endogeneity in brand choice models applications of random utility models to scanner data have been widely presented in marketing for the last 20 years one particular problem with these applications is that they have ignored possible correlations between the independent variables in the deterministic component of utility price promotion etc and the stochastic component or error term in fact marketing mix variables such as price not only affect brand purchasing probabilities but are themselves endogenously set by marketing managers this work tests whether these endogeneity problems are important enough to warrant consideration when estimating random utility models with scanner panel data our results show that not accounting for endogeneity may result in a substantial bias in the parameter estimates

annual miles drive used car prices this paper investigates whether the net benefits from owning a vehicle proxied by annual miles driven explain the price declines observed over a vehicle s life we first model the household decision on how much to drive each of its vehicles then we empirically establish that variation in household annual miles across brands explains observed price declines furthermore the effect of vehicle age on annual miles decisions and consequently on market value depends on household characteristics and the composition of the vehicle stock owned

price discrimination via second hand markets consumers have heterogeneous tastes for new and used goods and second hand markets involve transactions costs a monopoly seller may gain or lose from the existence of a second hand market locally it may prefer lower transactions costs but globally it may prefer high transactions costs so it can strangle the used market the monopolist uses the second hand market as an indirect device to achieve a form of second degree price discrimination if the monopolist can control the quality of its product when used it may wish to deteriorate this quality to worthless or else to have it as good as new

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

do consumers correctly expect price reductions testing dynamic behavior the assumption that consumers are fully rational and hold correct price expectations is demanding in dynamic settings we claim that it is testable provided that market level data on prices and purchases are available we find that consumers hold simple expectations regarding the timing of promotions for music albums consumers act as if they were aware of reductions but did not revise their beliefs over time the anticipation effect due to strategically delaying purchase amounts to 1 5 of the decision to purchase during regular periods these results have implications in terms of demand estimation optimal pricing and welfare computations

a dynamic oligopoly structural model for the prescription drug market after patent expiration this article incorporates consumer learning and heterogeneity into a dynamic oligopoly model for the prescription drug market in the model both firms and patients need to learn the generic qualities via patients experiences generic firms entry decisions are endogenous but their entry timings depend on a random approval process i apply the model to examine the impact of shortening the expected generic approval time although this policy experiment brings generics to the market sooner it increases a potential entrant s likelihood of entering a crowded market and hence could reduce the total number of generic entrants and consumer welfare

the flat rental puzzle 4cars and replace them after 2 years or when their odometer exceeds 34 000 km this is a very costly 5 strategy caused by rapid depreciation in used car prices we show how economic theory predicts that 6 in a competitive market cars are rented out covering their full economic lifespan and rental prices are 7 a declining function of their odometer value our solution to these puzzles is that actual rental markets 8 are not fully competitive and firms may be behaving suboptimally we provide a case study of a large 9 car rental company that provided us access to its operating data we develop a model of the company s 10 operations that predicts that the company can significantly increase its profits by keeping its rental cars 11 twice as long as it currently does and also by discounting the rental cost of older vehicles to induce 12 its customers to rent them the company undertook an experiment to test our model s predictions 13 we report initial findings from this experiment which involved over 4500 rentals of over 500 cars in 14 4 locations over a 5 month period the results are consistent with the predictions of our model and 15 suggest that a properly chosen declining rental price function can increase overall revenues profits 16 also increase significantly since doubling the holding period of rental cars cuts discounted replacement 17 costs by nearly 40 18

applied welfare economics with discrete choice models economists have been paying increasing attention to the study of situations in which consumers face a discrete rather than a continuous set of choices such models are potentially very important in evaluating the impact of government programs upon consumer welfare but very little has been said in general regarding the tools of applied welfare economics indiscrete choice situations this paper shows how the conventional methods of applied welfare economics can be modified to handle such cases it focuses on the computation of the excess burden of taxation and the evaluation of quality change the results are applied to stochastic utility models including the popular cases of probit and logit analysis throughout the emphasis is on providing rigorous guidelines for carrying out applied work this abstract was borrowed from another version of this item

understanding the role of trade ins in durable goods markets theory and evidence the act of trading in a used car as partial payment for a new car resonates with practically all consumers such transactions are prevalent in many other durable goods markets ranging from golf clubs to ct scanners what roles do trade ins play in these markets what motivates the seller to set up a channel to facilitate trade ins intuitively accepting a trade in would appear to stimulate demand for the producer s product but facilitating the resale of these used goods that substitute for new goods might also increase cannibalization although such transactions involve billions of dollars we know relatively little about this practice from the extant research literature this paper develops an analytical model that incorporates key features of real world durable goods markets i coexistence of new and used goods markets ii consumer heterogeneity with respect to quality sensitivity iii firms that anticipate the cannibalization problem arising from the coexistence of new and used goods and iv lemon problems in resale markets whereby sellers of used goods are better informed than buyers about the quality of their particular item in our analysis a trade in policy amounts to an intervention by the firm in the used goods market which reduces inefficiencies arising from the lemon problem it motivates owners to purchase new goods and reduces their proclivity to hold on to purchased goods because of the low price the latter would fetch in a lemon market we also show that trade in programs are more valuable for less reliable products as well as for products that deteriorate more slowly our analysis shows that producers in durable goods markets should consider trade in programs as a matter of routine despite cannibalization concerns arising from a more active resale market a producer s profits will inevitably rise from introducing trade ins given pervasive lemon problems we test the key predictions of the model about price and volume of trade by assembling a data set of transactions of u s automobile consumers and find broad support for our model

what high achieving low income students know about college abstract previous work demonstrates that low income higher achievers fail to apply to selective colleges despite their being admitted at high rates and receiving financial aid so generous that they pay less than at non selective schools the expanding college opportunities project a randomized controlled trial provides individualized information about colleges net prices resources curricula students and outcomes our prior study shows that the intervention raises students applications to admissions at enrollment and progress at selective colleges here we use survey data to show that it actually changes students knowledge and decision making we highlight topics on which they are misinformed

a note on progression penalty schemes and tax evasion abstract this note deals with the question of whether shifting the tax base towards more progression will stimulate or discourage tax evasion when the tax base is shifted so that either the expected tax revenues of government or the expected utility of taxpayer will remain unchanged the answer turns out to depend sensitively on the nature of penalty schemes if caught in tax evasion if the penalty rate is charged on the undeclared income tax evasion will increase while if the penalty rate is charged on the evaded tax tax evasion will decrease when the tax base is shifted towards progression

an economic theory of planned obsolescence planned obsolescence is the production of goods with uneconomically short useful lives so that customers will have to make repeat purchases however rational customers will pay for only the present value of the future services of a product therefore profit maximization seemingly implies producing any given flow of services as cheaply as possible with production involving efficient useful lives this paper shows why this analysis is incomplete and therefore incorrect monopolists are shown to desire uneconomically short useful lives for their goods oligopolists have the monopolist s incentive for short lives as well as a second incentive that may either increase or decrease their chosen durability however oligopolists can generally gain by colluding to reduce durability and increase rentals relative to sales some evidence is presented that appears to be generally consistent with the predictions of the theory

durable goods oligopoly with secondary markets the case of automobiles we study the effects of durability and secondary markets on equilibrium firm behavior in the car market we construct a dynamic oligopoly model of a differentiated product market to incorporate the equilibrium production dynamics that arise from the durability of the goods and their active trade in secondary markets we derive an econometric model and estimate its parameters using data from the automobile industry over a 20 year period our estimates are used to provide a measure of the competitive importance of the secondary market

dynamics of pricing in the video game console market skimming or penetration abstract nintendo lost its dominant position in the video game industry during the console war between its nintendo 64 and sony s playstation however nintendo could have made several different strategic decisions to change the outcome this article develops a structural model and investigates these alternative strategies through policy simulations in particular the author provides a framework to study firms optimal pricing strategies under network effects consumer heterogeneity and oligopolistic competition consumer heterogeneity provides an incentive for a durable goods manufacturer to price skim while network effects lead to an opposite motive for penetration pricing the proposed framework incorporates these two competing motives under oligopolistic competition the author estimates a demand system that allows for indirect network effects and consumer heterogeneity and then numerically solves for the markov perfect equilibrium in firms dynamic pricing game policy simulations indicate that ni

pricing patent loss and the market for pharmaceuticals dustry the drug price competition and patent term restoration act of 1984 very clearly reflects the determination of policy makers to simultaneously address issues of price control and technical progress the 1984 act increased returns to innovation by extending the period of patent protection to take into account the time between receipt of a patent and food and drug administration fda approval of a drug for sale in the market the 1984 act also reduced the testing requirements for approval of new generic brands of existing chemical entities thus reducing entry barriers in markets where patents have expired the expected outcome from eased entry conditions for generic substitutes was substantially enhanced price competition and lower prices for brand name drugs in fact prices for brand name drugs have tended to increase following entry by generics wagner and duffy 28 examined price changes for top selling generics and name brands they show substantial price increases in brand name prices accompanying large reductions in generic prices as entry of generics occurs grabowski and vernon 9 examined data on 18 major orally administered rug products subject to generic competition between 1983 and 1987 and found that the name brand price increased by an average of 7 one year subsequent to generic entry and 11 two years following generic entry

dynamic demand for new and used durable goods without physical depreciation the case of japanese video games we develop a new dynamic demand model for new and used durable goods and quantify the impact of used goods markets on producers profits and consumer welfare

secondary markets with changing preferences if consumer valuations change over time then secondary market frictions may raise monopoly profits and cause durability to be distorted away from the cost minimizing level a monopolist who favors such frictions overinvests in durability but planned obsolescence instead may be preferred when market frictions exist but a monopolist wishes they did not evidence from the book market is presented

a control function approach to endogeneity in consumer choice models abstract endogeneity arises for numerous reasons in models of consumer choice it leads to inconsistency with standard estimation methods that maintain independence between the model s error and the included variables the authors describe a control function approach for handling endogeneity in choice models observed variables and economic theory are used to derive controls for the dependence between the endogenous variable and the demand error the theory points to the relationships that contain information on the unobserved demand factor such as the pricing equation and the advertising equation the authors approach is an alternative to berry levinsohn and pakes s 1995 product market controls for unobserved quality the authors apply both methods to examine households choices among television options including basic and premium cable packages in which unobserved attributes such as quality of programming are expected to be correlated with price without correcting for endogeneity aggregate d

when do secondary markets harm firms to investigate whether secondary markets aid or harm durable goods manufacturers we build a dynamic model of durable goods oligopoly with transaction costs in the secondary market calibrating model parameters using data from the us automobile industry we find the net effect of opening the secondary market is to decrease new car manufacturers profits by 35 percent counterfactual scenarios in which the size of the used good stock decreases such as when products become less durable when the number of firms decreases or when firms can commit to future production levels increase the profitability of opening the secondary market

exploring the relationship between the markets for new and used durable goods the case of automobiles given that durable products are long lived there exists the possibility of secondary markets for used products as well as the potential for product obsolescence this is an important issue in markets where technology changes rapidly because the introduction of new versions of a product can make earlier versions obsolete more generally prices of older versions in the secondary market adjust in response to changes incorporated in new versions of the product thus another method of evaluating consumers response to a new product is by looking at the variation in market prices of the old product this paper develops a general model to explore the relationship between primary markets for new cars and secondary markets for used cars the results suggest that the depreciation of used cars is influenced strongly by the types of changes in new model cars

does amd spur intel to innovate more we estimate an equilibrium model of dynamic oligopoly with durable goods and endogenous innovation to examine the effect of competition on innovation in the personal computer microprocessor industry firms make dynamic pricing and investment decisions while consumers make dynamic upgrade decisions anticipating product improvements and price declines consistent with schumpeter we find that the rate of innovation in product quality would be 4 2 percent higher without amd present though higher prices would reduce consumer surplus by 12 billion per year comparative statics illustrate the role of product durability and provide implications of the model for other industries