In this paper, we examine a novel two-stage mechanism for selling government securities, wherein the dealers underwrite in the first stage the sale of securities, which are auctioned in stage 2 via either a discriminatory auction (DA) or a uniform price auction (UPA). Using proprietary data on auctions during 2006–2013, we find that (a) the first stage underwriting auction generates significant information, including predicting the likelihood of devolvement, and bid shading, and (b) the outcome of the underwriting auction may generate enough asymmetry amongst bidders that may make DA dominate UPA in certain counterfactual situations. We document that the unique two-stage auction design provides a market-driven mechanism to simultaneously insure against auction failures and produce information about the quality of the underlying issue. This paper was accepted by Karl Diether, finance.
{"title":"Underwriting Government Debt Auctions: Auction Choice and Information Production","authors":"Sudip Gupta, R. Sundaram, S. Sundaresan","doi":"10.2139/ssrn.2859846","DOIUrl":"https://doi.org/10.2139/ssrn.2859846","url":null,"abstract":"In this paper, we examine a novel two-stage mechanism for selling government securities, wherein the dealers underwrite in the first stage the sale of securities, which are auctioned in stage 2 via either a discriminatory auction (DA) or a uniform price auction (UPA). Using proprietary data on auctions during 2006–2013, we find that (a) the first stage underwriting auction generates significant information, including predicting the likelihood of devolvement, and bid shading, and (b) the outcome of the underwriting auction may generate enough asymmetry amongst bidders that may make DA dominate UPA in certain counterfactual situations. We document that the unique two-stage auction design provides a market-driven mechanism to simultaneously insure against auction failures and produce information about the quality of the underlying issue. This paper was accepted by Karl Diether, finance.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-10-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126772805","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Valerio Restocchi, Frank McGroarty, E. Gerding, Johnnie E. V. Johnson
Finding what causes pricing anomalies is an important step towards improving market efficiency. The favourite-longshot bias is one of the longest-standing pricing anomalies in state-contingent claims markets. However, existing models are unable to capture its full complexity. We develop a game-theoretic model of heterogeneous agents in a fixed-odds market. Comprehensive analysis using market data and agent-based simulations demonstrate that our model explains real market behaviour, including that of the market maker, better than existing theories. This model can be used to better understand the relation between market ecology and mispricing in broader contexts such as option and prediction markets.
{"title":"It Takes All Sorts: A Heterogeneous Agent Explanation of State-Contingent Claims Mispricing","authors":"Valerio Restocchi, Frank McGroarty, E. Gerding, Johnnie E. V. Johnson","doi":"10.2139/ssrn.2858339","DOIUrl":"https://doi.org/10.2139/ssrn.2858339","url":null,"abstract":"Finding what causes pricing anomalies is an important step towards improving market efficiency. The favourite-longshot bias is one of the longest-standing pricing anomalies in state-contingent claims markets. However, existing models are unable to capture its full complexity. We develop a game-theoretic model of heterogeneous agents in a fixed-odds market. Comprehensive analysis using market data and agent-based simulations demonstrate that our model explains real market behaviour, including that of the market maker, better than existing theories. This model can be used to better understand the relation between market ecology and mispricing in broader contexts such as option and prediction markets.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"81 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-10-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130707135","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This document was prepared to inform the work of the International Standards Organisation’s Committee ISP/PC 294 developing a guidance standard for unit pricing. Unit price (from now on UP) is the price per a standardised unit of measure presented to consumers at a point of sale (such as on a supermarket shelf). The document reviews existing studies conducted by academic and other organisations on UP, and summarises current legislative practices in different countries. Key recommendations for the development of a Unit Price guidance standard: Part 1 – Addressing awareness, barriers and benefits consumer awareness and usage of UP: Consumers demonstrated higher levels of UP awareness and usage in more recent studies (compared to those conducted in 70s/80s). This may be due to the longer presence of UP labels on the shelves. However, the level of UP usage varies considerably between studies with a lot of room for growth. We recommend a two-part approach conducted simultaneously: 1) Consistent, prominent and legible provision of UP across retailers (to ease consumer learning process by multiple exposures to UP); combined with, 2) Mass communication program aimed to educate consumers on UP application in typical buying situations. A particular effort should be made to target low socioeconomic groups and younger consumers – both groups are the least likely to currently use UP, but are the most likely to benefit greatly from it. Benefits of UP: Research studies identified numerous benefits of UP including: • The ability to save money on groceries (by switching to cheaper alternatives); • Improved accuracy, speed and ease of decision-making; and • Better price recall, facilitating more well-informed decisions. We recommend that UP education campaigns use the above benefits of UP, as these have been shown to be valuable outcomes for consumers. Barriers to UP adoption: Past research has pointed out a number of problems that could reduce UP usage by consumers, and its diligent provision by retailers. Issues with consumer (un)awareness or lack of understanding, and poor perceptions, could be addressed by changing consumer perceptions through education programs. Barriers to retail provision (such as cost of implementation, or lack of guidance on how best to do it) would require the systematic support and monitoring from the Government, for example, through subsidising the cost of UP installation for small retailers and consistent effort on further clarification of established UP principles – the aim of the best practice guidance standard. To overcome the above-mentioned barriers, the UP information should be: • Presented at a point of sale in a consistent, prominent and legible manner across all retailers. This could be achieved with a unified best practice guide, and, potentially mandated provision and presentation guidelines; • Visual presentation of the UP should require very limited cognitive effort from consumers – it should be intuitivel
{"title":"Unit Pricing in Supermarkets: Review of Past Evidence from Academic and Industry Studies","authors":"S. Bogomolova, I. Jarratt","doi":"10.2139/ssrn.2853977","DOIUrl":"https://doi.org/10.2139/ssrn.2853977","url":null,"abstract":"This document was prepared to inform the work of the International Standards Organisation’s Committee ISP/PC 294 developing a guidance standard for unit pricing. Unit price (from now on UP) is the price per a standardised unit of measure presented to consumers at a point of sale (such as on a supermarket shelf). The document reviews existing studies conducted by academic and other organisations on UP, and summarises current legislative practices in different countries. \u0000Key recommendations for the development of a Unit Price guidance standard: \u0000Part 1 – Addressing awareness, barriers and benefits consumer awareness and usage of UP: \u0000Consumers demonstrated higher levels of UP awareness and usage in more recent studies (compared to those conducted in 70s/80s). This may be due to the longer presence of UP labels on the shelves. However, the level of UP usage varies considerably between studies with a lot of room for growth. \u0000We recommend a two-part approach conducted simultaneously: \u00001) Consistent, prominent and legible provision of UP across retailers (to ease consumer learning process by multiple exposures to UP); combined with, \u00002) Mass communication program aimed to educate consumers on UP application in typical buying situations. A particular effort should be made to target low socioeconomic groups and younger consumers – both groups are the least likely to currently use UP, but are the most likely to benefit greatly from it. \u0000Benefits of UP: Research studies identified numerous benefits of UP including: \u0000• The ability to save money on groceries (by switching to cheaper alternatives); \u0000• Improved accuracy, speed and ease of decision-making; and \u0000• Better price recall, facilitating more well-informed decisions. \u0000We recommend that UP education campaigns use the above benefits of UP, as these have been shown to be valuable outcomes for consumers. \u0000Barriers to UP adoption: \u0000Past research has pointed out a number of problems that could reduce UP usage by consumers, and its diligent provision by retailers. Issues with consumer (un)awareness or lack of understanding, and poor perceptions, could be addressed by changing consumer perceptions through education programs. Barriers to retail provision (such as cost of implementation, or lack of guidance on how best to do it) would require the systematic support and monitoring from the Government, for example, through subsidising the cost of UP installation for small retailers and consistent effort on further clarification of established UP principles – the aim of the best practice guidance standard. \u0000To overcome the above-mentioned barriers, the UP information should be: \u0000• Presented at a point of sale in a consistent, prominent and legible manner across all retailers. This could be achieved with a unified best practice guide, and, potentially mandated provision and presentation guidelines; \u0000• Visual presentation of the UP should require very limited cognitive effort from consumers – it should be intuitivel","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-10-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128509821","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
People’s fairness preferences are an important constraint for what constitutes an acceptable economic transaction, yet little is known about how these preferences are formed. In this paper, we provide clean evidence that previous transactions play an important role in shaping perceptions of fairness. Buyers used to high market prices, for example, are more likely to perceive high prices as fair than buyers used to low market prices. Similarly, employees used to high wages are more likely to perceive low wages as unfair. Our data further allows us to decompose this history dependence into the effects of pure observation vs. the experience of payoff-relevant outcomes. We propose two classes of models of path-dependent fairness preferences - either based on endogenous fairness reference points or based on shifts in salience - that can account for our data. Structural estimates of both types of models imply a substantial deviation from existing history-independent models of fairness. Our results have implications for price discrimination, labor markets, and dynamic pricing.
{"title":"What Makes a Price Fair? An Experimental Study of Transaction Experience and Endogenous Fairness Views","authors":"Holger Herz, Dmitry Taubinsky","doi":"10.1093/JEEA/JVX011","DOIUrl":"https://doi.org/10.1093/JEEA/JVX011","url":null,"abstract":"People’s fairness preferences are an important constraint for what constitutes an acceptable economic transaction, yet little is known about how these preferences are formed. In this paper, we provide clean evidence that previous transactions play an important role in shaping perceptions of fairness. Buyers used to high market prices, for example, are more likely to perceive high prices as fair than buyers used to low market prices. Similarly, employees used to high wages are more likely to perceive low wages as unfair. Our data further allows us to decompose this history dependence into the effects of pure observation vs. the experience of payoff-relevant outcomes. We propose two classes of models of path-dependent fairness preferences - either based on endogenous fairness reference points or based on shifts in salience - that can account for our data. Structural estimates of both types of models imply a substantial deviation from existing history-independent models of fairness. Our results have implications for price discrimination, labor markets, and dynamic pricing.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126605183","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper extends the work of Korkie and Turtle (2002) by first proving that the traditional estimate for the optimal return of self-financing portfolios always over-estimates from its theoretic value. To circumvent the problem, we develop a Bootstrap estimate for the optimal return of self-financing portfolios and prove that this estimate is consistent with its counterpart parameter. We further demonstrate the superiority of our proposed estimate over the traditional estimate by simulation.
{"title":"On the Markowitz Mean-Variance Analysis of Self-Financing Portfolios","authors":"Z. Bai, Huixia Liu, W. Wong","doi":"10.2139/ssrn.938348","DOIUrl":"https://doi.org/10.2139/ssrn.938348","url":null,"abstract":"This paper extends the work of Korkie and Turtle (2002) by first proving that the traditional estimate for the optimal return of self-financing portfolios always over-estimates from its theoretic value. To circumvent the problem, we develop a Bootstrap estimate for the optimal return of self-financing portfolios and prove that this estimate is consistent with its counterpart parameter. We further demonstrate the superiority of our proposed estimate over the traditional estimate by simulation.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"57 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-08-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127044148","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study a duopoly where the two price setting firms have symmetric information. The firms produce substitute goods with a state dependent common value. The information that is available to both firms about the unknown state of nature is also available to the consumers, who also have access to additional private information. Each consumer has a unit demand and evaluates each of the substitute goods based on the information available to her. Although firms have the same information predatory pricing may still prevail with one firm, possibly the inferior one, setting the price low enough to drive the other firm out of the market. We show that predatory pricing holds if the signal distribution satisfied a novel condition that we call Vanishing Likelihood.
{"title":"Predatory Pricing and Information Aggregation in Markets with a Common Value","authors":"Itai Arieli, Moran Koren, Rann Smorodinsky","doi":"10.2139/ssrn.2825009","DOIUrl":"https://doi.org/10.2139/ssrn.2825009","url":null,"abstract":"We study a duopoly where the two price setting firms have symmetric information. The firms produce substitute goods with a state dependent common value. The information that is available to both firms about the unknown state of nature is also available to the consumers, who also have access to additional private information. Each consumer has a unit demand and evaluates each of the substitute goods based on the information available to her. Although firms have the same information predatory pricing may still prevail with one firm, possibly the inferior one, setting the price low enough to drive the other firm out of the market. We show that predatory pricing holds if the signal distribution satisfied a novel condition that we call Vanishing Likelihood.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"5 1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-08-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129088358","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Markus Arnold, Florian Elsinger, Frederick W. Rankin
This study investigates how headquarters’ involvement affects the efficiency of transfer price negotiations. Although prior research explores autonomous transfer price negotiations, evidence suggests that headquarters can become involved in these negotiations, particularly after they fail. Although the likely intention of headquarters’ involvement is to overcome inefficiencies arising from decentralized managers’ inability to agree on a transfer price, we suggest that such involvement can reduce agreement frequency and the efficiency of transfer pricing in coordinating transfers between divisions. Reduced agreement may occur because involvement can reduce managers’ perceived responsibility for the negotiation outcome and because they may expect headquarters’ decision to be more favorable for them than a negotiated price. Headquarters’ involvement can also reduce the coordination efficiency of transfer pricing because of information asymmetries and headquarters’ decision biases in interpreting negotiation failure and using available information. In an experiment, we manipulate whether headquarters’ involvement is absent or present. We also manipulate whether headquarters suggests a nonbinding price (weak involvement) or whether it imposes a price on divisions (strong involvement). Consistent with our predictions, we find that headquarters’ involvement reduces the frequency of negotiation agreement and the coordination efficiency of transfer pricing. Efficiency is reduced more when involvement is strong rather than weak. We contribute to research by studying managers’ negotiation behavior in the realistic setting of potential headquarters’ involvement and by providing evidence on headquarters’ biased perceptions of negotiation impasse and the unintended consequences of its involvement. This paper was accepted by Brian Bushee, accounting.
{"title":"The Unintended Consequences of Headquarters’ Involvement in Decentralized Transfer Price Negotiations: Experimental Evidence","authors":"Markus Arnold, Florian Elsinger, Frederick W. Rankin","doi":"10.2139/ssrn.2823935","DOIUrl":"https://doi.org/10.2139/ssrn.2823935","url":null,"abstract":"This study investigates how headquarters’ involvement affects the efficiency of transfer price negotiations. Although prior research explores autonomous transfer price negotiations, evidence suggests that headquarters can become involved in these negotiations, particularly after they fail. Although the likely intention of headquarters’ involvement is to overcome inefficiencies arising from decentralized managers’ inability to agree on a transfer price, we suggest that such involvement can reduce agreement frequency and the efficiency of transfer pricing in coordinating transfers between divisions. Reduced agreement may occur because involvement can reduce managers’ perceived responsibility for the negotiation outcome and because they may expect headquarters’ decision to be more favorable for them than a negotiated price. Headquarters’ involvement can also reduce the coordination efficiency of transfer pricing because of information asymmetries and headquarters’ decision biases in interpreting negotiation failure and using available information. In an experiment, we manipulate whether headquarters’ involvement is absent or present. We also manipulate whether headquarters suggests a nonbinding price (weak involvement) or whether it imposes a price on divisions (strong involvement). Consistent with our predictions, we find that headquarters’ involvement reduces the frequency of negotiation agreement and the coordination efficiency of transfer pricing. Efficiency is reduced more when involvement is strong rather than weak. We contribute to research by studying managers’ negotiation behavior in the realistic setting of potential headquarters’ involvement and by providing evidence on headquarters’ biased perceptions of negotiation impasse and the unintended consequences of its involvement. This paper was accepted by Brian Bushee, accounting.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"7 9‐10","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-08-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133111346","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the strategic impacts of behavioral price discrimination (BPD) on manufacturers and retailers in a distribution channel when there are switching costs in consumer demand. Unlike previous empirical studies of behavioral price discrimination, which rely only on differences in price elasticity across customers, our pricing model allows the firm strategies to additionally account for differences in price elasticity across time (due to switching costs). We estimate a dynamic pricing model using empirical data from the cola category and, through a series of counterfactuals, we find that the retailer should simply outsource the data analytics and customization of coupons to manufacturers and improve its profit beyond what it can achieve by proactively couponing on its own. We further find that serving as an information broker to sell its customer database to manufacturers can be a vital source of profit to the retailer. By contrast, manufacturers end up worse off, illustrating that customer information ...
{"title":"Behavioral Price Discrimination in the Presence of Switching Costs","authors":"Koray Cosguner, T. Chan, P. Seetharaman","doi":"10.1287/mksc.2016.1024","DOIUrl":"https://doi.org/10.1287/mksc.2016.1024","url":null,"abstract":"We study the strategic impacts of behavioral price discrimination (BPD) on manufacturers and retailers in a distribution channel when there are switching costs in consumer demand. Unlike previous empirical studies of behavioral price discrimination, which rely only on differences in price elasticity across customers, our pricing model allows the firm strategies to additionally account for differences in price elasticity across time (due to switching costs). We estimate a dynamic pricing model using empirical data from the cola category and, through a series of counterfactuals, we find that the retailer should simply outsource the data analytics and customization of coupons to manufacturers and improve its profit beyond what it can achieve by proactively couponing on its own. We further find that serving as an information broker to sell its customer database to manufacturers can be a vital source of profit to the retailer. By contrast, manufacturers end up worse off, illustrating that customer information ...","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-08-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129683035","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Horizontal-merger price simulations, which rely upon pre-merger data to predict post-merger prices, have been proposed and used in antitrust policymaking. However, a dearth of closely observed large mergers in differentiated-product industries makes empirical investigations of simulation performance extremely difficult, and raises many questions regarding the accuracy of simulation performance. Although a handful of previous studies exist, they focus on short-term simulation performances and ignore long-run effects of mergers. This research investigates the long-run simulation performance and long-run pricing effects of merger in the Korean automobile industry for the period 1991-2010. This period saw the merger of Hyundai and Kia Motors in 1998, a merger caused by the Asian economic crisis and which resulted in the conglomeration of 70 percent of the Korean automobile market. By taking Nevo's (2000, 2001) method as a base and measuring its performance against this real-world merger, I find that post-merger prices can be predicted reasonably well in the short term, but that large discrepancies appear in the long-run simulation. To account for this discrepancy, I confirm four further factors that appear essential to move toward a more accurate post-merger price simulation model: change in marginal costs, change in product lines, and change in consumer incomes and preferences. I counterfactually investigate each factor's contribution to price change, confirming their significance. In my investigation I estimate consumer preferences and substitution patterns leading up to the merger, then I calculate marginal costs, and simulate post-merger prices. In addition, I estimate automobile assembly plant-level production functions to evaluate merger synergy effects. By incorporating changes in the four factors I mention, I can account for 61 percent of the long-run price discrepancies.
{"title":"Reliability Examination in Horizontal-Merger Price Simulations: An Ex-Post Evaluation of the Gap between Predicted and Observed Prices in the 1998 Hyundai-Kia Merger","authors":"Hisayuki Yoshimoto","doi":"10.2139/ssrn.2400108","DOIUrl":"https://doi.org/10.2139/ssrn.2400108","url":null,"abstract":"Horizontal-merger price simulations, which rely upon pre-merger data to predict post-merger prices, have been proposed and used in antitrust policymaking. However, a dearth of closely observed large mergers in differentiated-product industries makes empirical investigations of simulation performance extremely difficult, and raises many questions regarding the accuracy of simulation performance. Although a handful of previous studies exist, they focus on short-term simulation performances and ignore long-run effects of mergers. This research investigates the long-run simulation performance and long-run pricing effects of merger in the Korean automobile industry for the period 1991-2010. This period saw the merger of Hyundai and Kia Motors in 1998, a merger caused by the Asian economic crisis and which resulted in the conglomeration of 70 percent of the Korean automobile market. By taking Nevo's (2000, 2001) method as a base and measuring its performance against this real-world merger, I find that post-merger prices can be predicted reasonably well in the short term, but that large discrepancies appear in the long-run simulation. To account for this discrepancy, I confirm four further factors that appear essential to move toward a more accurate post-merger price simulation model: change in marginal costs, change in product lines, and change in consumer incomes and preferences. I counterfactually investigate each factor's contribution to price change, confirming their significance. In my investigation I estimate consumer preferences and substitution patterns leading up to the merger, then I calculate marginal costs, and simulate post-merger prices. In addition, I estimate automobile assembly plant-level production functions to evaluate merger synergy effects. By incorporating changes in the four factors I mention, I can account for 61 percent of the long-run price discrepancies.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-07-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125619335","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Do the choices of consumers who search for a product's best price exhibit risk neutral, risk averse or loss averse risk attitudes? We study how in a problem of sequential search with costless recall the relation between a consumer's willingness to pay for continued search and the level of price uncertainty depends on her risk preferences. Independent of the current best price, an increase in price uncertainty encourages continued search when consumers are risk neutral. However, we prove that theory predicts an inversion when consumers are either risk or loss averse. In those cases, an increase in price uncertainty only increases the consumer's willingness to pay (WTP) for continued search if the current best price is sufficiently low. We subsequently use this observation in an empirical test to identify between different risk preferences in a stylized problem of sequential search. In line with the inversion, we find that a reduction in price uncertainty decreases the WTP for continued search when the current best price is low but increases the WTP when it is high. While at odds with the assumption of risk neutrality, this finding is consistent with models of consumer risk and/or loss aversion. Moreover, the model parameters of risk and loss aversion that lead to the best empirical fit have values similar to those estimated for other decision domains.
{"title":"Risk and Loss Aversion, Price Uncertainty and the Implications for Consumer Search","authors":"A. Soetevent, Tadas Bruzikas","doi":"10.2139/ssrn.2804464","DOIUrl":"https://doi.org/10.2139/ssrn.2804464","url":null,"abstract":"Do the choices of consumers who search for a product's best price exhibit risk neutral, risk averse or loss averse risk attitudes? We study how in a problem of sequential search with costless recall the relation between a consumer's willingness to pay for continued search and the level of price uncertainty depends on her risk preferences. Independent of the current best price, an increase in price uncertainty encourages continued search when consumers are risk neutral. However, we prove that theory predicts an inversion when consumers are either risk or loss averse. In those cases, an increase in price uncertainty only increases the consumer's willingness to pay (WTP) for continued search if the current best price is sufficiently low. We subsequently use this observation in an empirical test to identify between different risk preferences in a stylized problem of sequential search. In line with the inversion, we find that a reduction in price uncertainty decreases the WTP for continued search when the current best price is low but increases the WTP when it is high. While at odds with the assumption of risk neutrality, this finding is consistent with models of consumer risk and/or loss aversion. Moreover, the model parameters of risk and loss aversion that lead to the best empirical fit have values similar to those estimated for other decision domains.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-07-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125464115","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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