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Prior literature has demonstrated the power of zero pricing to boost consumer demand, but the current research shows a novel 'boomerang effect': a zero (vs. low, nonzero) price can lower demand when the offer comes with high incidental costs (e.g., the time cost in commuting to an offline class; the physical risk of getting a new vaccine). Five studies show that zero pricing, relative to low pricing, has a boosting (boomerang) effect on demand when incidental costs are low (high). The diverging effects of zero pricing on demand are explained by a dual-process model with a positive affective pathway and negative scrutiny pathway. Zero pricing triggers both positive affect and cognitive scrutiny of incidental costs; when incidental costs are high, the scrutiny pathway overrides the affective pathway and decreases demand. The finding has managerial implications as incidental costs often vary widely between marketing channels and over a product's life cycle., Author(s): Xiaomeng Fan [sup.1] , Fengyan Cindy Cai [sup.2] , Galen V. Bodenhausen [sup.3] Author Affiliations: (1) grid.440637.2, 0000 0004 4657 8879, School of Entrepreneurship and Management, ShanghaiTech University, , [...]

We study the planar maximum coverage location problem (MCLP) with rectilinear distance and rectangular demand zones in the case where 'partial coverage' is allowed in its true sense, i.e., when [...]

This paper studies the incentive for vertical information sharing in competing supply chains with production technologies that exhibit diseconomies of scale. We consider a model of two supply chains each consisting of one manufacturer selling to one retailer, with the retailers engaging in Cournot or Bertrand competition. For Cournot retail competition, we show that information sharing benefits a supply chain when (1) the production diseconomy is large and (2) either competition is less intense or at least one retailer's information is less accurate. A supply chain may become worse off when making its information more accurate or production diseconomy smaller, if such an improvement induces the firms in the rival supply chain to cease sharing information. For Bertrand retail competition, we show that information sharing benefits a supply chain when (1) the production diseconomy is largo and (2) either competition is less intense or information is more accurate. Under Bertrand competition a manufacturer may be worse off by receiving information, which is never the case under Cournot competition. Information sharing in one supply chain triggers a competitive reaction from the other supply chain and this reaction is damaging to the first supply chain under Cournot competition but may be beneficial under Bertrand competition. Key words: supply chain management; supply chain competition; information sharing History: Received January 8, 2009; accepted September 7, 2010, by Martin Lariviere, operations management. Published online in Articles in Advance February 15, 2011., 1. Introduction In undertaking initiatives such as quick response, continuous replenishment, or vendor-managed inventory, manufacturers and retailers have sought to leverage information sharing to improve supply chain performance. Although the [...]

This paper presents a new model of probabilistic binary choice under risk. In this model, a decision maker always satisfies first-order stochastic dominance. If neither lottery stochastically dominates the other alternative, a decision maker chooses in a probabilistic manner. The proposed model is derived from four standard axioms (completeness, weak stochastic transitivity, continuity, and common consequence independence) and two relatively new axioms. The proposed model provides a better fit to experimental data than do existing models. The baseline model can be extended to other domains such as modeling variable consumer demand. Key words: probabilistic choice; first-order stochastic dominance; random utility; strong utility History: Received March 8, 2010; accepted October 19, 2010, by Peter Wakker, decision analysis. Published online in Articles in Advance January 28, 2011., 1. Introduction Empirical studies show that decisions under risk are often contradictory (e.g., Hey and Orme 1994). Such decisions are best captured through a model of probabilistic choice. Popular models [...]

In developing industries, firms have to decide whether and when to enter the market depending on the state of demand, existing firms in the industry, and the firm's capabilities. This paper investigates a model of increasing demand, in which firms decide when to enter the market anticipating the strategic behavior of other potential entrants, and the effects of entry on future potential entrants. This paper shows that the ability of early entry to deter future competitors' entry leads firms to enter the market at a rate faster than demand is expanding. If there is the potential for many firms to enter the market, firms may be less likely to enter because of future competitor entry to correct any market opportunities. If firms enter the market depending on their fixed capabilities rather than depending on the firm's circumstances at each moment in time, firms end up entering the market at a faster rate in the early periods. Key words: industry dynamics; strategic entry; competition History: Received August 26, 2009; accepted April 6, 2010, by Preyas Desai, marketing. Published online in Articles in Advance July 2, 2010., 1. Introduction In growing industries, potential entrants have to decide whether and when to enter the industry. For example, in the satellite radio industry in the late 1990s, XM, Sirius, [...]

The Exact Affine Stone Index implicit Marshallian demand system is proposed. The system combines the desirable features of Hicksian and Marshallian demands.

Separate macroeconomic consumption demand functions are developed and tested for (1) durable goods, (2) nondurable goods and (3) services. These are compared for consistency with econometric studies of total consumer demand. Key factors determining demand for these goods are tested using U.S. 1960-2000 data. The econometric method used was 2SLS with heteroskedasticity controls. Data in first differences are used to reduce multicollinearity, non-stationarity and autocorrelation. The models explain 94% of the variance in demand for consumer durables, 86% of demand for nondurable consumer goods and 81% of services demand. Demand for durables like autos and appliances, was found to be driven by the disposable income, wealth, the exchange rate, availability of consumer credit, interest rates on consumer credit, demand for new housing, which affects appliance demand, and population growth. Demand for nondurable goods, such as groceries and clothes, was driven by the same factors, except for new housing demand and the exchange rate. Demand for consumer services such as laundry, restaurant, and entertainment services was found to be related to disposable income, wealth, and population growth, but not related to consumer credit availability, or consumer credit interest rates. However, mortgage interest rates paid by households did seem to affect the demand for services. Keywords: Consumption, Consumer Durables, Consumer Nondurables and Services, Consumer Demand, 1. INTRODUCTION Every economics student learns that the level of what's produced, the GDP, is determined by the demand for business and consumer goods, demand by government for goods and [...]

We analyze the optimal design of a markdown pricing mechanism with preannounced prices. In the presence of limited supply, buyers who choose to purchase at a lower price may face [...]

In this paper, we consider the classical multifare, single-resource (leg) problem in revenue management for the case where demand information is limited. Our approach employs a competitive analysis, which guarantees a certain performance level under all possible demand scenarios. The only information required about the demand for each fare class is lower and upper bounds. We consider both competitive ratio and absolute regret performance criteria. For both performance criteria, we derive the best possible static policies, which employ booking limits that remain constant throughout the booking horizon. The optimal policies have the form of nested booking limits. Dynamic policies, which employ booking limits that may be adjusted at any time based on the history of bookings, are also obtained. We provide extensive computational experiments and compare our methods to existing ones. The results of the experiments demonstrate the effectiveness of these new robust methods. Key words: revenue management; robust optimization; competitive analysis History: Accepted by Candace A. Yano, operations and supply chain management; received July 28, 2006. This paper was with the authors 7 1/2 months for 3 revisions. Published online in Articles in Advance July 10, 2008., 1. Introduction The majority of successful revenue management (RM) implementations rely heavily on the use of demand information. Experts advise against rushing to optimization in RM without first fully implementing [...]

An important managerial question is the choice of the pricing rule. We study whether this choice depends on the uncertainty about the number of participating bidders by comparing expected revenues under discriminatory and uniform pricing within an auction model with affiliated values, stochastic number of bidders, and linear bidding strategies. We show that if uncertainty about the number of bidders is substantial, then the discriminatory pricing generates higher expected revenues than the uniform pricing. In particular, the first-price auction might generate higher revenues than the second-price auction. Therefore, uncertainty about the number of bidders is an important factor to consider when choosing the pricing rule. We also study whether eliminating this uncertainty, i.e., revealing the number of bidders, is in the seller's interests, and discuss the existence of an increasing symmetric equilibrium. Key words: discriminatory pricing; uniform pricing; auctions; demand uncertainty; stochastic number of bidders History: Accepted by David E. Bell, decision analysis; received February 22, 2007. This paper was with the authors 2 months for 2 revisions. Published online in Articles in Advance July 21, 2008., 1. Introduction The choice of the pricing rule is an important and complex managerial decision. The focus of this paper is on the effect of demand uncertainty, within an auction [...]

Problems such as price volatility have been observed in electric power markets. Demand-side participation is frequently offered asa potential solution by promising to increase market efficiency when hockey-stick-type offer curves are present. However, the individual end-consumer will surely value electricity differently, which makes demand-side participation difficult as a group and at a bus. In this paper demand is categorized into two groups: one that highly values reliability and one that does not. The two types are modeled separately and a new optimal bidding function is developed and tested based on this model. Index Terms--Bidding function, demand-side participation, interruptible load contracting, must-serve demand, price-based demand.

We revisit the infinite-horizon decision problem of a single-stage single-item periodic-review inventory system under uncertain yield and demand. It is known that under some mild conditions the optimal replenishment policy is of the threshold type: an order is placed if and only if the starting inventory is below a threshold value. Although the structure of the optimal policy is well known, there has been little discussion about the optimal order quantities and the order threshold. In this paper, we construct upper and lower bounds for the optimal threshold value and the optimal order quantities through solving one-period problems with different cost parameters. These bounds provide interesting insights into the impact of yield uncertainty on the optimal policy. Heuristics are developed based on these bounds. Detailed computational studies show that, under some conditions, the performance of the heuristics is very close to that of the optimal solution and better than that of existing heuristics in the literature. Keywords: Random yield, inventory systems, Markov decision processes, heuristic, 1. Introduction This paper studies an infinite-horizon periodic-review inventory system under uncertain yield and demand. For this system, the structure of the optimal policy is known to be of the [...]

Measudring demand uncertainty is a key activity in supply chain planning, but it is difficult when demand history is unavailable, such as for new products. One method that can be [...]

We study an inventory system that consists of two demand classes. The orders in the first class need to be satisfied immediately, whereas the orders in the second class are to be filled in a given demand lead time. The two classes are also of different criticality. For this system, we propose a policy that rations the non-critical orders. Under a one-for-one replenishment policy with backordering and for Poisson demand arrivals for both classes, we first derive expressions for the service levels of both classes. The service level for the critical class is an approximation, whereas the service level for the non-critical class is exact. We then conduct a computational study to show that our approximation works reasonably, the benefits of rationing can be substantial, and the incorporation of demand lead time provides more value when the demand class with demand lead time is the critical class. The research is motivated by the spare parts service system of a major capital equipment manufacturer that faces two types of demand. For this company, the critical down orders need to be satisfied immediately, while the less critical maintenance orders can be satisfied after a fixed demand lead time. We conduct a case study with 64 representative parts and show that significant savings (as much as 14% on inventory on hand) are possible through incorporation of demand lead times and rationing. Keywords: Rationing, demand lead time, inventory management, spare parts, 1. Introduction The primary motivation behind this research is our experience with a leading capital equipment manufacturer. This company owns research, development, and manufacturing facilities in the United States, Europe, [...]

Due to the oligopoly structure of the electricity markets and to the constraints imposed by the transmission network, the producers may exert market power by strategically bidding higher than their marginal costs. This brings market performance far from the perfect competition equilibrium, with higher market clearing price and extra surpluses obtained by the producers. Demand elasticity can significantly affect the market performance contributing to mitigate the strategic bidding behavior of the producers. Compared to other commodity markets, demand elasticity in the electricity markets is low, but even a small increase can result in appreciable improvement of the market performance. The network constraints of the power system play a specific role in determining the oligopoly equilibrium of the gaming behavior of the electricity producers. The model of supply function equilibrium is first applied to a simple three-bus test system for a conceptual analysis and then to a standard IEEE 30-bus test system. The effects of an increase of demand elasticity are assessed, resorting to a set of proper quantitative indexes. Index Terms--Demand elasticity, market power, supply function equilibrium.

A study about the impact of capacity and price over demand is examined as it is observed that several aspects of service level depend on capacity. In other words, simultaneous choice of product price and manufacturing capacity exists if demand is stochastic and service-level sensitive. The results of the study are analyzed.

The author looks at international aspects of excess demand functions.

Random nth price auctions can identify the true demand for a good or service.

To analyze the effects of mergers among firms facing capacity constraints, we develop a numerical model of price-setting behavior among multi-product firms differentiated by location and capacity. We perform a number of computational experiments designed to inform merger policy, with specific reference to the Central Parking-Allright merger of 1999. The experiments show that capacity constraints on merging firms attenuate merger effects by much more than capacity constraints on non-merging firms amplify them. The experiments also highlight the dependence of merger welfare effects on parking demand. In preparation for further industry consolidation, we propose estimators of parking demand to more precisely estimate the costs and benefits of future mergers. JEL classification: L41; C63; C35 Keywords: Capacity constraints; Parking; Merger; Demand estimation

It is recognized that rate changes in price are proportional to excess demand of a corresponding commodity and that price does not converge to competitive equilibrium when dealing with more than two commodities in an economy of pure exchange. This paper researches excess-demand conditions that guarantee the process of price adjustment.

This paper examines the relationship between fertility and human capital investment and its implications for economic growth, focusing on the effects of declining mortality. Unlike the existing literature, this paper stresses the role of uncertainty about the number of surviving children. If the marginal utility of a surviving child is convex, then there will be a precautionary demand for children. As the mortality rate and thus, uncertainty fall, this demand decreases. Furthermore, lower mortality encourages educational investment in children. The key result is that this empirically observed quality--quantity trade-off is realized only if uncertainty is incorporated into individual's optimization problem. JEL classification: O40; I12; J11; J13 Keywords: Uncertainty; Precautionary demand; Quality--quantity trade-off; Growth

Water is a singularly important natural resource, viewed differently from the rest because of its importance to wealth and prosperity. This paper examines issues in the literature of residential water demand, paying particular attention to data set, specification model, variables, and common econometric problems.

The traditional stability tests performed on the models of US M1 demand when repeated over time lead to improper rejection of stability. The error-correction models 1948-1981 indicate that stability cannot be rejected. The agenda of challenges for empirical model specification can help remove apparent instabilities.

The author concludes that more research is necessary to determine what causes price and wage stickiness in the presence of demand shocks.

A model examines the role of demand-creating innovation in furthering economic growth.

Marketing managers of new technologies are often confronted with the difficulty of determining which products will actually takeoff in a market and at what speed. This paper is concerned with how radical innovations can achieve lower 'takeoff time' and proposes strategies for stimulating initial demand.

A model of incomplete markets is developed with single consumption goods, and notions developed from Walras. Market excess demand is explored.

Maximal elements are proposed and examined for binary relations, in the context of generalized lexicographic relations. A simple example is set out, studying equilibria with continuous demand.

The sensitivity of M.K. Wohlgenant's findings to the type of shifts in demand and supply was examined. Instead of using parallel shifts, pivotal shifts were assumed. The results showed that the degree of substitutability was not the only factor for the ranking of producer gains. The type of shifts in supply and demand curves also played a role. Hence, incorrect policy recommendations for the allocation of checkoff funds would result if erroneous a priori generalization is used in shifts of demand and supply.

Product locations and prices have been determined through a spatial model under conditions of elastic consumer demand with a finite reservation price. Conditions wherein a two-stage equilibrium leads to maximal product differentiation with full market covering have also been derived. Results confirm that firms relax price competition by maximizing product differentiation when the price reservation is high.

The theoretical study of the various demand structures across countries on international trade reveals that demand partiality favoring a good may bear either a positive or negative effect on net trade. Moreover, national preferences impact net export favorably. Overall, in the empirical test of 17 Organization for Economic Cooperation and Development countries, there is a propensity for demand bias favoring a good to impact net exports positively.

The disaggregation of total imports into raw materials, consumer, intermediate and capital goods reveals that long-term relative price elasticities of import demand are higher in short-run values. Imports are income-elastic for capital and intermediate merchandise, and foreign-exchange inelastic for all classes of import, suggesting that the Cameron economy has been less receptive to trade in general.

From the Survey of Consumer Finances conducted in 1989 and 1992 a logit model was tested for demographic and financial influences on household decisions to utilize home equity line credit. Results indicate that among households with credit lines other than credit card lines or business lines, the choice of a home equity credit line in lieu of another type of check credit line is influenced principally by percentage of equity in the home, income, net worth, age of the borrower, and credit price. Several implications may be derived from this study. As the markets reflect more complete information about the low-risk attributes of this credit, the convenience as a payment mechanism, and the tax subsidy to homeowners, it is expected that home equity credit lines users will be distributed more evenly across income and wealth categories. (Reprinted by permission of the publisher.)

An assessment of the housing demand functions for the Bombay Metropolitan Region has been established using a two-step econometric analysis. Regression results gathered from one of the two steps showed that the hedonic price index for different regions in Bombay is ancillary to housing, neighborhood and expenditure characteristics. It was also established that income elasticities for owners and tenants range between 0.33 and 0.38 respectively, while price elasticities for the two average about -0.21 and -0.75 correspondingly. Such figures clearly support the idea that housing demand is inelastic as regards to income and prices.

A proposed core model of macroeconomics has four major elements. Wages and prices develop according to Phillips-type equations, and are mostly estimated in the short run. Output is determined by demand in the short run. Aggregate demand is sensitive to interest, reacts to fiscal policy and responds to monetary policy which establishes short-term interest rates. Okun's law connects the variations in the unemployment rate to the growth in productivity.

This paper sets out to explore theoretically how a change in the distribution of disposable income affects the market demand for a good or service. With the help of only minimal information on the shape of the Engel curve and the transition from one distribution to the other, a variety of empirically relevant constellations are identified in which the size (or mean income) effect on market demand is counteracted by the distributional effect. Since the determining factors are expressed by relations between summary statistics, the results at the same time provide theoretically sound restrictions on economic approaches to market demand analysis., Changes in the distribution of disposable income have an effect on market demand for a good or service. There is an assortment of empirically relevant constellations in which the impact of the mean income on market demand is information based on the shape of the Engel curve and differences between income distributions.

Universally decentralised (UD) demand systems provide ways to analyze a wide range of household decision models that, otherwise, are not possible with unitary or the less decentralised collective models. Restrictions derived from derivatives of demand functions for different household allocation models allows testing between the different models.

This paper shows that demand elasticities and cost asymmetry are important determinants of strategic trade policy. In the symmetric case, the direction of intervention is critically dependent upon the elasticity of demand. Under unit elastic demand, free trade is optimal under symmetry, and a subsidy (tax) is optimal if the exporting firm has lower (higher) marginal cost than its competitor. If both the exporting governments intervene, then the conventional result that the lower cost firm gets the higher subsidy is reversed for inelastic demand. However, such an equilibrium is unstable in policy space. Key words: Strategic trade policy; Export subsidies; Stability in policy space; Existence of policy equilibrium; Multiple equilibria in policy space

The set of variables in a time series demand model in the form of the Almost Ideal Demand System are found to be I(1) with the demand equations forming a cointegrating system. The parameters of the cointegrating equations are estimated and tested using a 'triangular error correction' procedure. The null hypothesis of homogeneity with respect to prices and nominal income in the system cannot be rejected. Keywords: Conintegration; Demand system; Homogeneity

The study looks at price and income elasticities of demand for petroleum products in the Persian Gulf countries. The research used information gathered from 1970-91 and integrated to a partial adjustment model as basis. The results show that price and income are comparatively inelastic when seen on a short term basis, and that significant variations exist in these elasticities among cross-country and fuels.