competition under consumer loss aversion we address the effect of expectation based consumer loss aversion on firm strategy in imperfect competition consumers are fully informed about match value and price at the moment of purchase however some consumers are initially uninformed about their tastes and form a reference point consisting of an expected match value and price distribution whereas others are perfectly informed all the time we show that if firms have symmetric costs a larger share of informed consumers leads to a more competitive outcome the reverse holds if cost asymmetry in duopoly is sufficiently large

optimal pricing and return policies for perishable commodities this paper considers the pricing decision faced by a producer of a commodity with a short shelf or demand life a hierarchical model is developed and the results of the single period inventory model are used to examine possible pricing and return policies the paper shows that several such policies currently in effect are suboptimal these include those where the manufacturer offers retailers full credit for all unsold goods or where no returns of unsold goods are permitted the paper also demonstrates that a policy whereby a manufacturer offers retailers full credit for a partial return of goods may achieve channel coordination but that the optimal return allowance will be a function of retailer demand therefore such a policy cannot be optimal in a multi retailer environment it is proven however that a pricing and return policy in which a manufacturer offers retailers a partial credit for all unsold goods can achieve channel coordination in a multi retailer environment this article was originally published in marketing science volume 4 issue 2 pages 166 176 in 1985

overconfident consumers in the marketplace when consumers sign contracts expectations about future usage of the product or service matter for instance the value provided by car insurance depends on how likely a consumer believes she is to file a claim the value provided by a gym membership depends on how often a consumer anticipates going to the gym and the value provided by a cellular phone contract depends on how many gigabytes of data a consumer anticipates using the standard modeling paradigm makes the expedient assumption that consumers have rational expectations imposing rational expectations drastically simplifies models and eliminates the need to directly measure beliefs as they coincide with the distribution of observed outcomes yet a large literature shows that consumer beliefs often deviate substantially from rational expectations in systematic ways this has important consequences for contract design firm profits consumer welfare and public policy the term overconfidence is used broadly in the psychology literature referring to both overoptimism and overprecision overoptimistic individuals overestimate their own abilities or prospects either in absolute terms or in comparison to others in contrast overprecise individuals place overly narrow confidence intervals around forecasts thereby underestimating uncertainty these biases can lead consumers to misforecast their future product usage or to overestimate their abilities to navigate contract terms in consequence consumer overconfidence causes consumers

drip pricing and its regulation experimental evidence abstract this article analyzes the effects of drip pricing the business practice of decomposing a price into multiple components that are presented sequentially to buyers we experimentally examine the effects of this practice on seller strategies and buyer behaviors and we assess the implications for regulation in our experiment sellers set two prices a base or headline price and a drip price at first buyers observe only the base prices and make a tentative purchase decision subsequently revealing the sellers drip prices however comes at a cost to buyers we find that sellers only compete on base prices and thus set the highest possible drip price this makes the base price a reliable indicator for the lowest total price moreover few consumers invest in drip price searches a comparison with bertrand competition reveals significant effects with drip pricing consumer surplus is lower and seller profits are higher when there is uncertainty over possible drip sizes sellers also compete over drips and consumers more frequently fail to identify the cheapest offer bertrand competition also leads to higher consumer surplus and lower firm profits in this case hence our results point to positive effects of drip price regulation

the market for quacks a group of n quacks plays a price competition game facing a continuum of patients who recover with probability whether or not they acquire a quack s treatment if patients chose rationally the market would be inactive i assume however that patients choose according to a boundedly rational procedure which re ects anecdotal reasoning this element of bounded rationality has signi cant

choose to lose health plan choices from a menu with dominated option we examine the health plan choices that 23 894 employees at a u s firm made from a large menu of options that differed only in financial cost sharing and premium these decisions provide a clear test of the predictions of the standard economic model of insurance choice in the absence of choice frictions because plans were priced so that nearly every plan with a lower deductible was financially dominated by an otherwise identical plan with a high deductible we document that the majority of employees chose dominated plans which resulted in excess spending equivalent to 24 of chosen plan premiums low income employees were significantly more likely to choose dominated plans and most employees did not switch into more financially efficient plans in the subsequent year we show that the choice of dominated plans cannot be rationalized by standard risk preference or any expectations about health risk testing alternative explanations with a series of hypothetical choice experiments we find that the popularity of dominated plans was not primarily driven by the size and complexity of the plan menu nor informed preferences for avoiding high deductibles but by employees lack of understanding of health insurance our findings challenge the standard practice of inferring risk preferences from insurance choices and raise doubts about the welfare benefits of health reforms that expand consumer choice

do pharmacists buy bayer informed shoppers and the brand premium we estimate the effect of information and expertise on consumers willingness to pay for national brands in physically homogeneous product categories in a detailed case study of headache remedies we find that more informed or expert consumers are less likely to pay extra to buy national brands with pharmacists choosing them over store brands only 9 percent of the time compared to 26 percent of the time for the average consumer in a similar case study of pantry staples such as salt and sugar we show that chefs devote 12 percentage points less of their purchases to national brands than demographically similar nonchefs we extend our analysis to cover 50 retail health categories and 241 food and drink categories the results suggest that misinformation and related consumer mistakes explain a sizable share of the brand premium for health products and a much smaller share for most food and drink products we tie our estimates together using a stylized model of demand and pricing

is there an energy efficiency gap many analysts have argued that energy efficiency investments offer an enormous win win opportunity to both reduce negative externalities and save money this overview paper presents a simple model of investment in energy using capital stock with two types of market failures first uninternalized externalities from energy consumption and second forces such as imperfect information that cause consumers and firms not to exploit privately profitable energy efficiency investments the model clarifies that only if the second type of market failure cannot be addressed directly through mechanisms such as information provision energy efficiency subsidies and standards may be merited this chapter therefore reviews the empirical work on the magnitude of profitable unexploited energy efficiency investments a literature which frequently does not meet modern standards for credibly estimating the net present value of energy cost savings and often leaves other benefits and costs unmeasured these problems notwithstanding recent empirical work in a variety of contexts implies that on average the magnitude of profitable unexploited investment opportunities is much smaller than engineering accounting studies suggest finally there is tremendous opportunity and need for policy relevant research that utilizes randomized controlled trials and quasi experimental techniques to estimate the returns to energy efficiency investments and the welfare effects of energy efficiency programs

competition and price variation when consumers are loss averse we modify the salop 1979 model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase consumers sensitivity to losses in money increases the price responsiveness of demand and hence the intensity of competition at higher relative to lower market prices reducing or eliminating price variation both within and between products when firms face common stochastic costs in any symmetric equilibrium the markup is strictly decreasing in cost even when firms face different cost distributions we identify conditions under which a focal price equilibrium where firms always charge the same focal price exists and conditions under which any equilibrium is focal

competition in durable goods markets the strategic consequences of leasing and selling in marketing durable goods manufacturers use varying degrees of leasing and selling to consumers e g cars photo copiers personal computers airplanes etc the question that this raises is whether the distinction between leases and sales is simply one of price or whether the proportion of leases and sales effects a firm s ability to compete in the market in this paper we use two approaches to argue that leasing and selling create strategic consequences that extend beyond prices first we develop a stylized theoretical model that shows that the optimal proportion of leases and sales depends on the competitiveness of the market and on the inherent reliability of the firm s product and second we find support for the implications of our theoretical model with data from the automobile industry the u s automobile industry has seen a large increase in leasing over the last five years however the extent to which leasing has been embraced varies widely across manufacturers for example in 1993 the sport utility segment had the following lease percentages ford explorer 29 jeep grand cherokee 24 toyota 4 runner 11 and chevrolet blazer 9 in addition manufacturers often vary lease percentages across models for example in 1993 ford leased 22 of its crown victoria model 35 of its taurus model and 42 of its probe model a popular argument for why we see these differences is that higher priced cars are leased more often because leasing makes them more affordable however this rationale is not compelling in the face of our data for example the ford probe was priced significantly lower than the crown victoria and yet it was leased almost twice as often to develop a better understanding of why we observe differences in the proportion of leasing we develop a two period model of a duopoly in which each manufacturer chooses its optimal quantity and the fraction of units it wants to lease we find that in equilibrium neither firm leases all its units either they use a mix of leasing and selling or they use only selling our analysis suggests that the fraction of leased cars decreases as the manufacturers products become more similar and the competition between them increases the intuition for this result is that a higher fraction of leases puts the firm at a competitive disadvantage in the future this occurs because unlike firms that sell their product firms that lease are at a price disadvantage another important finding in this paper is that the extent of leasing chosen by a manufacturer depends on the reliability of its product in particular all else being equal the lower a product s reliability the lower its proportion of leases within the context of the automobile industry this suggests that more expensive cars may be leased more often because they are of higher quality and not necessarily because they are more expensive finally we test the implications of our theoretical model with data from the u s automobile market in particular for 1993 model year cars we develop a measure of reliability using data from consumer reports in addition we develop a measure of the extent of competition in each segment of the automobile market we support our hypotheses by finding that the extent to which a car model is leased depends strongly on its predicted reliability and on the competitive intensity within the segment

shrouded attributes and information suppression evidence from the field we use eld and natural experiments in online auctions to study the revenue eect of varying the level and disclosure of shipping charges our main ndings are 1 disclosure aects revenues for low shipping charges a seller is better odisclosing 2 increasing shipping charges boosts revenues particularly when these charges are hidden and 3 the level and disclosure of the shipping charge have little eect on the number of bidders attracted to an auction

consumption self control by rationing purchase quantities of virtue and vice consumers attempts to control their unwanted consumption impulses influence many everyday purchases with broad implications for marketers pricing policies addressing theoreticians and practitioners alike this paper uses multiple empirical methods to show that consumers voluntarily and strategically ration their purchase quantities of goods that are likely to be consumed on impulse and that therefore may pose self control problems for example many regular smokers buy their cigarettes by the pack although they could easily afford to buy 10 pack cartons these smokers knowingly forgo sizable per unit savings from quantity discounts which they could realize if they bought cartons by rationing their purchase quantities they also self impose additional transactions costs on marginal consumption which makes excessive smoking overly difficult and costly such strategic self imposition of constraints is intuitively appealing yet theoretically problematic the marketing literature lacks operationalizations and empirical tests of such consumption self control strategies and of their managerial implications this paper provides experimental evidence of the operation of consumer self control and empirically illustrates its direct implications for the pricing of consumer goods moreover the paper develops a conceptual framework for the design of empirical tests of such self imposed constraints on consumption in consumer goods markets within matched pairs of products we distinguish relative virtue and vice goods whose preference ordering changes with whet her consumers evaluate immediate or delayed consumption consequences for example ignoring long term health effects many smokers prefer regular relative vice to light relative virtue cigarettes because they prefer the taste of the former however ignoring these short term taste differences the same smokers prefer light to regular cigarettes when they consider the long term health effects of smoking these preference orders can lead to dynamically inconsistent consumption choices by consumers whose tradeoffs between the immediate and delayed consequences of consumption depend on the time lag between purchase and consumption this creates a potential self control problem because these consumers will be tempted to over consume the vices they have in stock at home purchase quantity rationing helps them solve the self control problem by limiting their stock and hence their consumption opportunities such rationing implies that per purchase occasion vice consumers will be less likely than virtue consumers to buy larger quantities in response to unit price reductions such as quantity discounts we first test this prediction in two laboratory experiments we then examine the external validity of the results at the retail level with a field survey of quantity discounts and with a scanner data analysis of chain wide store level demand across a variety of different pairs of matched vice regular and virtue reduced fat calorie or caffeine etc product categories the analyses of these experimental field and scanner data provide strong convergent evidence of a characteristic crossover in demand schedules for relative vices and virtues for categories as diverse as among others potato chips chocolate chip cookies cream cheese beer soft drinks ice cream and frozen yogurt chewing gum coffee and beef andturkey bologna vice consumers demand increases less in response to price reductions than virtue consumers demand although their preferences are not generally weaker for vices than for virtues constraints on vice purchases are self imposed and strategic rather than driven by simple preferences we suggest that rationing their vice inventories at the point of purchase allows consumers to limit subsequent consumption as a result of purchase quantity rationing however vice buyers forgo savings from price reductions through quantity discounts effectively paying price premiums for the opportunity to engage in self control thus purchase quantity rationing vice consumers are relatively price in sensitive from a managerial and public policy perspective our findings should offer marketing practitioners in many consumer goods industries new opportunities to increase profits through segmentation and price discrimination based on consumer self control they can charge premium prices for small sizes of vices relative to the corresponding quantity discounts for virtues virtue consumers on the other hand will buy larger amounts even when quantity discounts are relatively shallow a key conceptual contribution of this paper lies in showing how marketing researchers can investigate a whole class of strategic self constraining consumer behaviors empirically moreover this research is the first to extend previous theoretical work on impulse control by empirically demonstrating its broader implications for marketing decision making

returns policies between channel partners for durable products many durable products with relatively short selling seasons have been using returns policies between manufacturers and retailers as the contractual protocol for some time recently these sectors have witnessed the growing popularity of peer to peer web based used goods markets as important transaction channels between buyers and sellers given that these two issues are critically linked from both supply and demand perspectives in this paper we study the role that consumer valuation of used products plays in shaping a manufacturer s incentive to offer a returns policy option to a retailer when used goods might be devalued compared to new ones as a result of physical deterioration or obsolescence we do so through a two period dyadic channel framework where the retailer faces uncertain demand for a durable product from a renewable set of customers who are impatient but forward looking the manufacturer on the other hand needs to decide whether or not to offer a returns contract to the retailer we first characterize the necessary and sufficient condition under which a returns contract is the equilibrium strategy as well as the corresponding channel decisions further analysis of this condition reveals that a higher consumer valuation of used products increases the likelihood of a returns contract being the equilibrium strategy this result seems to be robust except when the potential demands for the two periods are quite deterministic and uncorrelated however it contradicts the burgeoning managerial trend to replace returns contracts with price only ones in sectors where used goods are valued relatively highly by the consumers we also discuss how used goods markets affect the equilibrium channel decisions as well as how demand uncertainty and logistics costs associated with returns influence the equilibrium contracting strategy

personal bankruptcy and credit market competition we document a link between u s credit supply and rising personal bankruptcy rates we exploit the exogenous variation in market contestability brought on by banking deregulation the relaxation of entry restrictions in the 1980s and 1990s at the state level we find deregulation explains at least 10 of the rise in bankruptcy rates we also find that deregulation leads to increased lending lower loss rates on loans and higher lending productivity our findings indicate that increased competition prompted banks to adopt sophisticated credit rating technology allowing for new credit extension to existing and previously excluded households the last quarter century saw a dramatic increase in the share of u s con sumers filing for personal bankruptcy thereby seeking a discharge of their unsecured debt in 2005 this increase led to the most comprehensive change to u s bankruptcy law since 1978 while several causes for the rise in bankruptcies have been advanced and it is the subject of ongoing research two potentially significant changes occurred during this period banking deregulation the relaxation of bank entry restrictions in the 1980s and 1990s and technological change in consumer lending banking deregulation by removing barriers to entry increases credit market competition and there fore affects the supply of credit new screening technologies change the way loans are made allowing for interest rates to better reflect underlying risk and thus facilitating lending to riskier borrowers in this paper we examine whether banking deregulation and technological change played a role in the increase in consumer bankruptcy the empirical literature has mostly focused on cross sectional differences in personal bankruptcy in particular it has revolved around legal institutions as a way to answer whether consumers file due to adverse events as part of a rational financial calculation or as a consequence of unfair or deceptive lending practices usually researchers have exploited the different asset exemptions across u s states i e the amount of personal assets protected from creditors

partial shrouding in asymmetric markets this paper studies shrouding of add on information in a market where firms differ in add on production costs we show that partial shrouding equilibria characterised by a selection result exist firms with high low add on costs shroud unshroud unshrouding firms charge lower base good prices than shrouding firms

securitization a financing vehicle for all seasons securitization is considered to be one of the biggest financial innovations of the last century it is also regarded as both a catalyst and a solution to the 2008 financial crisis once a popular method of financing the mortgage and consumer credit markets aspects of the global securitization market are now struggling to revive in this paper i discuss the role that ethics played in securitization prior to the 2008 financial crisis and find that it is not an obvious story of moral failures but rather that it lies in more subtle elements of the financial system the ethics uncertainty role in the securitization story is one of flawed incentives and the shifting of responsibility for handling risk the role of securitization and the ethics of risk transfer have rarely been discussed explicitly in the literature the historical origins of securitization and lessons learned from previous flawed uses of the process are also provided i also detail the various global institutional reform proposals that have taken place moving forward it is crucial to understand the causes consequences and ethical implications of securitization in the financial crisis so as to help individuals and managers better assess risk align incentives and design appropriate policy responses

who pays for public employee health costs abstract we analyze the incidence of public employee health benefits because these benefits are negotiated through the political process relevant labor market institutions deviate significantly from the competitive private sector benchmark empirically we find that roughly 15 percent of the cost of recent benefit growth was passed onto school district employees through reductions in wages and salaries strong teachers unions were associated with relatively strong linkages between benefit growth and growth in total compensation our analysis is consistent with the view that the costs of public workers benefits are difficult to monitor contributing to benefit oriented and often under funded compensation schemes

when more seems like less differential price framing increases the choice share of higher priced options four experiments supported by six supplemental studies show that premium but higher priced products e g direct flights larger capacity data storage devices are more popular when the additional

managing consumer returns in a competitive environment this paper investigates the pricing and restocking fee decisions of two competing firms selling horizontally differentiated products we model a duopoly facing consumers who have heterogeneous tastes for the products and who must experience a product before knowing how well it matches with their preferences the analysis yields several key insights restocking fees not only can be sustained in a competitive environment but also are more severe when consumers are less informed about product fit and when consumers place a greater importance on how well products attributes fit with their preferences we compare the competitive equilibrium prices to a scenario in which consumers are certain about their preferences and find conditions defining when consumer uncertainty results in higher equilibrium prices comparison to a monopoly setting yields a surprising result equilibrium restocking fees in a competitive environment can be higher than those charged by a monopolist this paper was accepted by jagmohan s raju marketing

equilibrium with product differentiation tive consumer formulations is used to examine the properties of single and multiple price equilibria conditions under which decreases in the intensity of consumer preferences reduce price are given it is shown that with certain types of demand curves entry can eliminate price cost markups even given product differentiation if competition is localized it is demonstrated that entry does not affect the markup finally the effect of spurious product differentiation on price is examined

the right to return this article studies the allocation of responsibility for unsold inventory provision for which is made in practically every distribution contract the two extreme cases are the consignment contract which allocates all the burden to the manufacturer and the no return contract in which retailers purchase the merchandise outright and assume responsibility for unsold inventory contract choices are shown to vary across countries industries products and types of transactions the article identifies six main factors affecting this choice optimal inventory policy in a stochastic retail demand environment relative advantage in disposing of the unsold inventory optimal risk allocation incentives to invest in promotions and provide services to increase consumer demand information asymmetry and costs associated with the consignment contract per se several testable implications are presented and the choice of contracts in the publishing industry is shown to be consistent with the predictions of the model

the effects of banning advertising in junk food markets we develop a structural model to analyze the eects of banning advertising on market equilibria and welfare in junk food markets we consider the impact on demand and prices and show how to quantify welfare eects when advertising might lead consumers to take decisions that are inconsistent with their underlying preferences we use transaction level data on the potato chips market and nd that banning advertising leads to a direct reduction in demand but also toughens price competition leading to lower prices and increased demand welfare increases as consumers benet from no longer making distorted

financial literacy and consumer credit portfolios we use survey data from a sample of uk households to analyse the relation ship between financialliteracy and consumer credit portfolios we show that individ uals who borrow on consumer credit exhibit worse financial literacy than those who do not borrowers with poor financialliteracy hold higher shares of high cost credit such as home collected credit mail order catalogue debt and payday loans than those with higher literacy we also show that individuals with poor financialliteracy are more likely to lack confidence when interpreting credit terms and to exhibit confusion over financialconcepts they are also less likely to engage in behaviour which might help them to improve their awareness of the credit market

the effect of information on product quality evidence from restaurant hygiene grade cards this study examines the effect of an increase in product quality information to consumers on e rms choices of product quality in 1998 los angeles county introduced hygiene quality grade cards to be displayed in restaurant windows we show that the grade cards cause i restaurant health inspection scores to increase ii consumer demand to become sensitive to changes in restaurants hygiene quality and iii the number of foodborne illness hospitalizations to decrease we also provide evidence that this improvement in health outcomes is not fully explained by consumers substituting from poor hygiene restaurants to good hygiene restaurants these results imply that the grade cards cause restaurants to make hygiene quality improvements

oligopolistic pricing with sequential consumer search n identical stores compete by choosing prices for a homogeneous good with constant marginal costs consumers search sequentially with perfect recall for the lowest price one class of consumers called shoppers have zero search costs while all other consumers have a positive search cost c there is a unique symmetric nash equilibrium price distribution with the property that it changes smoothly from marginal cost pricing when all consumers are shoppers and or c 0 and monopoly pricing when no consumers are shoppers remarkably as the number of stores increases the nash equilibrium becomes more monopolistic copyright 1989 by american economic association

why does the law of one price fail an experiment on index mutual funds we conduct an experiment to evaluate why individuals invest in high fee index funds in our experiments subjects allocate 10 000 across four s p 500 index funds and are rewarded for their portfolio s subsequent return subjects overwhelmingly fail to minimize fees we can reject the hypothesis that subjects buy high fee index funds because of bundled non portfolio services search costs for fees matter but even when we eliminate these costs fees are not minimized instead subjects place high weight on annualized returns since inception fees paid decrease with financial literacy interestingly subjects who choose high fee funds sense they are making a mistake

when cheaper is better fee determination in the market for equity mutual funds abstract in this paper we develop a model of the market for equity mutual funds that captures three key characteristics of this market first there is competition among funds second fund managers ability is not observed by investors before making their investment decisions third some investors do not make optimal use of all available information the main results of the paper are that 1 price competition is compatible with positive mark ups in equilibrium and 2 worse performing funds set fees that are greater or equal to those set by better performing funds these predictions are supported by available empirical evidence

consumer uncertainty and purchase decision reversals theory and evidence this research examines how prepurchase information that reduces consumer uncertainty about a product or service can affect consumer decisions to reverse an initial product purchase or service enrollment decision one belief commonly held by retailers is that provision of greater amounts of information before the purchase reduces decision reversals we provide theory and evidence showing conditions under which uncertainty reducing information provided before the purchase decision can actually increase the number of decision reversals predictions generated from an analytical model of consumer behavior incorporating behavioral theory of reference dependence are complemented by empirical evidence from both a controlled behavioral experiment and econometric analysis of archival data combined the theory and evidence suggest that managers should be aware that their information provision decisions taken to reduce decision reversals may actually increase them data as supplemental material are available at http dx doi org 10 1287 mksc 2015 0906

attention driven demand for bonus contracts abstract in many markets supply contracts include a series of small regular payments made by consumers and a single large bonus that consumers receive at some point during the contractual period but if for instance its production costs exceed its value to consumers such a bonus creates inefficiencies we offer a novel explanation for the frequent occurrence of bonus contracts which builds on a model of attentional focusing our main result identifies market conditions under which bonus contracts should be observed while a monopolist pays a bonus to consumers if at all only for low value goods firms standing in competition always i e independent of the consumers valuation offer bonus contracts thus competition does not eliminate but rather exacerbates inefficiencies arising from contracting with focused agents common contract schemes in markets for electricity telephony and bank accounts are consistent with our model but cannot be reconciled with alternative approaches such as models on consumption smoothing quasi hyperbolic discounting or switching costs

shrouded attributes consumer myopia and information suppression in competitive markets bayesian consumers infer that hidden add on prices e g the cost of ink for a printer are likely to be high prices if consumers are bayesian firms will not shroud information in equilibrium however shrouding may occur in an economy with some myopic or unaware consumers such shrouding creates an inefficiency which firms may have an incentive to eliminate by educating their competitors customers however if add ons have close substitutes a curse of debiasing arises and firms will not be able to profitably debias consumers by unshrouding add ons in equilibrium two kinds of exploitation coexist optimizing firms exploit myopic consumers through marketing schemes that shroud high priced add ons in turn sophisticated consumers exploit these marketing schemes it is not possible to profitably drive away the business of sophisticates it is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms we show that informational shrouding flourishes even in highly competitive markets even in markets with costless advertising and even when the shrouding generates allocational inefficiencies

duopolistic competition with choice overloaded consumers a large body of experimental work has suggested the existence of a choice overload effect in consumer decision making faced with large menus of choice options decision makers often defer or avoid choice a suggested reason for the occurrence of this effect is that the agents attempt to avoid the cognitive effort that is associated with choosing from larger menus building on this explanation we propose and analyse a model of duopolistic competition where firms compete in menu design in the presence of a consumer population with heterogeneous preferences and overload menu size thresholds the firms strategic trade off is between offering a large menu in order to match the preferences of as many consumers as possible and offering a small menu in order to avoid losing choice overloaded consumers to their rival assuming uniformly distributed preferences we focus on symmetric pure strategy equilibria under various assumptions on the overload distribution and product markups we also propose and analyse a measure of consumer welfare that applies to this environment among other things we provide conditions for maximum and minimum variety equilibria to be possible whereby both firms either offer the entire set of available products or the same one product respectively

something in the air pollution and the demand for health insurance we find that daily air pollution levels have a significant effect on the decision to purchase or cancel health insurance in a manner inconsistent with rational choice theory a one standard deviation increase in daily air pollution leads to a 7 2 increase in the number of insurance contracts sold that day conditional on purchase a one standard deviation decrease in air pollution during the cooling off i e cost free cancellation period relative to the order date level increases the return probability by 4 0 we explore a range of potential mechanism and find the most support for projection bias and salience

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

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

equilibrium returns policies in the presence of supplier competition the pioneering pasternack returns policy model analyzed channel coordination with a single supplier catering to a retailer facing stochastic demand for a perishable product with a fixed price and the model showed that giving partial returns of unsold stock to the retailer is the optimal policy for the entire supply chain the result thus begs the question as to why manufacturers of perishable commodities widely accept full returns of unsold stock as the norm we model the environment as one where two capacity constrained manufacturers compete for shelf space with the same retailer and we show that a complete credit returns policy is in fact the only possible equilibrium of the game our results obviate the need for knowing the exact functional form of the demand distribution in order to compute the returns credit as pasternack s results would require from a retailer s standpoint we establish a simple procurement strategy and show that it is optimal the same game with price only contracting has a pure strategy equilibrium when the supplier capacities are below a threshold value and a mixed strategy equilibrium when the supplier capacities cross this threshold but are still so limited that no single supplier can with certainty supply all the quantity demanded

electricity market integration redistribution effect versus resource reallocation in countries with a significant amount of low variable cost generation capacity the integration of electricity markets poses a real problem with respect to consumers interests in such cases consumers face a significant price rise compared with consumers in countries where low cost capacities are lacking this paper analyses this problem both in the short and long term focusing on a market dominated by nuclear and hydro production when there are too many restrictions on new capacity developments in low cost technologies market integration will lead to surplus redistribution without any production reallocation this really makes it legitimate to contemplate redistributive compensations towards local consumers in countries which benefited from low variable cost generators at the moment of liberalisation this paper examines two alternative ways of rent reallocation one by income with a windfall tax on nuclear producers and the allocation of this revenue to energy efficiency policy funds and another by price by giving drawing rights on the existing nuclear generators production to small commercial and domestic consumers at a level equivalent to the one necessary to maintain regulated prices 2009 elsevier ltd all rights reserved

on the evolution of market institutions the platform design paradox we study competition among market designers who create new trading platforms when boundedly rational traders learn to select among them we ask whether walrasian platforms leading to market clearing trading outcomes will dominate the market in the long run if several market designers compete we find that traders learn to select non market clearing platforms with prices systematically above the market clearing level provided at least one such platform is introduced by a market designer this in turn leads market designers to introduce non market clearing platforms hence platform competition induces non competitive market outcomes

exposing false advertising countries rely on different public and private agents to enforce consumer protection and fair competition regulations to analyze the repercussions of different regimes on social welfare we consider the possibility of false advertising by a firm in an environment with duopolistic competition and with consumers who can be rational or naive regarding the trustworthiness of advertising claims we compare the incentives for and outcomes of false advertisement verification and injunction requests made by one of three parties a government agency with a broad focus maximizing ex post total welfare and two narrowly focused parties the first a public or private party focused on consumer welfare net of its own enforcement costs and the second a competitor interested exclusively in its own profits considering ex ante welfare we find that having a narrowly focused party as the plaintiff can be optimal due to government agency commitment problems the optimal regime depends on both the share of the population s naive consumers and the level of enforcement costs resume denonciation de la publicite mensongere pour veiller a l application des reglementations en matieres de protection des consommateurs et de concurrence loyale les etats s appuient sur differents regimes de controle representes par des agents publics et prives afin d analyser les repercussions de ces differents regimes sur le bien etre nous evaluons la possibilite qu une entreprise puisse diffuser de la publicite mensongere dans un environnement concurrentiel duopolistique avec des consommateurs potentiellement rationnels ou naifs relativement a la veracite des allegations publicitaires nous comparons les mesures incitatives pour controler la publicite mensongere et leurs resultats ainsi que les mises en demeure initiees par l une de ces trois parties une agence gouvernementale a visee large aux fins de maximisation totale du bien etre ex post et deux autres parties a visee plus ciblee l une publique ou privee tournee vers le bien etre des consommateurs deduction faite de ses propres co ts de mise en uvre et l autre representee par un concurrent s interessant exclusivement a ses propres profits en tenant compte du bien etre ex ante et en raison des problemes d engagement des agences gouvernementales nous constatons qu une procedure peut s averer optimale des lors que le demandeur represente une partie a visee plus ciblee le regime optimal depend a la fois de la proportion de consommateurs naifs et du niveau des couts de mise en uvre

shrouded costs of government the political economy of state and local public pensions abstract why do public sector workers receive so much of their compensation in the form of pensions and other benefits this paper presents a political economy model in which politicians compete for taxpayers and government employees votes by promising compensation packages but some voters cannot evaluate every aspect of promised compensation if pension packages are shrouded so that public sector workers better understand their value than ordinary taxpayers then compensation will be highly back loaded in equilibrium the welfare of public sector workers could be improved holding total public sector costs constant if they received higher wages and lower pensions centralizing pension determination has two offsetting effects on generosity more state level media attention helps taxpayers better understand pension costs and that reduces pension generosity but a larger share of public sector workers will vote within the jurisdiction which increases pension generosity a short discussion of pensions in two decentralized states california and pennsylvania and two centralized states massachusetts and ohio suggests that centralization appears to have modestly reduced pensions but as the model suggests this is unlikely to be universal

the political economy of hatred this paper develops a model of the interaction between the supply of hate creating stories from politicians and the willingness of voters to listen to hatred hatred is fostered with stories of an out group s crimes but the impact of these stories comes from repetition not truth hate creating stories are supplied by politicians when such actions help to discredit opponents whose policies benefit an out group egalitarians foment hatred against rich minorities opponents of redistribution build hatred against poor minorities hatred relies on people accepting rather than investigating hate creating stories hatred declines when there is private incentive to learn the truth increased economic interactions with a minority group may provide that incentive this framework is used to illuminate the evolution of anti black hatred in the united states south episodes of anti semitism in europe and the recent surge of anti americanism in the arab world

product diversion to a direct competitor a manufacturer will often limit competition among downstream partners by authorizing only a select group of retailers to carry its product however it is not uncommon for authorized retailers to create an additional competitor by diverting units to an unauthorized seller this paper presents an analytical model that demonstrates how diversion from authorized retailers to an unauthorized direct competitor can occur under circumstances not considered by the prior literature in fact diversion can represent a prisoner s dilemma whereby retailers diminish their own profit by selling to the unauthorized direct seller the authorized retailer s profit loss actually increases as the per unit diversion costs incurred by the authorized retailer decrease the model also shows that the unauthorized direct seller earns greater profit by strategically procuring a unilaterally constraining quantity even though this procurement strategy results in an equivalent increase in the quantity sold by the retailers combined the results identify a new reason for diversion and its consequences for retailers and the unauthorized direct seller

competitive advantage of qualified weee recyclers through epr legislation abstract most of waste appliances in china are handled by unqualified recyclers rather than by qualified ones equipped with advanced but costly technology to address this problem china implements a series of take back legislations in the framework of extended producer responsibility epr with a self financing subsidy scheme to analyze the performance of the legislations we develop a two period model with a selling period run by a manufacturer and a recycling period conducted by two recyclers we show that the self financing condition gives an upper limit for the subsidy we also show that this limit is not monotone in the recyclers competitiveness difference and there may be a gap between the upper limit and the optimal subsidy that maximizes the social welfare i e a larger subsidy does not necessarily render a larger welfare further we numerically show that the legislations improve the environment performance but decrease the total profits of the manufacturer and recyclers interestingly the legislations may or may not decrease the consumer surplus

choice inconsistencies among the elderly evidence from plan choice in the medicare part d program comment consumers enrollment decisions in medicare part d can be explained by abaluck and gruber s 2011 model of utility maximization with psychological biases or by a neoclassical version of their model that precludes such biases we evaluate these competing hypotheses by applying nonparametric tests of utility maximization and model validation tests to administrative data we find that 79 percent of enrollment decisions from 2006 to 2010 satisfied basic axioms of consumer theory under the assumption of full information the validation tests provide evidence against widespread psychological biases in particular we find that precluding psychological biases improves the structural model s out of sample predictions for consumer behavior

advertising and aggregate consumption a bayesian dsge assessment aggregate data reveal that advertising in the u s absorbs approximately 2 of gdp and has a well defined pattern over the business cycle being strongly procyclical and highly volatile because the purpose of brand advertising is to foster sales we ask whether such spending has an appreciable effect on the pattern of aggregate consumption and through this avenue on economic activity this question is addressed by developing a dynamic general equilibrium model in which households preferences for differentiated goods depend on the intensity of brand advertising which is endogenously determined by profit maximizing firms once the model is estimated to match the u s economy it argues that the presence of advertising in the long run raises aggregate consumption and hours worked eventually fostering economic activity we also find that advertising has a relevant impact on fluctuations in consumption investment and markup over the business cycle all of the abovementioned effects are proven to epend crucially on the degree of competitiveness of advertising at the firm level

collusion with intertemporal price dispersion we develop a theory of optimal collusive intertemporal price dispersion dispersion clouds consumer price awareness encouraging firms to coordinate on dispersed prices our theory generates a collusive rationale for price cycles and sales patient firms can support optimal collusion at the monopoly price for less patient firms monopoly prices must be punctuated with fleeting sales the most robust structure involves price cycles that resemble edgeworth cycles low consumer attentiveness enhances the effectiveness of price dispersion by reducing the payoff to deviations involving price reductions however for sufficiently low attentiveness price rises are also a concern

the market for news we investigate the market for news under two assumptions that readers hold beliefs which they like to see confirmed and that newspapers can slant stories toward these beliefs we show that on the topics where readers share common beliefs one should not expect accuracy even from competitive media competition results in lower prices but common slanting toward reader biases on topics where reader beliefs diverge such as politically divisive issues however newspapers segment the market and slant toward extreme positions yet in the aggregate a reader with access to all news sources could get an unbiased perspective generally speaking reader heterogeneity is more important for accuracy in media than competition per se

helping consumers know themselves in standard models with asymmetric information the parties involved are assumed to have private information about their own characteristics in the health insurance market for example customers are typically assumed to know more about their health status than insurers do and if the customers use this information in deciding whether to buy insurance we have a classic case of adverse selection modern data gathering technologies however can reverse this situation for example because cell phone providers keep and analyze detailed records they can know more about a consumer s expected usage than the customer herself does similarly a credit card company may know more about a customer s probability of incurring a late fee than the customer herself we explore the consequences of this reversal in the information asymmetry 1 a bare bones model examines how providing consumers with information about their own usage affects prices and welfare we first establish the rather obvious result that taking prices as given consumers benefit from having better information about their own usage they can choose the pricing plans that are more suitable for them recent

can more consumers lead to lower profits a model of multi product competition abstract the article analyzes the optimal pricing strategy of duopoly retailers who sell two goods to three consumer segments two segments that are interested in one good and one that wants to buy both goods the analysis suggests that the markup on one of the goods might be negative and that the existence of consumers who buy both goods can either increase or decrease markups surprisingly the addition of the consumers who buy both goods unchanging the number of the other consumers might decrease profits and increasing the number of consumers who buy one good might also reduce profits this suggests that firms should consider carefully how additional customers might affect the competitive environment and the equilibrium before attempting to attract them to the market

can information costs affect consumer choice nutritional labels in a supermarket experiment this paper investigates whether information costs under currently regulated nutritional labeling prevent consumers from making healthier food choices we implement five nutritional shelf label treatments in a market level experiment these labels reduce information costs by highlighting and summarizing information available on the nutritional facts panel following a difference in differences and synthetic control method approach we analyze weekly store level scanner data for microwave popcorn purchases from treatment and control stores our results suggest that consumer purchases are affected by information costs implemented low calorie and no trans fat labels increase sales in contrast implemented low fat labels decrease sales suggesting that consumer response is also influenced by consumers taste perceptions a combination of these claims into one label treatment increases information costs and does not affect sales significantly

exponential growth bias and household finance exponential growth bias is the pervasive tendency to linearize exponential functions when assessing them intuitively we show that exponential growth bias can explain two stylized facts in household finance the tendency to underestimate an interest rate given other loan terms and the tendency to underestimate a future value given other investment terms bias matters empirically more biased households borrow more save less favor shorter maturities and use and benefit more from financial advice conditional on a rich set of household characteristics there is little evidence that our measure of exponential growth bias merely proxies for broader financial sophistication what drives household financial decisions the canonical economic model assumes that consumers choose to consume borrow or save based on their preferences their expectations and the costs and benefits of borrowing and saving a growing body of work applies insights from psychology to enrich specifications of three of the model s key pieces preferences expectations and problem solving conditional on parameter values 1 in this paper we bring psychological evidence to bear on a fourth specification issue how consumers perceive the costs and benefits of borrowing and saving we begin by tying together existing and new evidence on these cost perceptions to show that most consumers err systematically when given information commonly available in the market on the saving side consumers display future value bias a systematic tendency to underestimate a future value given

are we taxing ourselves how deliberation and experience shape voting on taxes abstract we let consumers vote on tax regimes in experimental markets we test if taxes on sellers are more popular than taxes on consumers i e on voters themselves even if taxes on sellers are inefficiently high taxes on sellers are more popular if voters underestimate the extent of tax shifting in the market we show that inexperienced voters are prone to such a tax shifting bias that experience is an effective de biasing mechanism but that pre vote deliberation about tax regimes makes initially held opinions more extreme rather than correct our results suggest that voting on taxes is prone to bias and that easy to interpret facts are needed to de bias voters

the failure of competition in the credit card market the bank credit card market containing 4 000 firms and lacking regulatory barriers casually appears to be a hospitable environment for the model of perfect competition nevertheless this article reports that credit card interest rates have been exceptionally sticky relative to the cost of funds moreover major credit card issuers have persistently earned from three to five times the ordinary rate of return in banking during the periods 1983 88 the failure of the competitive model appears to be partly attributable to consumers making credit card choices without taking account of the very high probability that they will pay interest on their outstanding balances copyright 1991 by american economic association

lechatelier samuelson principle in games and pass through of shocks abstract the lechatelier samuelson principle states that as a reaction to a shock an agent s short run adjustment of an affected action is smaller than its long run adjustment when the agent can also adjust other related actions we extend the principle to strategic environments where the long run adjustment also accounts for other players adjusting their strategies we show that the principle holds for supermodular games strategic complements satisfying monotone comparative statics and provide sufficient conditions for the principle to hold in games of strategic substitutes heterogeneity we discuss the principle s implications for cost pass through of multiproduct firms

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

exclusionary vertical restraints law has economics mattered i was asked to report on the effect of economics on the development of antitrust analysis of exclusionary vertical relationships particularly on the current acceptance of post chicago theories of exclusionary market power such as raising rivals costs rrc in order to better understand the role of economics in vertical restraints law however i first analyze acceptance of the free riding efficiency theory this provides a second data set in addition since antitrust involves balancing market power harms with efficiency benefits a more complete picture is achieved i have reached three basic tentative conclusions first developments in economics clearly have an effect on developments in the law this has been true for both the free rider and exclusionary market power theories however the process by which antitrust adopts new economic concepts seems to be subject to a long lag second the process appears to be subject to considerable randomness it appears to depend on the partly random draw of judges lawyers and economic consultants third when economic theories are accepted courts often restrict their engagement with the theories assertion sometimes is substituted for economic evidence and legal conclusions sometimes are overly broad

product differentiation search costs and competition in the mutual fund industry a case study of s p 500 index funds we investigate the role that non portfolio fund differentiation and information search frictions play in creating two salient features of the mutual fund industry the large number of funds and the sizeable dispersion in fund fees in a case study we find that despite the financial homogeneity of s p 500 index funds this sector exhibits the fund proliferation and fee dispersion observed in the broader industry we show how extra portfolio mechanisms explain these features these mechanisms also suggest an explanation for the puzzling late 1990s shift in sector assets to more expensive and often newly entered funds an influx of highinformation cost novice investors

add on pricing by asymmetric firms this paper uses an analytical model to examine the consequences of add on pricing when firms are both horizontally and vertically differentiated and there is a segment of boundedly rational consumers who are unaware of the add on fees at the time of initial purchase we find that consumers who know the add on fees can be penalized and increasingly so by the existence of boundedly rational consumers our consideration of quality asymmetries on base goods and add ons plus the inclusion of boundedly rational consumers leads to several novel findings regarding firm profits when quality asymmetry is on base goods only and with boundedly rational consumers add on pricing can diminish profit for a qualitatively superior firm and increase profit for an inferior firm i e a lose win result compared to when add on pricing is prohibited or infeasible when quality asymmetries exist on both base goods and add ons and without boundedly rational consumers the opposite win lose result prevails when quality asymmetries exist on both base goods and add ons and with boundedly rational consumers the result can be win win win lose or lose win depending on the magnitude of quality differentiation on add ons this paper was accepted by j miguel villas boas marketing

selling and leasing strategies for durable goods with complementary products it has been recognized that when a durable goods manufacturer sells its output it has an incentive to produce at a rate that will drive down the market price of the product over time because anticipation of declining prices makes consumers less willing to invest in owning the durable good selling can be self defeating for the manufacturer if the manufacturer instead leases the product it can eliminate its own incentive to decrease the price over time which allows it to extract larger rents from consumers in this paper we investigate how a durable goods manufacturer s choice between leasing and selling is affected by a complementary product that is produced by an independent firm we show that a durable goods manufacturer that leases its product has an incentive to increase prices by limiting the availability of the product in response to the availability of a complement because this potential for opportunistic behavior discourages output of the complement leasing can also be problematic as a result the durable goods manufacturer faces a trade off between leasing which commits the manufacturer to not overproduce and selling which commits it to not underproduce our contribution is to identify this trade off and show how a durable goods manufacturer can use a combination of leasing and selling to balance its strategic commitment across both its own market as well as the complementary market

using return policies to elicit retailer information we show that a manufacturer may prefer to offer a return policy when dealing with a retailer who holds advance knowledge about market conditions roughly stated the manufacturer offers a liberal return allowance in lieu of a lower price to satisfy a retailer facing unfavorable market conditions a retailer facing favorable conditions finds this tradeoff unattractive because he is likely to sell the merchandise anyway and thus not make as much use of the generous return terms as a consequence a retailer is less inclined to misstate market conditions by serving as an additional control instrument a returns policy reduces the manufacturer s need to ration cut production

restoring rational choice the challenge of consumer financial regulation abstract this lecture considers the case for consumer financial regulation in an environment where many households lack the knowledge to manage their financial affairs effectively the lecture argu

a model of add on pricing this paper examines competitive price discrimination with horizontal and vertical taste differences consumers with higher valuations for quality are assumed to have stronger brand preferences two models are considered a standard competitive price discrimination model in which consumers observe all prices and an add on pricing game in which add on prices are naturally unobserved and firms may advertise a base good at a low price in hopes of selling add ons at high unadvertised prices in the standard game price discrimination is self reinforcing the model sometimes has both equilibria in which the firms practice price discrimination and equilibria in which they do not the analysis of the add on pricing game focuses on the chicago school argument that profits earned on add ons will be competed away via lower prices for advertised goods a conclusion is that add on practices can raise equilibrium profits by creating an adverse selection problem that makes price cutting unappealing although profitable when jointly adopted using add on pricing is not individually rational in a simple extension with endogenous advertising practices and costless advertising several models that could account for add on pricing are discussed

managing new and remanufactured products we study a firm that makes new products in the first period and uses returned cores to offer remanufactured products along with new products in future periods we introduce the monopoly environment in two period and multiperiod scenarios to identify thresholds in remanufacturing operations next we focus our attention on the duopoly environment where an independent operator io may intercept cores of products made by the original equipment manufacturer oem to sell remanufactured products in future periods we characterize the production quantities associated with self selection and explore the effect of various parameters in the nash equilibrium among other results we find that if remanufacturing is very profitable the original equipment manufacturer may forgo some of the first period margin by lowering the price and selling additional units to increase the number of cores available for remanufacturing in future periods further as the threat of competition increases the oem is more likely to completely utilize all available cores offering the remanufactured products at a lower price

a model of casino gambling we show that prospect theory offers a rich theory of casino gambling one that captures several features of actual gambling behavior first we demonstrate that for a wide range of preference parameter values a prospect theory agent would be willing to gamble in a casino even if the casino offers only bets with no skewness and with zero or negative expected value second we show that the probability weighting embedded in prospect theory leads to a plausible time inconsistency at the moment he enters a casino the agent plans to follow one particular gambling strategy but after he starts playing he wants to switch to a different strategy the model therefore predicts heterogeneity in gambling behavior how a gambler behaves depends on whether he is aware of the time inconsistency and if he is aware of it on whether he can commit in advance to his initial plan of action this paper was accepted by brad barber teck ho and terrance odean special issue editors

exploiting naivete about self control in the credit market we develop a model of the credit market where competitive lenders oer long term contracts specifying a non linear schedule of possible repayment schedules to borrowers who may dier both in their taste for immediate gratication and their prior beliefs about that taste the equilibrium contract to a borrower with given beliefs is discontinuous it features an advantageous option involving fast repayment and a penalty for deviating and repaying later these predictions seem to resemble some salient features of many credit card and mortgage contracts for fully sophisticated borrowers the discontinuity acts as a commitment device and yields fast repayment but all other borrowers even those with an arbitrarily small amount of naivete end up delaying repayment despite the penalty and receive little benet from commitment furthermore because they believe they will repay early they underestimate the cost of credit and hence borrow too much non sophisticated borrowers cross subsidize sophisticated borrowers while sophisticated borrowers discipline rms by preventing very exploitative contracts we identify natural conditions under which the above results obtain even if

aggregation and imperfect competition on the existence of equilibrium we present a new approach to the theory of imperfect competition and apply it to study price competition among differentiated products the central result provides general conditions under which there exists a pure strategy price equilibrium for any number of firms producing any set of products this includes products with multi dimen sional attributes in addition to the proof of existence we provide conditions for uniqueness our analysis covers location models the characteristics approach and probabilistic choice together in a unified framework to prove existence we employ aggregation theorems due to prekopa 1971 and borell 1975 our companion paper caplin and nalebuff 1991 introduces these theorems and develops the application to super majority voting rules we present a new approach to the theory of imperfect competition and apply it to study price competition among differentiated products the central result is that there exists a pure strategy price equilibrium for any number of firms producing any set of products in addition to the proof of existence we provide conditions for uniqueness our model both unites diverse strands of the earlier literature and opens up uncharted areas for future analysis in particular we expand the traditional one dimensional framework to allow for multi dimen sional product differentiation our approach involves twin restrictions on consumer preferences one on individuals preferences the other on the distribution of preferences across society these are generalizations of the restrictions supporting 64 majority rule presented in caplin and nalebuff 1988 to prove existence we apply a new technique of aggregation this technique is valuable in a variety of other problems in the companion paper we use the aggregation result to generalize our earlier work on 64 majority rule and to characterize the relationship between the distribution of human capital and the distribution of income caplin and nalebuff 1991 there are additional applications in statistics and in search theory we begin with a brief review of the early literature on imperfect competition describing in more detail the existence problem and previous solutions section 3 presents our twin assumptions and shows that they cover many standard cases in section 4 we introduce the aggregation theorem and use it in the analysis of demand functions the proof of existence of equilibrium is in section

demand uncertainty and returns policies manufacturers facing uncertain demand may induce distributors to carry ample stocks of their products by agreeing to accept returns of unsold goods for credit the authors model the manufacturer s decision to accept returns showing that this decision depends crucially on the nature of the demand uncertainty uncertainty over customer arrivals favors returns while uncertainty over consumers valuation of the manufacturer s product leads distributors to set retail prices too high from the manufacturer s standpoint when returns are allowed the authors show that returns can be expected to raise retail prices while maintaining shrinking distributor margins copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

your loss is my gain a recruitment experiment with framed incentives empirically labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success an effect attributed to loss aversion this is puzzling as penalties are infrequently used in practice the most obvious explanation is selection loss averse agents are unwilling to accept such contracts i formalize this intuition then run an experiment to test it surprisingly i find that workers were 25 percent more likely to accept penalty contracts with no evidence of adverse or advantageous selection consistent with the existing literature penalty contracts also increased performance on the job by 0 2 standard deviations i outline extensions to the basic theory that are consistent with the main results but argue that more research is needed on the long term effects of penalty contracts if we want to understand why firms seem unwilling to use them

do returns policies intensify retail competition the paper manufacturer s returns policies and retail competition by padmanabhan and png 1997 argues that returns policies intensify retail competition and therefore raise the manufacturer s profits they reach that result through a problematic method to solve the game particularly in the game where the manufacturer accepts returns they unreasonably assume the retailers would never face stock constraints thus changing the retail competition from a cournot like competition to a bertrand one actually in a game where retailers first order stocks and then compete by choosing prices even if a manufacturer offers full return policies the retailers can still use insufficient stocks as quantities precommitment in order to uphold retail prices hence the retailers still face stock constraints at the final stage of the game the nature of the game is essentially unaffected by returns policies when demand is certain this note shows that returns policies do not intensify retail competition in the model proposed by padmanabhan and png 1997

information provision and consumer behavior a natural experiment in billing frequency abstract in this study i estimate a causal effect of increased billing frequency on consumer behavior i exploit a natural experiment in which residential water customers switched exogenously from bimonthly to monthly billing customers increase consumption by 3 5 5 in response to more frequent information this result is reconciled in models of price and quantity uncertainty where increases in billing frequency reduce the distortion in consumer perceptions using treatment effects as sufficient statistics i calculate consumer welfare gains equivalent to 0 5 1 of annual water expenditures heterogeneous treatment effects suggest increases in outdoor water use