem the dynamic programming problem is solved several times within a maximum likelihood iteration for each value of the state space elements and for each value of the parameters in the parameter set the state space in our model consists of purchase and nonpurchase alternatives in each time period coupon availability and no coupon availability in each time period level of inventory in each time period for each household and consumption rate of each household we use scanner panel data on purchases in the disposable diaper product category and promotions we estimate the inventory holding and stockout costs brand specific value of coupons and consumers expectations of future coupons the key insights and lessons learned can be summarized as follows 1 our results are consistent with the notion that consumers hold beliefs about future coupons and that such beliefs affect the purchase decision we find that the dynamic optimization model performs significantly better than a single period optimization model and a naive benchmark model 2 we find a high and significant stockout cost consistent with the essential nature of the product category our estimate of the holding cost yields a reasonable annualized percentage value when converted to the cost of capital we find that consumer valuation of coupons differ markedly across brands 3 our empirical evidence supports the notion that consumers hold beliefs about future coupon availability we also find that the expectations about future coupons estimated endogenously differ depending upon whether or not a coupon was available in the current period thus the proposed model structure yields rich managerial insights and facilitates several what if scenarios a possible limitation of our model and estimable structural models in general is the computational cost while it is possible to conceptually extend the state space to accommodate variations across households and add a richer parameter structure each addition multiplies the size of the state space and the computation time for this reason we have kept the state space as tight as possible and refrained from additions that would otherwise enable us to incorporate heterogeneity in consumer decisions for example we assumed that consumers are similar other than reflected by their purchase behavior we built a category purchase incidence model rather than a brand choice model we refrained from including unobserved heterogeneity in the parameters we chose to opt out of modeling autocorrelation and other time dependent error term patterns in the likelihood function thus we have made an effort to build a structural model that reasonably reflects consumer purchase behavior without requiring expensive computation currently there are developments in econometrics to approximate the computation of the valuation functions without sacrificing much accuracy when these methods are well developed we expect that structural models will become more commonplace in marketing

lowering customer evaluation costs product differentiation and price competition when match uncertainty is resolved via costly evaluation the first product sampled by a customer is more likely to make the sale this prompts firms to lower their products evaluation costs to attract customers to sample their products first such efforts by firms are called customer learning investment cli when product quality is freely observable but horizontal match is not we examine how cli choices interact with quality and price competition in a duopoly cli has a competition effect in that a higher cli of a firm increases its demand but decreases that of its rivals in the market covered duopoly both qualities will decrease increase when the high end low end firm invests more in customer learning and remain unchanged when they invest equally relative to when neither firm invests we further show that the firm with a higher relative production efficiency invests more in customer learning than the competitor in the market not covered duopoly cli by the low end firm also creates a market

the effects of bank lending in an open economy this article assesses the effects of bank lending in a small open economy with a floating exchange rate and sticky prices a theoretical model with costly financial intermediation is developed for new zealand the results show that the long run and business cycle effects of bank lending are small whether firms borrow from financial intermediaries or public debt markets is unlikely to affect economic activity in other words the financial structure or degree to which a country s financial system is intermediary based or market based does not matter

free to choose reform choice and consideration sets in the english national health service choice in public services is controversial we exploit a reform in the english national health service to assess the effect of removing constraints on patient choice we estimate a demand model that explicitly captures the removal of the choice constraints imposed on patients we find that post removal patients became more responsive to clinical quality this led to a modest reduction in mortality and a substantial increase in patient welfare the elasticity of demand faced by hospitals increased substantially post reform and we find evidence that hospitals responded to the enhanced incentives by improving quality this suggests greater choice can raise quality

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

hysteresis price acceptance and reference prices the existence of price thresholds in grocery retailing is well documented most authors explain the existence of price thresholds using assimilation contrast theory adaptation level theory or prospect theory however each of these theories is untenable if consumers are believed to behave rationally we offer a theoretical explanation grounded in real options theory rot and economic hysteresis we test the rot hypothesis against three plausible alternatives using a maximum likelihood friction model that we augment for unobserved heterogeneity our findings support the rot hypothesis and suggest that the existence of price thresholds in aggregate data are driven by a common recognition of real option values which do not disappear with the inclusion of consumer heterogeneity

job matching and occupational choice this paper presents a model of job matching the generalizes the existing literature by allowing for different jobs types or occupations such differences affect the value of job specific experience inducing a career profile where certain types are sampled before others more specifically the analysis shows that it is optimal for the young and inexperienced to gravitate toward jobs exhibiting a certain kind of risk then after deriving the equilibrium job turnover rate for an economy in which people do not switch occupations panel data are used to estimate its underlying parameters the hypothesis that people do not switch occupations is rejected against the alternative that they do thus providing empirical support for the theoretical extension undertaken here

brand loyalty and market equilibrium two concepts of brand loyalty are defined inertial brand loyalty resulting from time lags in awareness and cost based brand loyalty resulting from intertemporal utility effects their market level implications are formally derived in a continuous time model it is found that inertial brand loyalty leads to equilibria with price dispersion while cost based brand loyalty also may allow single price equilibria in all cases as brand loyalty vanishes so does the difference between the average trading price and the price which obtains with no brand loyalty consistent with empirical results the theory predicts that the relationship between market share and performance is positive in cross sectional studies but flat in time series studies the theory is also consistent with the view that market share is an asset in itself after developing the theory several strategic implications are drawn in the end some questions for further theoretical and empirical research are raised

limited choice sets local price response and implied measures of price competition it is becoming increasingly evident that a consumer s brand choice decision in low involvement categories does not involve full search evaluation and comparison of price information of all brands available at point of purchase global price response the authors propose a two stage choice process in which the consumer first identifies a subset of brands within the universal set of brands called the choice set and then evaluates only those brands that are in the choice set relative to one another to select a single brand the authors find that consistent with reports of the extent of external price search of consumers response to shelf price variations is limited to the brands in the choice set local price response their results indicate that employing the assumption of global price response may lead to biased estimates of price elasticity and derived measures of clout and vulnerability to enable a managerially meaningful and useful assessment of a brand s competitive clout and vulnerability the