frictionless commerce a comparison of internet and conventional retailers there have been many claims that the internet represents a new nearly frictionless market our research empirically analyzes the characteristics of the internet as a channel for two categories of homogeneous products books and cds using a data set of over 8 500 price observations collected over a period of 15 months we compare pricing behavior at 41 internet and conventional retail outlets we find that prices on the internet are 9 16 lower than prices in conventional outlets depending on whether taxes shipping and shopping costs are included in the price additionally we find that internet retailers price adjustments over time are up to 100 times smaller than conventional retailers price adjustments presumably reflecting lower menu costs in internet channels we also find that levels of price dispersion depend importantly on the measures employed when we compare the prices posted by different internet retailers we find substantial dispersion internet retailer prices differ by an average of 33 for books and 25 for cds however when we weight these prices by proxies for market share we find dispersion is lower in internet channels than in conventional channels reflecting the dominance of certain heavily branded retailers we conclude that while there is lower friction in many dimensions of internet competition branding awareness and trust remain important sources of heterogeneity among internet retailers

rational inattentiveness in a forecasting experiment while standard theory assumes rational optimizing agents under full information the latter is rarely found in reality information has to be acquired and processed both involving costs in rational inattentiveness models agents update their information set only when the benefit outweighs the information cost we test the rational inattentiveness model in a controlled laboratory environment our design is a forecasting task with costly information and a clear cost benefit structure while we find numerous deviations from the model predictions on the individual level the aggregate results are consistent with rational inattentiveness and sticky information models rejecting simpler behavioral heuristics

quantifying and understanding the economics of large financial movements abstract financial market data offer the exciting possibility of quantifying and understanding the physics of a complex dynamical system and the hope that this line of thinking may give some insights into understanding collective human behavior various measures of stock market activity have been found to exhibit puzzling features that have recently attracted much research attention these features include the power law distributions of return volume number of trades assets under management of trading institutions and other power law relations linking them here we review these empirical results and show that some of these findings can be usefully interpreted within the framework of a reduced form model gabaix x gopikrishnan p plerou v stanley h e 2003 a theory of power law distributions in financial market fluctuations nature 423 267 270 and an economic model gabaix x gopikrishnan p plerou v stanley h e 2006b institutional investors and stock market volatility quarterly journal of economics 121 461 504 the features not only present a challenge to models of market fluctuations but their specific power law nature also suggests new modeling directions which include ideas from statistical physics which proved useful in understanding similar relationships that occur in the physics of critical phenomena

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

the impact of sharing customer returns information in a supply chain with and without a buyback policy in this paper we examine a single period problem in a supply chain in which a stackelberg manufacturer supplies a product to a retailer who faces customer returns and demand uncertainty we show that the manufacturer incurs a significant profit loss with and without a buyback policy if it fails to account for customer returns in the wholesale price decision under the assumption that the retailer is better informed than the manufacturer on customer returns information we show that without a buyback policy the retailer prefers not to share if the manufacturer overestimates while it prefers to share customer returns information if the manufacturer underestimates this information if the manufacturer offers a buyback policy we have the opposite results we also discuss incentives to share the customer returns information and some of the issues that are raised in sharing this information

imperfect choice or imperfect attention understanding strategic thinking in private information games to understand the thinking process in private information games we use mousetracking to record which payoffs subjects attend to the games have three information states and vary in strategic complexity subjects consistently deviate from nash equilibrium choices and often fail to look at payoffs which they need to in order to compute an equilibrium response choices and lookups are similar when stakes are higher when cluster analysis is used to group subjects according to lookup patterns and choices three clusters appear to correspond approximately to level 3 level 2 and level 1 thinking in level k models and a fourth cluster is consistent with inferential mistakes as for example in qre or cursed equilibrium theories deviations from nash play are associated with failure to look at the necessary payoffs the time durations of looking at key payoffs can predict choices to some extent at the individual level and at the trial by trial level

discrete equilibrium price dispersion an explicit solution of an equilibrium model with price setting firms and searching customers makes possible a number of comparativestatics predictions about how cost differences among firms search costs of customers and taxes will affect the mean and variance of the distribution of market prices another implication of the model is that a firm s demand depends on the difference between its price and the average price in the market

correlation neglect in belief formation many information structures generate correlated rather than mutually independent signals the news media being a prime example this article provides experimental evidence that many people neglect the resulting double counting problem in the updating process in consequence beliefs are too sensitive to the ubiquitous telling and re telling of stories and exhibit excessive swings we identify substantial and systematic heterogeneity in the presence of the bias and investigate the underlying mechanisms the evidence points to the paramount importance of complexity in combination with people s problems in identifying and thinking through the correlation even though most participants in principle have the computational skills that are necessary to develop rational beliefs many approach the problem in a wrong way when the environment is moderately complex thus experimentally nudging people s focus towards the correlation and the underlying independent signals has large effects on beliefs

economic insights from neuroeconomic data how and to what extent neuroeconomic data broadly interpreted as data other than standard choice data should be used in advancing economic theory is open to question several authors have attempted to make use of such nonstandard data to shed light on the process of economic decision making john w payne james r bettman and eric j johnson 1993 miguel costa gomes vincent p crawford and bruno broseta 2001 and xavier gabaix et al 2006 have used mouselab software in order to determine the manner in which people use information joseph wang michael spezio and colin camerer 2006 make use of eye tracking data for the same purpose more dramatically researchers such as paul william glimcher joseph kable and kenway louie 2007 are using brain scanning data in an attempt to constrain economic models of discounting and time preference camerer forthcoming presents an excellent review of economic research involving nonstandard data in opposition to this trend faruk gul and wolfgang pesendorfer forthcoming present a strong critique of the use of nonchoice data within economics they put forward two specific arguments that users of neuroeconomic data must refute if their work is to be taken seriously first economic models were designed only to explain choices thus nonchoice data can be used neither to confirm nor deny a particular economic model second it is by and large true that economists are interested in choice behavior any two models will either make different predictions for choice in which case they can be differentiated by standard choice data or they will not in which case an economist will not be interested in differentiating between them economic insights from neuroeconomic data

empirical research on discrete choice game theory models of entry an illustration abstract we discuss the empirical implementation of discrete game theoretic models of firm entry after presenting a simple model of entry that underlies much of existing empirical analysis we discuss the major problems that must be tackled when empirically implementing theoretical models and econometric methods used in the literature finally we present results from a reduced form estimation of a sequential move entry game using data from the uk hamburger market

channel coordination under price protection midlife returns and end of life returns in dynamic markets this paper examines three channel policies that are used in declining price environments price protection p is a mechanism under which the manufacturer pays the retailer a credit applying to the retailer s unsold inventory when thewholesale price drops during the life cycle midlife returns m allow the retailer to return units partway through the life cycle at some rebate and end of life returns e allow the retailer to return unsold units at the end of the life cycle under decliningretail prices if the wholesale prices and the return rebates are set properly then em i e midlife and end of life returns achieves channel coordination however such a policy may not be implementable because it may require the manufacturer to be worse off as a result of coordination if p is used in addition to em and the terms are set properly then pem guarantees both coordination and a win win outcome if theretail price is constant over time then em is sufficient to guarantee both coordination and a win win outcome

thinking ahead the decision problem we propose a model of costly decision making based on time costs of deliberating current and future decisions we model an individual decision maker s thinking process as a thought experiment that takes time and let the decision maker think ahead about future decision problems in yet unrealized states of nature by formulating an intertemporal state contingent planning problem which may involve costly deliberation in every state of nature and by letting the decision maker deliberate ahead of the realization of a state we attempt to capture the basic observation that individuals generally do not think through a complete action plan instead individuals prioritize their thinking and leave deliberations on less important decisions to the time or event when they arise

dynamic price competition we consider the model of price competition for a single buyer among many sellers in a dynamic environment the surplus from each trade is allowed to depend on the path of previous purchases and as a result the model captures phenomena such as learning by doing and habit formation in consumption we characterize markovian equilibria for finite and infinite horizon versions of the model and show that the stationary infinite horizon version of the model possesses an efficient equilibrium where all the sellers receive an equilibrium payoff equal to their marginal contribution to the social welfare

information acquisition under risky conditions across real and hypothetical settings i collect data on how subjects acquire information about risky choices in both real and hypothetical settings using process tracing software called mouselab on average there are no significant differences across settings in the amount of time subjects take to make a choice or the completeness of the information they acquire subjects also acquire information in sequences consistent with an integration model of decision making such as expected utility theory or prospect theory i do not find significant differences in risk preferences across settings on average but i do find that subjects risk preferences are related to the completeness of the information that they acquire and where they start their information acquisition jel c91 d80 d83

guessing with negative feedback an experiment we investigate experimentally a new variant of the beauty contest game bcg in which players actions are strategic substitutes a negative feedback bcg our results show that chosen numbers are closer to the rational expectation equilibrium than in a strategic complements environment a positive feedback bcg we also find that the estimated average depth of reasoning from the cognitive hierarchy model does not differ between the two environments we show that the difference may be attributed to the fact that additional information is more valuable when players actions are strategic substitutes rather than strategic complements in line with other recent experimental findings

rational inattention optimal consideration sets and stochastic choice we unite two basic approaches to modelling limited attention in choice by showing that the rational inattention model implies the formation of consideration sets only a subset of the available alternatives will be considered for choice we provide necessary and sufficient conditions for rationally inattentive behaviour which allow the identification of consideration sets in simple settings chosen options are those that are best on a stand alone basis in richer settings the consideration set can only be identified holistically in addition to payoffs prior beliefs impact consideration sets linear inequalities identify all priors consistent with each possible consideration set

no news is news do markets underreact to nothing as illustrated in the tale of the dog that did not bark the absence of news and the passage of time often contain information we test whether markets fully incorporate this information using the empirical context of mergers during the year after merger announcement the passage of time is informative about the probability that the merger will ultimately complete we show that the variation in hazard rates of completion after announcement strongly predicts returns this pattern is consistent with a behavioral model of underreaction to the passage of time and cannot be explained by changes in risk or frictions

do consumers need more protection from small dollar lenders historical evidence and a roadmap for future research we summarize the current debate surrounding four small dollar credit products pawn loans vehicle title loans payday loans and cash installment loans from finance companies we review the contributions of scholars that inform this debate we underscore that users of these products fit the description of those whom consumer credit models predict benefit from these products many studies find that on average consumer use of small dollar credit products is at worst innocuous there are however findings of heterogeneity in borrowers experiences the disagreements surrounding these credit products and the difficulty in crafting the proper policy response stems from this heterogeneity jel d18 g23

learning about unstable publicly unobservable payoffs neoclassical finance assumes that investors are bayesian in many realistic situations bayesian learning is challenging here we consider investment opportunities that change randomly while payoffs are observable only when invested in a stylized version of the task we wondered whether performance would be affected if one were to follow reinforcement learning principles instead the answer is a definite yes when asked to perform our task participants overwhelmingly learned in a bayesian way they stopped being bayesians though when not nudged into paying attention to contingency shifts this raises an issue for financial markets who has the incentive to nudge investors

price dispersion in the small and in the large evidence from an internet price comparison site this paper examines four million daily price observations for more than 1 000 consumer electronics products on the price comparison site http shopper com we find little support for the notion that prices on the internet are converging to the law of one price in addition observed levels of price dispersion vary systematically with the number of firms listing prices the difference between the two lowest prices the gap averages 23 per cent when two firms list prices and falls to 3 5 per cent in markets where 17 firms list prices these empirical results are an implication of a general clearinghouse model of equilibrium price dispersion

why is production more volatile than sales theory and evidence on the stockout avoidance motive for inventory holding this paper argues that the macroeconomically interesting features of inventory behavior are well captured by a model in which firms face only demand uncertainty with a nonnegativity constraint on inventories empirical implications of the stockout avoidance model of inventory behavior are derived and then tested on disaggregated automobile industry data the results largely support the model though they suggest a small role for production smoothing as well subsidiary evidence on the relative variance of demand and cost shocks suggests that demand shocks are indeed more important

dynamic pricing of new experience goods we develop a dynamic model of experience goods pricing with independent private valuations we show that the optimal paths of sales and prices can be described in terms of a simple dichotomy in a mass market prices are declining over time in a niche market the optimal prices are initially low followed by higher prices that extract surplus from the buyers with a high willingness to pay we consider extensions of the model to integrate elements of social rather than private learning and turnover among buyers

pinocchio s pupil using eyetracking and pupil dilation to understand truth telling and deception in sender receiver games we conduct laboratory experiments on sender receiver games with an incentive for senders to exaggerate such as security analyst s painting a rosy picture about earnings prospects our results show that overcommunicati on messages are more informative of the true state than they should be in equilibri um is consistent with a level k model eyetracking shows that senders look much more on the payoff rows corresponding to the true state and much less at receiver payoffs than at their own payoffs senders pupils also dilate more when their deception is larger in magnitude together these data are consistent with the hypothesis that figuring out ho w to deceive another player is cognitively difficult as assumed in the level k mod el a combination of sender messages and lookup patterns predicts the true state about t wice as often as predicted by equilibrium using these measures would enable receiver subjects to hypothetically earn up to 16 21 percent more than they actually do

the allocation of time in decision making we study the allocation of time across decision problems if a decision maker 1 has noisy estimates of value 2 improves those estimates the longer he or she analyzes a choice problem and 3 allocates time optimally then the decision maker should spend less time choosing when the difference in value between two options is relatively large to test this prediction we ask subjects to make 27 binary incentive compatible intertemporal choices and measure response time for each decision our time allocation model explains 54 of the variance in average decision time these results support the view that decision making is a cognitively costly activity that uses time as an input allocated according to cost benefit principles

firm survival and the evolution of oligopoly after their commercial introduction the number of producers of autos tires televisions and penicillin initially grew and then experienced a sharp decline or shakeout guided by an evolutionary model of entry and exit firm survival patterns in the four products are examined to determine whether there were common forces governing their distinctive evolution predictions concerning the effects of pre and post entry experience and the timing of entry on firm survival are tested the findings are used to reflect on why industries experience shakeouts and evolve to be oligopolies

order in product customization decisions evidence from field experiments differentiated product models are predicated on the belief that a product s utility can be derived from the summation of utilities for its individual attributes in one framed field experiment and two natural field experiments we test this assumption by experimentally manipulating the order of attribute presentation in the product customization process of custom made suits and automobiles we find that order affects the design of a suit that people configure and the design and price of a car that people purchase by influencing the likelihood that they will accept the default option suggested by the firm

fact free learning aragones acknowledges financial support from the spanish ministry of science and technology grant sec2003 01961 and creabarcelona economics aragones gilboa and schmeidler gratefully acknowledge support from the polarization and conflict project cit 2 ct 2004 506084 funded by the european commission dg research sixth framework programme gilboa and schmeidler gratefully acknowledge support from the israel science foundation grant 790 00 and 975 03 postlewaite gratefully acknowledges support from national science foundation grant sbr 9810693

lessons about markets from the internet many of us have grown used to tired of and finally downright skeptical of claims of the transformative powers of the internet it was to usher in the new economy but we seem mostly to have the old it would transform retail but toys r us has outlasted etoys frictionless commerce would be the norm but plenty of friction still exists the internet was also claimed to require a whole new economics with all new laws while this too was very far from the truth existing theories have mostly done quite well the internet has had a substantial effect on economic thought in this paper we discuss some ways in which the internet has affected how economists think about markets

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

the benefits of forced experimentation striking evidence from the london underground network we estimate that a signi cant fraction of commuters on the london underground do not travel their optimal route consequently a tube strike which forced many commuters to experiment with new routes taught commuters about the existence of superior journeys bringing about lasting changes in behavior this eect is stronger for commuters who live in areas where the tube map is more distorted thereby pointing towards the importance of informational imperfections we argue that the information produced by the strike improved network e ciency search costs are unlikely to explain the suboptimal behavior instead individuals seem to under experiment in normal times as a result of which constraints can be welfare improving jel classi cation d83 l91 r41

number of sellers average prices and price dispersion abstract a variety of models provide differing predictions regarding the effect of an increase in the number of competitors in a market seller density on prices and price dispersion we review different approaches to generating equilibrium price dispersion and then empirically estimate the relationship between seller density average product price and price dispersion in the retail gasoline industry using four unique gasoline price data sets controlling for station level characteristics we find that an increase in station density consistently decreases both price levels and price dispersion across four geographical areas

competition in interrelated markets an empirical study abstract this paper studies competition in small concentrated and interrelated markets our data set consists of price information from 486 driving schools in 235 local markets in sweden which gives a large sample to test hypotheses on how market structure influences competition the results show that the price in a market is lower if prices in nearby markets are low and the distances to them are short as suggested in models of spatial competition moreover we find that prices in closely located markets are interdependent it is also shown that prices are increasing in firm concentration within a market as most theories of oligopoly predict

limited horizon forecast in repeated alternate games abstract in two player infinite horizon alternating move games a limited forecast n 1 n 2 equilibrium is such that 1 player i chooses actions according to his n i length forecasts so as to maximise the average payoff over the forthcoming n i periods and 2 players equilibrium forecasts are correct with finite action spaces n 1 n 2 solutions always exist and are cyclical and the memory capacity of the players has no influence on the set of solutions a solution is hyperstable if it is an n 1 n 2 solution for all n 1 n 2 sufficiently large hyperstable solutions are shown to exist and are characterized for generic repeated alternate move 2 2 games journal of economic literature classification numbers c72 d81

a sparsity based model of bounded rationality this article defines and analyzes a sparse max operator which is a less than fully attentive and rational version of the traditional max operator the agent builds as economists do a simplified model of the world which is sparse considering only the variables of first order importance his stylized model and his resulting choices both derive from constrained optimization still the sparse max remains tractable to compute moreover the induced outcomes reflect basic psychological forces governing limited attention the sparse max yields a behavioral version of basic chapters of the microeconomics textbook consumer demand and competitive equilibrium i obtain a behavioral version of marshallian and hicksian demand arrow debreu competitive equilibrium the slutsky matrix the edgeworth box roy s identity and so on the slutsky matrix is no longer symmetric nonsalient prices are associated with anomalously small demand elasticities because the consumer exhibits nominal illusion in the edgeworth box the offer curve is a two dimensional surface rather than a one dimensional curve as a result different aggregate price levels correspond to materially distinct competitive equilibria in a similar spirit to a phillips curve the arrow debreu welfare theorems typically do not hold this framework provides a way to assess which parts of basic microeconomics are robust and which are not to the assumption of perfect maximization jel codes d01 d03 d11 d51

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

decision time consideration time and status quo bias economists increasingly appreciate the value of studying the time taken to make decisions in order to provide insights into decision makers choices this article shows that studying how time is allocated among individual options is also valuable in helping researchers to understand the impact default options have on decision makers attention allocation as approximated by how the time is allocated the study of this impact generates new insights into the well known choice phenomenon of status quo bias which typically refers to decision makers tendency to stick to a default option by designing a series of novel experiments i find that this bias arises even when the choice is among prizes of fixed monetary value expressed in arithmetic form i also find asymmetric attention i e more time devoted to default options and strikingly asymmetric choice errors specifically decision makers fail to select an alternative better than the default 28 of the time while they incorrectly select an alternative worse than the default only 11 of the time and provide evidence supporting a causal relationship between asymmetric attention and asymmetric errors jel d03 d12 d83

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

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

controlling opportunism in vertical contracting when production precedes sales in a make to stock vertical contracting setting with private contracts when retailers do not observe each other s stocks before choosing their prices an opportunism problem always exist in contract equilibria but public market wide resale price maintenance rpm can restore monopoly power however other widely used tools which do not fall under antitrust scrutiny and require only private bilateral contracts such as buyback contracts also allow the producer to fully exercise his monopoly power we conclude that a more lenient policy toward rpm is unlikely to affect the producer s ability to control opportunism

costly information acquisition experimental analysis of a boundedly rational model the directed cognition model assumes that agents use partially myopic option value calculations to select their next cognitive operation the current paper tests this model by studying information acquisition in two experiments in the first experiment information acquisition has an explicit financial cost in the second experiment information acquisition is costly because time is scarce the directed cognition model successfully predicts aggregate information acquisition patterns in these experiments when the directed cognition model and the fully rational model make demonstrably different predictions the directed cognition model better matches the laboratory evidence jel d83

an empirical model of optimal dynamic product launch and exit under demand uncertainty this paper considers the decision problem of a firm that is uncertain about the demand and hence profitability of a new product we develop a model of a decision maker who sequentially learns about the true product profitability from observed product sales based on the current information the decision maker decides whether to scrap the product central to this decision problem are sequential information gathering and the option value of scrapping the product at any point in time the model predicts the optimal demand for information e g in the form of test marketing and it predicts how the launch or exit policy depends on the firm s demand uncertainty furthermore it predicts what fraction of newly developed products should be launched on average and what fraction of these products will fail i e exit the model is solved using numerical dynamic programming techniques we present an application of the model to the case of the u s ready to eat breakfast cereal industry simulations show that the value of reducing uncertainty can be large and that under higher uncertainty firms should strongly increase the fraction of all new product opportunities launched even if their point estimate of profits is negative alternative simpler decision rules are shown to lead to large profit losses compared to our method finally we find that the high observed exit rate in the u s ready to eat cereal industry is optimal and to be expected based on our model

learning from experience simply there is substantial academic interest in modeling consumer experiential learning however approximately optimal solutions to forward looking experiential learning problems are complex limiting their behavioral plausibility and empirical feasibility we propose that consumers use cognitively simple heuristic strategies we explore one viable heuristic index strategies and demonstrate that they are intuitive tractable and plausible index strategies are much simpler for consumers to use but provide close to optimal utility they also avoid exponential growth in computational complexity enabling researchers to study learning models in more complex situations well defined index strategies depend on a structural property called indexability we prove the indexability of a canonical forward looking experiential learning model in which consumers learn brand quality while facing random utility shocks following an index strategy consumers develop an index for each brand separately and choose the brand with the highest index using synthetic data we demonstrate that an index strategy achieves nearly optimal utility at substantially lower computational costs using iri data for diapers we find that an index strategy performs as well as an approximately optimal solution and better than myopic learning we extend the analysis to incorporate risk aversion other cognitively simple heuristics heterogeneous foresight and an alternative specification of brands

estimation of a model of entry in the airline industry this paper considers the effect of an airline s scale of operation at an airport on the profitability of routes flown out of that airport the empirical methodology uses the entry decisions of airlines as indicators of underlying profitability the results extend the empirical literature on airport presence by providing a new set of estimates of the determinants of city pair profitability these estimates imply that city pair profits increase in airport presence and decrease rapidly in the number of entering firms the literature on empirical models of oligopoly entry is also extended via a focus on the role of differences between firms

public sector performance measurement and stakeholder support abstract over the past several decades there has been dramatically increased attention paid to measuring the performance of public sector and nonprofit organizations in the united states and elsewhere recent research has indicated that public sector and nonprofit organizations are responsive to performance measurement in both productive and unproductive ways however it is not yet known how stakeholders respond to this measurement this paper makes use of a unique panel survey dataset of the population of elementary and middle schools in the state of florida to directly investigate this question we exploit the fact that florida changed its school grading system in 2002 and study the degree to which private contributions to schools are responsive to the information contained in school grades we find evidence that school grades can have substantial effects on a school s ability to obtain private contributions we also observe that schools serving different clienteles are treated differently in response to changes in school grades

on the role of heuristics experimental evidence on inflation dynamics we run an experiment where groups of six subjects must set prices in a non stationary macroeconomic environment where prices are complements the exogenous variable a business indicator is common knowledge and prices are flexible disregarding sticky prices or sticky information in a first treatment subjects insignificantly corrected for past errors which implies that history plays a role for determining current prices by reporting the business indicator in a simpler form the second treatment tacitly offered a heuristic for setting prices this option was widely taken bringing about an excess response to the business indicator and a significant deviation from equilibrium even in the long run in a third treatment with staggered pricing we observe that subjects look only one round into the future but not further ahead contrary to theoretical predictions our findings suggest that monetary transmission may be impaired due to what we label sticky reasoning the failure or unwillingness to iteratively delete dominated strategies 2013 elsevier b v all rights reserved

an empirical model of firm entry with endogenous product type choices i describe a model of entry with endogenous product type choices these choices are formalized as the outcomes of a game of incomplete information in which rivals differentiated products have nonuniform competitive effects on profits i estimate the model for location choices in the video retail industry using a nested fixed point algorithm solution the results imply significant returns to product differentiation simulations illustrate the tradeoff between demand and intensified competition and the extent to which markets with more scope for differentiation support greater entry

vertical price controls with uncertain demand a manufacturer distributes output before knowing demand and thus risks making more than its rivalrous independent retailers can sell at the monopoly price if demand is low retailers may therefore resell more than the joint profit maximizing output anticipating this they will not pay as much for the merchandise ex ante as they would if the manufacturer could commit to preventing rivalry the manufacturer has many options including vertical integration chain outlets restricted output buy backs just in time deliveries and minimum resale prices the article discusses each option s advantages and disadvantages and concludes that all roads lead to resale price maintenance the article closes with an alternative to the dealercartel hypothesis for minimum resale prices

a model of focusing in economic choice we present a generally applicable theory of focusing based on the hypothesis that a person focuses more on and hence overweights attributes in which her options dier more our model predicts that the decisionmaker is too prone to choose options with concentrated advantages relative to alternatives but maximizes utility when the advantages and disadvantages of alternatives are equally concentrated in intertemporal choice because the relative concentrations of an option s costs and benets can be dierent from the perspective of a single period and the perspective of the entire choice problem the decisionmaker often exhibits a form of time inconsistency she is present biased when the costs of current misbehavior are distributed over many future dates such as in harmful consumption but future biased when the benet of many

minding small change among small firms in kenya abstract many micro enterprises in kenya have low productivity we focus on one particular business decision which may indicate low productivity keeping enough change on hand to break larger bills this is a surprisingly large problem our estimates suggest that the average firm loses approximately 5 8 of total profits because they do not have enough change we conducted two experiments to shed light on why this happens surveying firms weekly about lost sales thereby increasing the salience of change and explicitly informing firms about lost sales we find that both interventions significantly altered change management and reduced lost sales this largely rules out many potential explanations such as the risk of theft or the costs of holding change being too high one explanation consistent with firms response to the survey and information on their lost sales is that firms were not perfectly attentive to change management prior to the interventions

on the use of heuristics to approximate competitors private information abstract firms often lack knowledge of the nature of the uncertainty they or their opponents face and use heuristics or approximations to determine their strategy we define and analyze one type of heuristic strategy in which firms choose strategies based on the expectation of their opponents private information rather than the full information about the distribution of that private information we find that in equilibrium the degree to which the heuristic strategy differs from the bayesian strategy depends on 1 the convexity of a firm s marginal profits with respect to their opponents private information and 2 whether firm strategies are complementary or substitutable under certain conditions firms equilibrium profits are greater when all firms use heuristics than when all firms use the full information our results provide insight into incentives firms may have to either facilitate or impede access to industry information

the effects of experience on preferences theory and empirics for environmental public goods this article develops a choice model for environmental public goods which allows for consumers to learn about their preferences through consumption experiences we develop a theoretical model of bayesian updating perform comparative statics over the model and show how the theoretical model can be consistently incorporated into a reduced form econometric model our main findings are that in a random utility model rum discrete choice model a subject s scale should increase and the variability of scale should decrease with experience if subjects are bayesians we then estimate the model using field data regarding preferences for one particular public good water quality we find strong evidence that additional experience increases scale thereby making consumer preferences more predictable from the econometrician s perspective we find supportive but less convincing evidence that experience decreases the variability of scale across subjects

signaling with costly acquisition of signals in this paper we investigate the consequences of introducing a cost to observe the signal in an otherwise standard signaling game beyond identifying equilibria which we contrast with those of a standard signaling game we study their robustness to two important classes of refinements acting through restrictions on out of equilibrium beliefs and through trembles our results suggest that more prominence should be given to the pooling outcome on the minimum signal

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

the implications of pooled returns policies abstract when selling products with highly uncertain demands and short life cycles it is common for a manufacturer to offer some form of returns policy to entice the distributors to increase their order quantities in this paper we consider a multi item returns policy called pooled or joint returns policy under which the distributor can return any combination of the products up to r percent of the total purchases across all products we analyze the distributor s optimal profit and order quantity under the pooled returns policy and compare these operating characteristics to the case when a single item non pooled returns policy is instituted under the non pooled returns policy the distributor can only return on individual items using item specific return limits we show an intuitive result that the distributor will always achieve a higher profit under the pooled policy however the manufacturer could actually obtain a lower profit under the pooled policy due to a counter intuitive result the distributor may order less under the pooled policy even though the pooled policy offers more flexibility this counter intuitive result motivates us to determine the conditions under which the distributor would order less under the pooled policy finally we develop a heuristic for determining the distributor s optimal order quantities associated with the n product case under the pooled policy

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

an economic theory of vertical restraints vertical restraints imposed by manufacturers on the prices locations and sales of retail firms represent a puzzling departure from the simple price mediated exchange of conventional markets in this article we analyze the theoretical basis for these restraints in a setting where retailers inform consumers and are imperfectly competitive and where a manufacturer has some monopoly power we identify three potential externalities affecting retailers decisions these externalities lead to the failure of simple uniform price contracts to coordinate the incentives of retailers with the objective of maximizing combined manufacturer and retailer profits we identify the packages of vertical restraints that are minimally sufficient under various conditions to neutralize the externalities and to achieve the joint profit maximum

price price dispersion and number of sellers at a low entry cost shopbot abstract shopbots function as market intermediaries by providing unprecedented quantities of information to buyers and sellers this paper explores the role of market structure across shopbot mediated markets using an unbalanced panel of 399 digital camera models it extends prior work by using an ultra low entry cost site additionally allowing controls for life cycle and popularity effects we find a robust negative relationship between seller number and price which persists even as markets become crowded with sellers the results are capable of either an scp or a carlson mcafee heterogeneous cost interpretation but observed entry behaviour here is consistent with the latter

consumer inertia choice dependence and learning from experience in a repeated decision problem abstract understanding when and how individuals think about real life problems is a central question in economics this paper studies the role of inertia inattention state dependence and learning the empirical setting is a tariff experiment when optional measured tariffs for local telephone calls were introduced unanticipatedly we find that consumers tend to align their choices of tariff and telephone use levels correctly despite low potential savings mistakes are not permanent as individuals actively engage in tariff switching in order to reduce the monthly cost of telephone service ignoring unobservable heterogeneity and the endogeneity of past choices would have reversed these results

limited attention as a scarce resource in information rich economies this article uses basic facts from the psychology of attention to show how the limited attention of consumers affects economic competition the article determines endogenously whether an economy is information rich or information poor a conventional economic equilibrium results if subjects have spare attention capacity at the positive level the respective impacts of advances in information technology international integration and the media on equilibrium diversity and level of attention seeking activities are shown at the normative level the issues of welfare efficiency and optimal policy interventions are addressed

electoral competition with rationally inattentive voters how do voters allocate costly attention to alternative political issues and how does selective ignorance of voters interact with policy design by politicians we address these questions by developing a model of electoral competition with rationally inattentive voters rational inattention amplies the eects of preference intensity because voters pay more attention where stakes are higher the model has many potential applications and those that we discuss in more detail imply that extremist voters are more attentive and inuential public goods are under provided divisive issues receive more attention and less transparent candidates choose more extreme policies endogenous attention can also lead to multiple equilibria explaining how poor voters in developing countries can be politically empowered by welfare programs

market structure and market performance in e commerce we investigate the effect of market structure on market performance in the market for consumer electronics we exploit product life cycle information to build an instrumental variable for the number of firms in a market a variable which hitherto had to be treated as exogenous in comparable studies on seller behavior in e commerce we combine data from austria s largest online site for price comparisons with retail data on wholesale prices provided by a major hardware producer for consumer electronics we observe input prices of firms and all their moves in the entry and the pricing game using this information for 70 digital cameras we generate instrumenting is particularly important for estimating the effect of competition on the markup of the price leader

consumer search behavior and sunk costs abstract this paper presents the results of four economic experiments involving 41 undergraduate students who were assigned the task of searching for the lowest price from a known distribution of prices economic theory predicts that individuals should continue to draw until the expected gain of another search is less than the marginal search cost additionally once individuals have made a draw and then continued they should never return to a price drawn earlier exercise recall both of these predictions are tested in the paper and the results show that behavior is not always consistent with them it appears that individuals are making decisions based on the total return from searching rather than simply the marginal return from another draw

a serial supply chain of newsvendor problem with safety stocks under complete and partial information sharing abstract we consider a supply chain where multiple members are serially connected the decision is to determine the ordering quantity of a member to the next upstream member in the supply chain the basic cost model is similar to the newsvendor problem with additional consideration to safety stock this paper presents optimal approaches for coordination of the supply chain under both complete and partial information sharing in order to maximize the total expected benefit for complete information sharing we develop an optimal coordination algorithm for partial information sharing we propose an optimal coordination algorithm based on the alternating direction method and the diagonal quadratic approximation method a numerical example is discussed to show the optimal convergence of ordering quantities and discuss the properties of the proposed algorithms

information gatekeepers on the internet and the competitiveness of homogeneous product markets we examine the equilibrium interaction between a market for price information controlled by a gatekeeper and the homogenous product market it serves the gatekeeper charges fees to firms that advertise prices on its internet site and to consumers who access the list of advertised prices gatekeeper profits are maximized in an equilibrium where a the product market exhibits price dispersion b access fees are sufficiently low that all consumers subscribe c advertising fees exceed socially optimal levels thus inducing partial firm participation and d advertised prices are below unadvertised prices introducing the market for information has ambiguous social welfare effects

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

strategic pricing with rational inattention to quality this paper studies both theoretically and experimentally the pricing strategy of a rm that faces a consumer who is rationally inattentive to product quality sims 2003 in a standard sequential pricing game rational inattention to quality produces two types of mixed strategy perfect bayesian equilibria one where sellers pool at a low price and buyers are fully inattentive to quality and one where there is semi pooling at a high price and buyers are selectively attentive to quality i characterize these

search and satisficing many everyday decisions are made without full examination of all available options and as a result the best available option may be missed we develop a search theoretic choice experiment to study the impact of incomplete consideration on the quality of choices we find that many decisions can be understood using the satisficing model of herbert simon 1955 most subjects search sequentially stopping when a satisficing level of reservation utility is realized we find that reservation utilities and search order respond systematically to changes in the decision making environment jel d03 d12 d83

attention discrimination theory and field experiments with monitoring information acquisition we link two important ideas attention is scarce and lack of information about an individual drives discrimination in selection decisions our model of allocation of costly attention implies that applicants from negatively stereotyped groups face attention discrimination less attention in highly selective cherry picking markets where more attention helps applicants and more attention in lemon dropping markets where it harms them to test the prediction we integrate tools to monitor information acquisition into correspondence field experiments in both countries we study we find that unfavorable signals minority names or unemployment systematically reduce employers efforts to inspect resumes also consistent with the model in the rental housing market which is much less selective than labor markets we find landlords acquire more information about minority relative to majority applicants we discuss implications of endogenous attention for magnitude and persistence of discrimination in selection decisions returns to human capital and potentially for policy