capital inflows financial structure and housing booms we use a panel var to study the effect of shocks to capital inflows which are identified using sign restrictions on the housing market in oecd countries to explore how effects of these shocks change with the structure of the mortgage market and the degree of mortgage securitization we allow the var coefficients to vary with mortgage market characteristics our results indicate that capital inflow shocks have a significant and positive effect on real house prices real credit available to the private sector and real residential investment the responses of these variables are stronger in countries with more developed mortgage markets and in countries where securitization is allowed

buyer search costs and endogenous product design buyer search costs for price are changing in many markets through a model of buyer and seller behavior i consider the effects of changing search costs on prices both when product differentiation is fixed and when it is endogenously determined in equilibrium if firms cannot change product design lower buyer search costs for price lead to increased price competition however if product design is a decision variable lower search costs for price may also lead to higher product differentiation which decreases price competition in this case the overall effect of lower buyer search costs for price may even be higher prices lower social welfare and higher industry profits the result is especially interesting because recent technological changes such as internet shopping can affect the market structure through lowering buyer search costs

the strategic value of high cost customers many firms today manage their existing customers differentially based on profit potential providing fewer incentives to less profitable customers and firing unprofitable customers although researchers and industry experts advocate this practice results have been mixed we examine this practice explicitly accounting for competition and find that some conventional prescriptions may not always hold we analyze a setting where customers differ in their cost to serve we find that when a firm can discriminate among its customers but the rival cannot customer base composition influences the rival s poaching behavior consequently even though a low cost customer is more profitable when viewed in isolation a high cost customer may be strategically more valuable by discouraging poaching therefore contrary to conventional advice it can be profitable for a firm to retain unprofitable customers moreover some customers may become more valuable to retain and receive better incentives when they are less profitable we further show that in competitive settings traditional customer lifetime value metrics may lead to poor retention decisions because they do not account for the competitive externality that actions toward some customers impose on the cash flows from other customers our results suggest that firms may need to evolve from a segmentation mindset which views each customer in isolation to a customer portfolio mindset which recognizes that the value of different customers is interlinked this paper was accepted by j miguel villas boas marketing

dsge model with financial frictions over subsets of business cycle frequencies abstract we estimate a dsge model with financial frictions and banks on subsets of frequency bands corresponding to higher and lower business cycle frequencies our results show that goodness of fit and parameter estimates associated with real and financial frictions vary substantially across business cycle frequency bands with the estimated coefficients related to financial adjustment costs and for the parameter governing the costs associated to capital requirements displaying the largest variations moreover the comparison of the marginal likelihoods with a frictionless framework suggests that the introduction of financial frictions provides a significant improvement at lower business cycle frequencies this is consistent with the presence of macro financial linkages where credit market frictions affect spending decisions over longer time horizons

international credit supply shocks abstract house prices and exchange rates can potentially amplify the expansionary effect of capital inflows we first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase in this environment we illustrate how house price increases and exchange rates appreciations contribute to fueling the boom by inflating the value of collateral we then document empirically in a panel var model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012 that an increase in the leverage of us broker dealers also leads to an increase in cross border credit flows a house price and consumption boom a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model finally we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan to value ratio and the share of foreign currency denominated credit

do switching costs make markets less competitive abstract the conventional wisdom in economic theory holds that switching costs make markets less competitive this article challenges this claim the authors formulate an empirically realistic model of dynamic price competition that allows for differentiated products and imperfect lock in they calibrate this model with data from frequently purchased packaged goods markets these data are ideal in the sense that they have the necessary variation to identify switching costs separately from consumer heterogeneity equally important consumers exhibit inertia in their brand choices a form of psychological switching cost this makes the results applicable to the broad range of products that are distinctly identified i e branded rather than just to products for which there is a product adoption cost or explicit switching fee in the simulations prices are as much as 18 lower with than without switching costs more important equilibrium prices do not increase even in the presence of switching costs that

durable goods monopolists durable goods monopolists face special problems because the sale of their products creates a secondhand market not controlled by the monopolist to the extent the monopolist is able to rent his product rather than sell it or to make binding promises about his future production such problems are ameliorated given the inability to do the above the monopolist is led to producing goods less durable than those produced by either competitive firms or monopolist returns a reverse averch johnson result that monopolist sellers may invest less in fixed costs including plant modernization and research and development than would the renters is shown it is also shown that even though sellers have less monopoly power than renters and nondurable goods monopolists it is possible that the seller will cause a greater deadweight loss than the other types of monopolies

new keynesian models durable goods and collateral constraints abstract econometric evidence suggests that in response to monetary policy shocks durable and non durable spending co move positively and durable spending exhibits a much larger sensitivity to the shocks a standard two sector new keynesian model with perfect financial markets is at odds with these facts the introduction of a borrowing constraint where durables play the role of collateral assets helps in reconciling the model with the empirical evidence

securitized markets international capital flows and global welfare we study the effect of collateralized lending and securitization on the global supply of securitized assets welfare and international net and gross capital flows in a two country general equilibrium model with idiosyncratic investment risk the financial sectors in the two countries home and foreign differ by the collateral requirement for investment loans with home requiring lower margins in autarky home endogenously supplies more assets and enables more risk sharing upon financial integration capital flows from foreign to home leading to lower interest rates and an increase in the global supply of assets foreign enjoys substantial welfare gains through better risk sharing and portfolio reallocation while the welfare experience for home is ambiguous gross capital flows arise when agents face aggregate shocks to the expected payoff to investment projects but can collapse when shocks concern the variance of returns

household risk management and optimal mortgage choice the portfolio of the typical american household is quite unlike the diversie ed portfolio of liquid assets discussed in e nance textbooks the major asset in the portfolio is a house a relatively illiquid asset with an uncertain capital value the value of the house generally exceeds the net worth of the household which e nances its homeownership through a mortgage contract to create a leveraged position in residential real estate other e nancial assets and liabilities are typically far less important than the house and its associated mortgage contract the importance of housing in household wealth is illustrated in figure i this e gure plots the fraction of household assets in housing and in equities against the wealth percentile of the household poor households appear at the left of the e gure and wealthy households at the right data come from the 1989 and 1998 survey of consumer finances the e gure shows that middle class american families from roughly the fortieth to the eightieth percentile of the wealth distribution have more than half their assets in the form of housing even after the expansion of equity ownership during the 1990s equities are of negligible importance for these households 1

housing finance and monetary policy we document three facts concerning how the structure of housing finance affects the monetary transmission mechanism first the characteristics of residential mortgage markets differ markedly across industrialized countries second the impact of monetary policy shocks to residential investment and house prices is significantly stronger in those countries with larger flexibility development of mortgage markets third the transmission to consumption is stronger only in those countries where mortgage equity release is common and mortgage contracts are predominantly of the variable rate type we then build a two sector dsge model with financial constraints to rationalize those facts

financial intermediation house prices and the welfare effects of the u s great recession abstract this paper quantifies the welfare costs of the great recession in the united states and their distribution between borrowing and saving households we use a calibrated dynamic general equilibrium model with shocks to aggregate income and to the financial intermediation sector the model matches the boom bust cycle in house prices the dynamics of household leverage and the increase in inequality of wealth observed in the u s after 2007 we find large welfare costs for financially constrained households the borrowers savers instead benefited from a redistribution of housing wealth due to the de leveraging of borrowers caused by the plunge in house prices this redistribution mechanism was exacerbated by the financial intermediation shock we also show that the welfare costs for borrowers would have been lower if aggregate leverage had remained at pre 2001 levels

housing dynamics over the business cycle housing construction measured by housing starts leads gdp in a number of countries measured as residential investment the lead is observed only in the united states and canada elsewhere residential investment is coincident variants of existing theory however predict housing construction lagging gdp in all countries in the sample nominal interest rates are low ahead of gdp peaks introducing long term nominal mortgages and an estimated process for nominal interest rates into a standard model aligns the theory with observations on starts as mortgages transmit nominal rates into real housing costs longer time to build makes residential investment cyclically coincident abstract from author

durable goods oligopoly abstract this paper models a durable goods oligopoly as a differential game two cases are treated sales where firms cannot lease but must sell the good in question and leasing where firms do not sell but only rent in the sales case firms face increasing marginal cost of production and the good in question depreciates for this case a rational expectations feedback nash equilibrium is constructed for which monopoly or oligopoly output is less than the efficient level this gap between oligopoly and competitive output diminishes as the number of firms increases when firms can only lease the good the good is assumed not to depreciate and the monopoly level of steady state output is compared with the level of steady state output for a feedback equilibrium duopoly for this case the duopoly equilibrium has steady state output that is less than the corresponding efficient level but greater than the monopoly level the leasing model is shown to be isomorphic to the adjustment cost duopoly model of driskill and mccafferty journal of economic theory 49 1989 324 338

reward programs and tacit collusion reward programs a promotional tool to develop customer loyalty offer incentives to consumers on the basis of cumulative purchases of a given product or service from a firm reward programs have become increasingly common in many industries the best known examples include frequent flier programs offered by airlines frequent guest programs offered by hotels and frequent shopper programs offered by supermarkets despite the widespread business practice of reward programs research efforts on reward programs particularly in marketing have been scarce our paper takes an important step towards understanding the design of reward programs and its implications on pricing strategies we study a market that consists of two segments heavy and light user segments the key distinction between the two segments is that the heavy user segment purchases in each period and thus is a candidate for the reward programs in contrast the light user segment exits the market after one purchase and is not in a position to exploit reward programs an important feature of our model is that we allow for different price sensitivity between heavy user and light user segments our model closely examines the type of rewards a reward worth a dollar to the consumer might have different cost implications for the offering firm depending on the type of reward for example cash rewards have higher unit reward cost inefficient reward for the firm than a free product of the firm such as an airline ticket or long distance minutes efficient reward specifically we examine an interesting puzzle observed in the marketplace several firms offer a cash reward or a product not made by the firm such as jackets electronic items etc these firms could offer their own product as rewards and significantly lower their cost we examine whether there is any reason for such a seemingly suboptimal practice our analysis shows that reward programs weaken price competition by offering the incentives for repeat purchases reward programs increase a firm s cost to attract competing firms current customers because firms gain less from undercutting their prices equilibrium prices go up moreover as consumers become unwilling to switch because of potential rewards the firm with a larger market share in the heavy user segment charges higher prices therefore a low price in the first period which leads to a larger market share in the heavy user segment will always be followed by a high price in the second period in our model consumers are rational and can correctly anticipate firms incentive to offer lower prices initially to enroll them into the reward programs our paper offers an explanation as to why the type and amount of reward may vary across the programs we identify two determining factors for the selection of rewards size and relative price sensitivity of the heavy user segment we find that in a market with a small heavy user segment that is also much more price sensitive than the light user segment it is optimal for firms to offer the most inefficient rewards the intuition is based on the firms incentive to exploit the price insensitive light user segment by offering inefficient rewards firms are able to commit to weaker competition and therefore higher prices when the heavy user segment is large or not very price sensitive when compared to the light user segment competing firms should adopt the most efficient rewards to maximize their profit this may well be the case in a number of real world situations in which efficient rewards are quite prevalent we also find that optimal reward amount has a negative relationship with unit reward cost because both firms use rewards to attract the heavy users they tend to offer more when they adopt the more efficient rewards finally our paper identifies the relationship between market characteristics and theimpact of reward programs on firms profits and consumers benefits we find that firms gain from the adoption of reward programs as long as light users are not too price sensitive when light users are very price sensitive firms engage in intense price competition thus benefiting little from the loyalty of heavy users created through rewards because reward programs increase market prices light users who do not get the reward earn strictly lower benefit in contrast heavy users often stand to gain more from the reward program in most cases firms and the heavy users are better off at the expense of light users

tax incidence in differentiated product oligopoly abstract we analyze the incidence of ad valorem and unit excise taxes in an oligopolistic industry with differentiated products and price setting bertrand firms both taxes may be passed on to consumers by more than 100 percent and an increase in the tax rate can increase short run firm profits and hence the long run number of firms we provide summary conditions for these effects to arise the conditions depend on demand curvatures and are written in elasticity form surprisingly the analysis largely corroborates cournot results with homogeneous demand

the economic impact of wireless number portability this paper examines the price response of wireless carriers to the introduction of number portability in the u s i find that wireless prices decreased in response to number portability but not uniformly across plans average prices for the plans with the fewest minutes decreased by only 0 19 month 0 97 but average prices for medium and high volume plans decreased by 3 64 month 4 84 and 10 29 month 6 81 respectively the results suggest that higher volume users in the wireless market benefited more from the policy induced reduction in switching costs

digital piracy a competitive analysis in recent years the issue of copyright protection for intellectual properties such as computer software music cds and videos has become increasingly important it is often claimed that illegal copying of intellectual property costs companies billions of dollars in lost revenues and reduces firms incentives to innovate some researchers have shown that copying can be beneficial to firms when there are strong network effects and copying expands the market in this paper we first examine the impact of illegal copying of software and other similar intellectual properties on firms prices profits and quality choices even when there are no network effects and the market is saturated we show that contrary to the claims of manufacturers there are conditions under which copying can increase firms profits lead to better quality products and increase social welfare this is because weaker copyright protection enables firms to reduce price competition by allowing price sensitive consumers to copy thus weaker copyright protection can serve as a coordination device to reduce price competition we also examine how equilibrium copyright enforcement is affected by network externalities in contrast to previous research we show that strong network effects can sometimes lead to a firm choosing higher levels of copyright protection our results show that in the presence of strong network effects stronger copyright enforcement by one firm can serve as a coordinating device to reduce price competition

competitive price discrimination we model firms as supplying utility directly to consumers the equilibrium outcome of competition in utility space depends on the relationship u between profit and average utility per consumer public policy constraints on the deals firms may offer affect equilibrium outcomes via their effect on u f rom this perspective we examine the profit utility and welfare implications of price discrimination policies in an oligopolistic framework we also show that an equilibrium outcome of competitive nonlinear pricing when consumers have private information about their tastes is for firms to offer efficient two part tariffs

a characterization of ramsey equilibrium abstract consider a perfect foresight equilibrium model with a single capital good a borrowing constraint and many infinitely lived households with fixed but different discount factors the steady state capital stock is held by the most patient household quart j econ 95 1980 375 382 econ j 38 1928 543 559 an example shows the total capital can exhibit an equilibrium cycle in contrast to the stability property of the one household case in the example only the most patient household saves and his income deceases in capital we give a condition implying income is increasing in capital and use it to show any equilibrium converges to the steady state

optimal monetary policy with durable consumption goods abstract we document that the durable goods sector is much more interest sensitive than the nondurables sector and then investigate the implications of these sectoral differences for monetary policy we formulate a two sector general equilibrium model that is calibrated both to match the sectoral responses to a monetary shock derived from our empirical var and to imply an empirically realistic degree of sectoral output volatility and comovement while the social welfare function involves sector specific output gaps and inflation rates the performance of the optimal policy rule can be closely approximated by a simple rule that targets a weighted average of aggregate wage and price inflation in contrast a rule that stabilizes a more narrow measure of final goods price inflation performs poorly in terms of social welfare

asymmetries in housing and financial market institutions and emu despite convergence pressures differences in housing and financial market institutions across the 15 member states of the european union are still enormous this paper argues that they have profound effects on the responsiveness of output and inflation in the different countries to changes in short term interest rates as well as to asset market shocks of external origin the economic reasoning behind this claim is set out and the institutional differences are described the paper assesses the sometimes conflicting empirical evidence on this issue barriers to convergence and implications for labour market flexibility are discussed the uk ireland finland and sweden tend to cluster at one extreme of the relevant institutional characteristics the paper concludes with a set of proposals for institutional reforms which would significantly reduce the tensions within emu and the potential for instability in these economies entailed by emu membership

price discrimination in free entry markets using a spatial model of monopolistic competition we investigate price discrimination in free entry zero profit markets we show that when brands are heterogeneous competition does not prevent discrimination the power to earn economic profits is not necessary for a firm to maintain discriminatory prices our model treats formally the fact that consumers difer not only in the utility they derive from a good but also in how strongly they prefer one brand over all others in markets where firms are very competitive sorting consumers on the strength on brand preference produces larger price differentials between groups than sorting on the basis of consumers reservation prices for the good when firms sort customers on the basis of strength of brand preference however we find that the output and welfare effects are generally less favorable than when sorting is more closely related to consumers reservation prices

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

evaluating theories of bank runs with heterogeneity restrictions this paper empirically tests theories of bank runs we use a structural panel var to extract runs from deposit market data identification exploits cross sectional heterogeneity in deposit insurance we identify bank runs as adverse deposit market supply shocks hitting uninsured banks harder compared to insured conditional on a run we study the behavior of uninsured banks with bad and good fundamentals we find that both experience runs but deposit outflows at the former are more severe panic effects which affect all uninsured deposits alike irrespective of fundamentals dominate in the aggregate insured banks partially absorb the outflow of uninsured deposits

bank integration and co movements across housing markets this paper investigates whether bank integration measured by cross border bank flows can capture the co movements across housing markets in developed countries by using a spatial dynamic panel model the transmission can occur through a global banking channel in which global banks intermediate wholesale funding to local banks changes in financial conditions are passed across borders through the banks balance sheet exposure to credit currency maturity and funding risks resulting in house price spillovers while controlling for country level and global factors we find significant co movement across housing markets of countries with proportionally high bank integration bank integration can better capture house price co movements than other measures of economic integration once we account for bank exposure other spatial linkages traditionally used to account for return co movements across region such as trade foreign direct investment portfolio investment geographic proximity etc become insignificant moreover we find that the co movement across housing markets decreases for countries with less developed mortgage markets characterized by fixed mortgage rate contracts low limits of loan to value ratios and no mortgage equity withdrawal

the learning curve market dominance and predatory pricing sufficient conditions for id and iid are given in the case of two step learning in which a firm reaches the bottom of its learning curve after just two sales however examples are also constructed for the two step learning case in which neither id nor iid holds it is also shown that in equilibrium iid implies that learning is privately disadvantageous although it is socially advantageous finally introducing avoidable fixed costs and possible exit into the model yields a new theory of predatory pricing based on the learning curve hypothesis

intraconnectivity and interconnectivity when value creation may reduce profits this paper analyses firms decisions to provide connectivity to their customers we distinguish between intraconnectivity the ability of one firm s customers to connect to each other and interconnectivity the ability of one firm s customers to connect with another firm s customers the profitability implications of allowing connectivity are not a straightforward consequence of the consumer value of connectivity because connectivity affects not only the customer value but also the intensity of competition by creating or changing network externality we find that if sales are driven by brand switching rather than by category expansion a firm may find it optimal not to provide intraconnectivity even if providing it is not costly and may find it optimal to provide interconnectivity even at a cost exceeding the consumer value of connectivity on the other hand if category expansion is possible providing intraconnectivity may be profitable in this case either the equilibrium intraconnectivity provision may be asymmetric or both firms may find it individually optimal to provide intraconnectivity under certain conditions in the latter case the firms choice of intraconnectivity is a prisoner s dilemma game

monk mortgages in a new keynesian model abstract there has been much interest recently in the role of household long term mortgage debt in the transmission of monetary policy this paper offers a tractable framework that integrates the long term debt channel with the standard new keynesian channel providing a tool for monetary policy analysis that reflects the recent debates in the literature as there is a nontrivial role in the model for both short and long term debt it provides a laboratory to investigate the effects of monetary policy operating not only through its current short term actions but also through expected persistent changes in its stance

strategic decentralization in channels the purpose of this paper is to understand the effect of strategic interaction on a manufacturer s channel structure decision in the model i analyze if there were no strategic interaction then the manufacturer would prefer vertical integration to decentralization with strategic interaction however decentralization can be a nash equilibrium strategy as mcguire and staein mcguire timothy richard staelin 1983a an industry equilibrium analysis of downstream vertical integration marketing sci 2spring 161 192 showed so the question arises what is it about strategic interaction that makes decentralization a nash equilibrium strategy the answer i give is that strategic interaction makes it possible for a manufacturer s retail demand curve to rise when he decentralizes i show that this raising of the demand curve on decentralization can happen only if one of the following mutually exclusive conditions is satisfied 1 the manufacturers products are demand substitutes at the retail level and strategic complements at the manufacturer or retailer levels 2 the manufacturer s products are demand complements at the retail level and strategic substitutes at the manufacturer or retailer levels strategic complementarity at the retailer manufacturer level means that if one retailer manufacturer raises his price then the other retailer manufacturer would raise his price as well strategic substitutability is just the opposite these results show that what is important for decentralization to occur is not how demand substitutable the two manufacturers products are as one might have thought from earlier works in the literature but rather the nature of coupling between demand dependence and strategic dependence

bayesian evaluation of dsge models with financial frictions we evaluate two most popular approaches to implementing financial frictions into dsge models the bernanke gertler and gilchrist 1999 setup where frictions affect the price of loans and the kiyotaki and moore 1997 model where they concern the quantity of loans we take both models to the data and check how well they fit it on several margins overall comparing the models favors the bernanke gertler and gilchrist framework however even this model does not make a clear improvement over the new keynesian benchmark in terms of marginal likelihood and similarity of impulse responses to those obtained from a var

games with strategic complementarities new applications to industrial organization this paper provides an introduction to the analysis of games with strategic complementarities and applications to industrial organization oligopoly pricing comparative statics and a taxonomy of strategic behavior in two stage games

household balance sheet channels of monetary policy a back of the envelope calculation for the euro area abstract this paper formulates a back of the envelope approach to study the effects of monetary policy on household consumption expenditures we analyze several transmission mechanisms operating through direct partial equilibrium channels intertemporal substitution and net interest rate exposure and indirect general equilibrium channels net nominal exposure as well as wealth collateral and labor income channels the strength of these forces varies across households depending on their marginal propensities to consume their balance sheet composition the sensitivity of their own earnings to fluctuations in aggregate labor income and the responsiveness of aggregate earnings asset prices and inflation to monetary policy shocks we quantify all these channels in the euro area by combining micro data from the hfcs and the eu lfs with structural vars estimated on aggregate time series we find that the indirect labor income channel and the housing wealth effect are strong drivers of the aggregate consumption response to monetary policy and explain the cross country heterogeneity in these responses

bertrand supertraps we study oligopoly price competition between multiproduct firms firms whose products interact in the profit function specifically we focus on the impact of intrafirm product interactions on the level of equilibrium profits this impact may be decomposed in two different ways a a direct effect keeping the competitors actions fixed plus a strategic effect i e through the competitors actions or alternatively b a competitive advantage effect change in firmi only plus an imitation effect change in all other firms we derive conditions such that a the strategic effect more than outweighs the direct effect and conditions such that b the imitation effect more than outweighs the competitive advantage effect bertrand supertraps for example an increase in the degree of economies of scope would increase profits if prices were fixed or if the change were limited to firmi s cost function however if all firms increase the degree of economies of scope then all firms receive lower profits a variety of other applications is considered including learning curves core competencies demand synergies systems competition compatibility bundling network effects switching costs durable goods long term contracts

monetary policy transmission in a model with animal spirits and house price booms and busts abstract can monetary policy trigger pronounced boom bust cycles in house prices and create persistent business cycles we address this question by building heuristics into an otherwise standard dsge model as a result monetary policy sets off waves of optimism and pessimism animal spirits that drive house prices that in turn have strong repercussions on the business cycle we compare our findings to a standard model with rational expectations by means of impulse responses we suggest that a standard taylor rule is not well suited to maintain macroeconomic stability instead an augmented rule that incorporates house prices is shown to be superior

housing collateral and the monetary transmission mechanism in this paper we quantify the effects of the recent increase in the housing loan to value ratio ltv on the monetary transmission mechanism we set up a two sector dynamic stochastic general equilibrium model with collateral constraints and production of goods and housing using bayesian methods we quantify the component of the monetary transmission mechanism that is generated by housing collateral we find that this component is substantial and strongly increasing in the ltv we conclude that in order to properly understand the monetary transmission mechanism we need to take into account the effects of housing related collateral constraints and their changing nature

subprime borrowers securitization and the transmission of business cycles a growing literature i e jaffee lynch richardson and van nieuwerburgh 2009 acharya and schnabl 2009 argues that securitization improves financial stability if the securitized assets are held by capital market participants rather than financial intermediaries i construct a quantitative macroeconomic model with a novel specification for mortgage backed securities mbs to evaluate this claim my findings suggest that the existence of the securitization market stabilizes the economy under the condition that financial intermediaries do not engage in the acquisition of securitized assets in the presence of large negative housing preference shocks the drop in output in the first year after the shock is halved if subprime mbs are purchased by non financial agents rather than held by banks less

collusion in bertrand vs cournot competition a virtual bargaining approach how do firms manage to collude without communicating why do we find more collusion in price competition than in quantity competition why is collusion so hard to detect we examine strategic behavior in competitive interactions by developing and applying the concept of virtual bargaining when decision makers virtually bargain they mentally simulate and choose among agreements that they could reach if they were able to explicitly negotiate with each other virtual bargainers focus on agreements that offer some protection against the possibility that their counterparts may deviate and best respond to these agreements we develop a formal account of virtual bargaining and demonstrate that it leads to collusion in bertrand but not in cournot competition in this framework collusion is a result of virtual bargaining as a mode of reasoning and requires neither communication nor dynamic considerations such as rewards and punishments between the players this paper was accepted by manel baucells decisi

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

price differentials in monetary unions the role of fiscal shocks we study the effect of regional expenditure and revenue shocks on price differentials for 47 us states and 9 eu countries we identify shocks using sign restrictions on the dynamics of expenditures revenues deficits and output and construct two estimates for structural price differentials dynamics one for the average and one for each unit which optimally weight information contained in the data for all units on average expansionary fiscal disturbances produce positive while distortionary balance budget shocks produce negative price differential responses the negative price differentials responses in some units is partially explained by spillovers and labour supply effects

how does financial liberalisation affect the influence of monetary policy on the current account abstract does the current account improve or deteriorate following a monetary policy expansion we examine this issue theoretically and empirically we show that a standard open economy dsge model predicts that the current account response to a monetary policy shock depends on the degree of financial regulation in particular financial liberalisation makes it more likely that the current account deteriorates following a monetary expansion we test this theoretical prediction with a varying coefficient bayesian panel var model where the coefficients are allowed to vary as a function of the degree of financial product and labour market regulation on data from 1976q1 2006q4 for 19 oecd countries our empirical results support the theory we therefore conclude that following a monetary policy expansion the current account is more likely to go into deficit in countries with more liberalised financial markets

cyclicality of labor wedge and informal sector abstract empirical evidence suggests that the labor wedge defined as the gap between the firm s marginal product of labor and the household s marginal rate of substitution is quite volatile and countercyclical this article argues that the presence of an informal sector can provide a key for understanding the observed countercyclical behavior of the labor wedge

why market shares matter an information based theory consider a duopoly market in which consumers have heterogeneous information about the quality differential q of the two goods when firms are ignorant about q consumers rationally believe that a firm with high market shares is likely to produce a high quality good as a result firms try to signal jam the inferences of consumers and compete for market shares beyond the level explained by short run profit maximization when firms know q multiple equilibria may exist but there is always one equilibrium in which market shares signal quality and then the market tends to be more competitive

sticky prices in the euro area a summary of new micro evidence this paper summarises the vast evidence on micro price setting recently obtained for euro area countries we consider studies with micro data on consumer and producer prices as well as survey information the main findings are 1 prices in the euro area are sticky and stickier than in the us 2 downward price rigidity is only slightly more marked than upward price rigidity 3 heterogeneity and asymmetries are observed in price setting and 4 the relevance of theories that explain price stickiness such as implicit or explicit contracts marginal costs and coordination failure is confirmed whereas menu costs pricing thresholds and costly information explanations are judged much less relevant by firms jel c25 d40 e31

the response of asset prices to monetary policy shocks stronger than thought standard macroeconomic theory predicts rapid responses of asset prices to monetary policy shocks small scale vector autoregressions vars however often find sluggish and insignificant impact effects using the same high frequency instrument to identify monetary policy shocks we show that a large scale dynamic factor model finds overall stronger and quicker asset price reactions compared to a benchmark var both on euro area and us data our results suggest that incorporating a sufficiently large information set is crucial to estimate monetary policy effects

new evidence on inflation persistence and price stickiness in the euro area implications for macro modeling this paper evaluates new evidence on price setting practices and inflation persistence in the euro area with respect to its implications for macro modeling it argues that several of the most commonly used assumptions in micro founded macro models are seriously challenged by the new findings jel e31 e52

redistributive shocks and productivity shocks abstract a productivity innovation reduces labor share at impact making it countercyclical it subsequently produces a long lasting increase that peaks five years later at a level larger in absolute terms than the initial drop before slowly returning to average i e labor share overshoots we estimate a bivariate shock process to the production function that under competition in factor markets accounts for this overshooting we pose this process in an otherwise standard real business cycle economy and we find that the contribution of productivity innovations to the variance of hours is 1 of that in the standard rbc model

we re number 1 price wars for market share leadership i examine the dynamics of oligopolies when firms derive subjective value from market leadership in equilibrium prices alternate in tandem between high levels and occasional price wars which take place when market leadership is at stake the stationary distribution of market shares is typically multimodal that is much of the time there is a stable market leader even though shareholders do not value market leadership per se a corporate culture that values market leadership may increase shareholder value the online appendix is available at https doi org 10 1287 mnsc 2017 2725 this paper was accepted by bruno cassiman business strategy

financial innovation and european housing and mortgage markets in this paper we assess the recent history of house prices and of mortgage lending across europe we develop a simple economic framework to estimate the likely contributions of fundamental factors such as changes in real incomes and population growth to house price appreciation we also try to quantify how much of price rises might have been driven by rising expectations of future capital gains we estimate that this might have played a significant role in several countries including spain sweden belgium and the uk we then consider what different types of mortgage arrangement might become attractive in a world of higher house prices analysing types of indexed mortgage that have advantages where prices are higher relative to incomes and where house prices may be volatile and cannot be assumed to carry on rising

technology adoption in the presence of network externalities we analyze technology adoption in industries where network externalities are significant the pattern of adoption depends on whether technologies are sponsored a sponsor is an entity that has property rights to the technology and hence is willing to make investments to promote it key findings include the following 1 compatibility tends to be undersupplied by the market but excessive standardization can occur 2 in the absence of sponsors the technology superior today has a strategic advantage and is likely to dominate the market 3 when one of two rival technologies is sponsored that technology has a strategic advantage and may be adopted even if it is inferior 4 when two competing technologies both are sponsored the technology that will be superior tomorrow has a strategic advantage

cross market network effect with asymmetric customer loyalty implications for competitive advantage a cross market network effect exists in many industries e g newspaper publishing media software in which a seller sells both a primary and a secondary product e g a newspaper publisher sells newspapers to readers and advertising space to advertisers and the value of the secondary product depends on the size of the user base of the primary product this paper examines the competitive implications of asymmetric customer loyalty in such markets in traditional markets an advantage in customer loyalty generates a profit advantage we show here however that in the presence of a cross market network effect a midlevel of loyalty advantage in the primary product market can lead to an overall profit disadvantage this surprising result is derived from the interdependence of the two markets whereby a profit in one market may be gained at the cost of the other and by the positive relationship between a larger loyalty segment and a higher opportunity cost of price competition in the product of the primary market extending our model to a two period entry game also shows that under certain conditions the entrant with disadvantage in customer loyalty can outperform the incumbent in profit and market share this result suggests that asymmetry in customer loyalty can be a source of first mover advantage or disadvantage

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

third degree price discrimination in oligopoly all out competition and strategic commitment price discrimination by imperfectly competitive firms may intensify competition leading to lower prices for all consumers the tradeoff of consumer groups welfare that is characteristic of monopolistic discrimination need not arise this escalation of competition may make firms worse off and as a result firms may wish to avoid the discriminatory outcome under conditions similar to those in which unambiguous price and welfare effects may arise unilateral commitments not to price discriminate including the adoption of everyday low pricing or no haggle policies may raise firm profits by softening price competition

one is almost enough for monopoly it has been argued that two factors product durability and potential entry may force a monopolist to price at marginal cost this article shows that when these two forces coexist the tendency toward competition may be negated first we prove that durable goods oligopolists without commitment powers may attain joint profits arbitrarily close to those of a monopolist with perfect commitment power second we demonstrate that the presence of a potential entrant may enable a durable goods monopolist to act as if he had commitment power thus potential as well as actual entry may restore monopoly power

sticky price models and durable goods the inclusion of a durable goods sector in sticky price models has strong and unexpected implications even if most prices are flexible a small durable goods sector with sticky prices may be sufficient to make aggregate output react to monetary policy as though most prices were sticky in contrast flexibly priced durables with sufficiently long service lives can undo the implications of standard sticky price models in a limiting case flexibly priced durables cause monetary policy to have no effect on aggregate output our analysis suggests that durable goods prices are the most relevant data for calibrating price rigidity jel e21 e23 e31 e52

dynamic price competition with network effects i consider a dynamic model of competition between two proprietary networks consumers die and are replaced with a constant hazard rate and firms compete for new consumers to join their network by offering network entry prices i derive a series of results pertaining to a existence and uniqueness of symmetric equilibria b monotonicity of the pricing function e g larger networks set higher prices c network size dynamics increasing dominance vs reversion to the mean and d firm value how it varies with network effects finally i apply my general framework to the study of termination charges in wireless telecommunications i consider various forms of regulation and examine their impact on firm profits and market share dynamics

international capital flows and the boom bust cycle in spain we study the joint dynamics of foreign capital flows and real activity during the recent boom bust cycle of the spanish economy using a three country new keynesian model with credit constrained households and firms a construction sector and a government we estimate the model using 1995q1 2013q2 data for spain the rest of the euro area rea and the rest of the world we show that falling risk premia on spanish housing and non residential capital a loosening of collateral constraints for spanish households and firms as well as a fall in the interest rate spread between spain and the rea fuelled the spanish output boom and the persistent rise in foreign capital flows to spain before the global financial crisis during and after the global financial crisis falling house prices and a tightening of collateral constraints for spanish borrowers contributed to a sharp reduction in capital inflows and to the persistent slump in spanish real activity the credit crunch was especially pronounced for spanish households firm credit constraints tightened later and more gradually and contributed much less to the slump

modelling inflation shifts and persistence in tunisia perspectives from an evolutionary spectral approach this article examines the dynamic characteristics of the inflation rate in tunisia over the last two decades and particularly following the onset of the arab spring in 2010 which causes distortions in this country s monetary policy we focus on the two specific dimensions of the tunisian inflation rate inflation regimes and persistence we tackle this issue by adopting an evolutionary spectral approach initially proposed by priestley and tong 1973 our main findings indicate a stable inflation regime in the last 10 years with an average inflation rate of around 5 5 it is also found that the tunisian inflation experienced a high degree of inertia which reflects its gradual responses to shocks we also discuss the policy implications of these results which typically require policy makers to implement sound institutional reforms to reduce inflation

monetary policy when households have debt new evidence on the transmission mechanism in response to an unanticipated change in interest rates households with mortgage debt adjust their expenditure signicantly especially on durable goods renters react to a lesser extent and outright home owners do not react at all all housing tenure groups experience a signicant change in disposable income over and above the direct impact on mortgage repayments the response of house prices is sizable driving a signicant adjustment in loanto income ratios but little change in loan to value ratios a simple collateral constraint model augmented with durable goods and a renting decision generates predictions consistent with these novel empirical ndings and suggests that heterogeneity in housing debt positions plays an important role in the transmission of monetary policy

monetary policy housing rents and inflation dynamics in this paper we study the effect of monetary policy shocks on housing rents our main finding is that in contrast to house prices housing rents increase in response to contractionary monetary policy shocks we also find that after a contractionary monetary policy shock rental vacancies and the homeownership rate decline this combination of results suggests that monetary policy may affect housing tenure decisions own versus rent in addition we show that with the exception of the shelter component all other main components of the consumer price index cpi either decline in response to a contractionary monetary policy shock or are not responsive these findings motivated us to study the statistical properties of alternative measures of inflation that exclude the shelter component we find that measures of inflation that exclude shelter have most of the statistical properties of the widely used measures of inflation such as the cpi and the price index for personal consumption expenditures but have higher standard deviations and react more to monetary policy shocks finally we show that the response of housing rents accounts for a large proportion of the price puzzle found in the literature

the role of financial intermediaries in monetary policy transmission the recent financial crisis has stimulated theoretical and empirical research on the propagation mechanisms underlying business cycles in particular on the role of financial frictions many issues concerning the interactions between banking and monetary policy forced policy makers to redefine economic policies and motivated macroeconomists to focus on the implications of financial intermediation constraints for asset price fluctuations the behavior of non financial firms households governments and in turn for real macroeconomic performance this paper surveys research on the role of financial intermediaries and financial frictions in the transmission of monetary policy and discusses how to design both the new banking regulatory and supervisory structures and monetary policy in order to stabilize the economy it also serves as an introduction to this special issue

why firms may prefer not to price discriminate via mixed bundling abstract we analyze a simple model of joint purchase discounts using a discrete choice framework to characterize consumer choices the model suggests that mixed bundling is more likely to be associated with monopoly this is due to the benefits reaped via price discrimination in a duopoly environment however only pure components pricing may be offered in equilibrium since firms fear the extra degree of competition inherent in mixed bundling

can intangible capital explain cyclical movements in the labor wedge intangible capital is an important factor of production in modern economies that is generally neglected in business cycle analyses we demonstrate that intangible capital can have a substantial impact on business cycle dynamics especially if the intangible is complementary with production capacity we focus on customer capital the capital embodied in the relationships a firm has with its customers introducing customer capital into a standard real business cycle model generates a volatile and countercyclical labor wedge due to a mismeasured marginal product of labor we also provide new evidence on cyclical variation in selling effort to discipline the exercise

who bears interest rate risk we study the allocation of interest rate risk within the european banking sector using novel data banks exposure to interest rate risk is small on aggregate but heterogeneous in the cross section contrary to conventional wisdom net worth is increasing in interest rates for approximately half of the institutions in our sample cross sectional variation in banks exposures is driven by cross country differences in loan rate fixation conventions for mortgages banks use derivatives to partially hedge on balance sheet exposures residual exposures imply that changes in interest rates have redistributive effects within the banking sector received october 31 2017 editorial decision august 30 2018 by editor philip strahan authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

consumer learning brand loyalty and competition in several markets consumers can gain further information regarding how well a product fits their preferences only by experiencing it after purchase this could then generate loyalty for the products tried first this paper considers a model in which consumers learn in the first period about the product they buy and then make choices in the second period about the competing products given what they learned in the first period the paper finds that if the distribution of valuations for each product is negatively positively skewed a firm benefits is hurt in the future from having a greater market share today the brand loyalty characteristic with negative skewness two effects are identified on one hand marginal forward looking consumers are less price sensitive than myopic consumers and this is a force toward higher prices on the other hand forward looking firms realize that they gain in the future from having a higher market share in the current period and compete more aggressively in prices for similar discount factors for consumers and firms the latter effect dominates the paper also characterizes the importance of consumer learning effects on the market outcome

interest rate pass through mortgage rates household consumption and voluntary deleveraging abstract exploiting variation in the timing of resets of adjustable rate mortgages arms we find that a sizable decline in mortgage payments up to 50 percent induces a significant increase in c

sharing the wealth when should firms treat customers as partners marketers often stress the importance of treating customers as partners a fundamental premise of this perspective is that all parties can be weakly better off if they work together to increase joint surplus and reach pareto efficient agreements for marketing managers this implies organizing marketing activities in a manner that maximizes total surplus this logic is theoretically sound when agreements between partners are limitless and costless in most consumer marketing contexts business to consumer this is typically not true the question i ask is should one still expect firms to partner with consumers and reach pareto efficient agreements in this paper i use the example of a firm s choice of product configuration to demonstrate two effects first i show that a firm may configure a product in a manner that reduces total surplus but increases firm profits second one might conjecture that increased competition would eliminate this effect but i show that in a duopoly firm profits may be increasing in the cost of product completion this second result suggests that firms may prefer to remain inefficient and or stifie innovations both results violate a fundamental premise of partnering that firms and consumers should work together to increase total surplus and reach pareto efficient agreements the model illustrates that pareto efficient agreements are less likely to occur if negotiation with individual partners is infeasible or costly such as in business to consumer contexts consumer marketers in one to many marketing environments should be wary of treating customers as partners because pareto efficient agreements may not be optimal for their firm

house prices capital inflows and macroprudential policy this paper evaluates the monetary and macroprudential policies that mitigate the procyclicality arising from the interlinkages between current account deficits and financial vulnerabilities we develop a two country dynamic stochastic general equilibrium dsge model with heterogeneous households and collateralised debt the model predicts that external shocks are important in driving current account deficits that are coupled with run ups in house prices and household debt in this context optimal policy features an interest rate response to credit and a ltv ratio that countercyclically responds to house price dynamics by allowing an interest rate response to changes in financial variables the monetary policy authority improves social welfare because of the large welfare gains accrued to the savers the additional use of a countercyclical ltv ratio that responds to house prices increases the ability of borrowers to smooth consumption over the cycle and is pareto improving domestic and foreign shocks account for a similar fraction of the welfare gains delivered by such a policy

rationalizability learning and equilibrium in games with strategic complementarities we study a rich class of noncooperative games that includes models of oligopoly competition macroeconomic coordination failures arms races bank runs technology adoption and diffusion r d competition pretrial bargaining coordination in teams and many others for all these games the sets of pure strategy nash equilibria correlated equilibria and rationalizable strategies have identical bounds also for a class of models of dynamic adaptive choice behavior that encompasses both best response dynamics and bayesian learning the players choices lie eventually within the same bounds these bounds are shown to vary monotonically with certain exogenous parameters we study the class of noncooperative supermodular games introduced by topkis 1979 and further analyzed by vives 1985 1989 who also pointed out the importance of these games in industrial economics supermodular games are games in which each player s strategy set is partially ordered the marginal returns to increasing one s strategy rise with increases in the competitors strategies so that the game exhibits strategic complementarity 2 and if a player s strategies are multidimensional marginal returns to any one com ponent of the player s strategy rise with increases in the other components this class turns out to encompass many of the most important economic applications of noncooperative game theory in macroeconomics diamond s 1982 search model and bryant s 1983 1984 rational expectations models can be represented as supermodular games in each of these models more activity by some members of the economy raises the returns to increased levels of activity by others in oligopoly theory some models of bertrand oligopoly with differentiated products qualify as supermodu lar games in these games when a firm s competitors raise their prices the marginal profitability of the firm s own price increase rises a similar structure is present in games of new technology adoption such as those of dybvig and spatt 1983 farrell and saloner 1986 and katz and shapiro 1986 when more users hook into a communication system or more manufacturers adopt an interface standard the marginal return to others of doing the same often rises similarly in some specifications of the bank runs model introduced by diamond and dybvig 1983 when more depositors withdraw their funds from a bank it is more worthwhile for other depositors to do the same in the warrant exercise

consumption and capital market imperfections an international comparison the excess sensitivity of consumption to current income fluctuations is higher in countries where consumers borrow less low levels of consumer debt can result either from capital market imperfections or from a low demand for loans the evidence suggests that the former view is more appropriate than the latter and thus supports the hypothesis that excess sensitivity may be attributed to liquidity constraints rather than to other factors copyright 1989 by american economic association

quality incentives for gps in a regulated market abstract this paper analyses whether gps in a capitation system have incentives to provide quality even though health is a credence good a model is developed where the quality of the service varies due to inherent differences between the gps and rational patients make choices based on the outcome of treamtent we find that it is difficult to provide appropriate incentives since the search activity of patients offsets direct effects of a change in reimbursement variation in the inherent ability of the gps is good since it increases the search activity of the patients and the optimal reimbursement scheme is inversely proportional to the dispersion in types finally we find that offering a menu of contracts can potentially increase social welfare above the level of a simple capitation regime but it tends to lead to a higher variation in quality levels