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Tuesday, October 30, 2012

Supply and demand

 

DeBeers' "Fighting Diamonds": Recruiting American Consumers in World War II Advertising

Jessica Ghilani
Journal of Communication Inquiry, July 2012, Pages 222-245

Abstract:
In the 1940s, the advertising agency, N.W. Ayer, created for then-client, DeBeers Consolidated Mines, a campaign that wedded the values of patriotism, American citizenship, and luxury consumerism through advertising copy. The text and accompanying images touted what they termed "Fighting Diamonds." While most American military and labor propaganda of World War II encouraged civilians to sacrifice, ration, and save, "Fighting Diamonds" ads assured would-be buyers that their wartime gemstone diamond and jewelry splurges supported the Allied Forces. This article examines the connections between American military recruitment history and DeBeers' "Fighting Diamond" advertisements via a series of archival materials from the N.W. Ayer and Son Advertising Agency Records at the Smithsonian National Museum of American History Archives Center. I argue that "Fighting Diamonds" were part of a growing trend within advertisement propaganda that positioned American political participation and civic duties increasingly as consumer decisions.

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The next industrial revolution: Integrated services and goods

James Tien
Journal of Systems Science and Systems Engineering, September 2012, Pages 257-296

Abstract:
The outputs or products of an economy can be divided into services products and goods products (due to manufacturing, construction, agriculture and mining). To date, the services and goods products have, for the most part, been separately mass produced. However, in contrast to the first and second industrial revolutions which respectively focused on the development and the mass production of goods, the next - or third - industrial revolution is focused on the integration of services and/or goods; it is beginning in this second decade of the 21st Century. The Third Industrial Revolution (TIR) is based on the confluence of three major technological enablers (i.e., big data analytics, adaptive services and digital manufacturing); they underpin the integration or mass customization of services and/or goods. As detailed in an earlier paper, we regard mass customization as the simultaneous and real-time management of supply and demand chains, based on a taxonomy that can be defined in terms of its underpinning component and management foci. The benefits of real-time mass customization cannot be over-stated as goods and services become indistinguishable and are co-produced - as "servgoods" - in real-time, resulting in an overwhelming economic advantage to the industrialized countries where the consuming customers are at the same time the co-producing producers.

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The Economics of Spam

Justin Rao & David Reiley
Journal of Economic Perspectives, Summer 2012, Pages 87-110

Abstract:
We estimate that American firms and consumers experience costs of almost $20 billion annually due to spam. Our figure is more conservative than the $50 billion figure often cited by other authors, and we also note that the figure would be much higher if it were not for private investment in anti-spam technology by firms, which we detail further on. Based on the work of crafty computer scientists who have infiltrated and monitored spammers' activity, we estimate that spammers and spam-advertised merchants collect gross worldwide revenues on the order of $200 million per year. Thus, the "externality ratio" of external costs to internal benefits for spam is around 100:1. In this paper, we start by describing the history of the market for spam, highlighting the strategic cat-and-mouse game between spammers and email providers. We discuss how the market structure for spamming has evolved from a diffuse network of independent spammers running their own online stores to a highly specialized industry featuring a well organized network of merchants, spam distributors (botnets), and spammers (or "advertisers"). We then put the spam market's externality ratio of 100 into context by comparing it to other activities with negative externalities. Lastly, we evaluate various policy proposals designed to solve the spam problem, cautioning that these proposals may err in assuming away the spammers' ability to adapt.

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Price Discrimination by Day-of-Week of Purchase: Evidence from the U.S. Airline Industry

Steven Puller & Lisa Taylor
Journal of Economic Behavior & Organization, forthcoming

Abstract:
This paper identifies a source of price discrimination utilized by airlines - price discrimination based on the day-of-the-week that a ticket is purchased. Using unique transaction data, we compare tickets on the same airline and route that are purchased on different days of the week, after controlling for the day of week of travel, the ticket restrictions, the demand characteristics of the flights, and the number of days in advance that the ticket is purchased. We find that fares are 5% lower when purchased on the weekend. We conjecture that this is a form of price discrimination. If airlines believe that weekend purchasers are more likely to be price-elastic leisure travelers, then they may offer lower prices on weekends when the mix of purchasing customers makes demand more price elastic. This conjecture is supported by the finding that the weekend purchase effect is distinctly larger on routes with a mixture of both business and leisure customers than on routes that disproportionately serve leisure customers. We illustrate that this pricing practice can have important impacts on airline profits. These results have implications for other industries that have the ability to change prices daily based upon the types of customers who purchase on a specific day.

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Financial Constraints on Corporate Goodness

Harrison Hong, Jeffrey Kubik & Jose Scheinkman
NBER Working Paper, October 2012

Abstract:
An influential thesis, dubbed "Doing well by doing good," argues that corporate social responsibility is profitable. But heterogeneity in firm financial constraints can induce a spurious correlation between profits and goodness even if the motives for goodness are non-profit in nature. We use two identification strategies to show that financial constraints are indeed an important driver of corporate goodness. First, during the Internet bubble, previously constrained firms experienced a temporary relaxation of their constraints and their goodness temporarily increased relative to their previously unconstrained peers. Second, a constrained firm's sustainability score increases more with its idiosyncratic equity valuation and lower cost of capital than a less-constrained counterpart. In sum, firms are more likely to do good when they do well.

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Does CSR Reduce Firm Risk? Evidence from Controversial Industry Sectors

Hoje Jo & Haejung Na
Journal of Business Ethics, November 2012, Pages 441-456

Abstract:
In this paper, we examine the relation between corporate social responsibility (CSR) and firm risk in controversial industry sectors. We develop and test two competing hypotheses of risk reduction and window dressing. Employing an extensive U.S. sample during the 1991-2010 period from controversial industry firms, such as alcohol, tobacco, gambling, and others, we find that CSR engagement inversely affects firm risk after controlling for various firm characteristics. To deal with endogeneity issue, we adopt a system equation approach and difference regressions and continue to find that CSR engagement of firms in controversial industry sectors negatively affects firm risk. To examine the premise that firm risk is more of an issue for controversial firms, we further examine the difference between non-controversial and controversial firm samples, and find that the effect of risk reduction through CSR engagement is more economically and statistically significant in controversial industry firms than in non-controversial industry firms. These findings support the risk-reduction hypothesis, but not the window-dressing hypothesis, and the notion that the top management of U.S. firms in controversial industries is, in general, risk averse and that their CSR engagement helps their risk management efforts.

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Mutual halo effects in cultural production: The case of modernist architecture

Randall Collins & Mauro Guillén
Theory and Society, November 2012, Pages 527-556

Abstract:
Previous research has suggested that in cultural production fields the concatenation of eminence explains success, defined as influence and innovation. We propose that individuals in fields as diverse as philosophy, literature, mathematics, painting, or architecture gain visibility by cumulating the eminence of others connected to them across and within generations. We draw on interaction ritual chain and social movement theories, and use evidence from the field of modernist architecture, to formulate a model of how networks of very strong ties generate motivations and emotional enthusiasm, change reputations, and form collective movements that over time transform the structure of cultural fields. Because major aesthetic innovations break sharply with older styles, they need very strong group solidarity over a long period of time to propagate a new standard of practice. We propose mutual halo effects, i.e., the reciprocal reinforcement of upstream and downstream prestige on a given individual node, as the key factor accounting for success in a cultural production field. We discuss the relevance of these results for building a model of influence and innovation in cultural production fields in which networks - reshaped by shifting technological, political, and economic conditions - trigger new styles.

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Does Intellectual Property Restrict Output? An Analysis of Pharmaceutical Markets

Darius Lakdawalla & Tomas Philipson
Journal of Law and Economics, February 2012, Pages 151-187

Abstract:
Standard analysis of intellectual property focuses on the balance between incentives for research and the welfare costs of restraining output through monopoly pricing. We present evidence from the pharmaceutical industry that output often fails to rise after patent expirations. Patents restrict output by allowing monopoly pricing but may also boost output and welfare by improving incentives for marketing, a form of nonprice competition. We analyze how nonprice factors such as marketing mitigate and even offset the costs of monopoly associated with intellectual property. Empirical analysis of pharmaceutical patents suggests that, in the short run, patent expirations reduce output and consumer welfare by decreasing marketing. In the long run, patent expirations benefit consumers, but by 30 percent less than would be implied by the reduction in price alone. Focusing only on the pricing issues of intellectual property may lead to incomplete or even inaccurate conclusions for welfare.

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Effects of Piracy on Quality of Information Goods

Atanu Lahiri & Debabrata Dey
Management Science, forthcoming

Abstract:
It is commonly believed that piracy of information goods leads to lower profits, which translate to lower incentives to invest in innovation and eventually to lower-quality products. Manufacturers, policy makers, and researchers all claim that inadequate piracy enforcement efforts translate to lower investments in product development. However, we find many practical examples that contradict this claim. Therefore, to examine this claim more carefully, we develop a rigorous economic model of the manufacturer's quality decision problem in the presence of piracy. We consider a monopolist who does not have any marginal costs but has a product development cost quadratic in the quality level produced. The monopolist faces a consumer market heterogeneous in its preference for quality and offers a quality level that maximizes its profit. We also allow for the possibility that the manufacturer may use versioning to counter piracy. We unexpectedly find that in certain situations, lower piracy enforcement increases the monopolist's incentive to invest in quality. We explain the reasons and welfare implications of our findings.

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Return Shipping Policies of Online Retailers: Normative Assumptions and the Long-Term Consequences of Fee and Free Returns

Amanda Bower & James Maxham
Journal of Marketing, September 2012, Pages 110-124

Abstract:
To limit costs associated with product returns, some online retailers have instituted equity-based return shipping policies, requiring customers to pay to return products when retailers determine that customers are at fault. The authors compare the normative assumptions about customers that underlie equity-based return shipping policies with the more realistic, positivist expectations as predicted by attribution, equity, and regret theories. Two longitudinal field studies over four years using two surveys and actual customer spending data indicate that retailer confidence in those normative assumptions is unjustified. Contrary to retailer assumptions, neither the positive consequences of free returns nor the negative consequences of fee returns were reversed when customer perceptions of fairness were taken into account. Depending on the locus and extent of blame, customers who paid for their own return decreased their postreturn spending at that retailer 75%-100% by the end of two years. In contrast, returns that were free to the consumer resulted in postreturn customer spending that was 158%-457% of prereturn spending. The findings suggest that online retailers should either institute a policy of free product returns or, at a minimum, examine their customer data to determine their customers' responses to fee returns.

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Overpredicting and Underprofiting in Pricing Decisions

Luxi Shen et al.
Journal of Behavioral Decision Making, December 2012, Pages 512-521

Abstract:
This research examines sellers' price-setting behavior and discovers a naturally occurring mismatch between sellers and buyers: Sellers who make a price decision often consider alternative prices and engage in the joint evaluation mode, whereas buyers who make a purchase decision see only the finally set price and are in the single evaluation mode. This mismatch in evaluation modes leads sellers to overpredict buyers' price sensitivity and underprice their products. However, these effects apply only to products unfamiliar to buyers and without salient reference prices and can be alleviated if sellers are encouraged to mimic single evaluation when making pricing decisions. These propositions are empirically tested and verified.

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Innovation without Patents: Evidence from World's Fairs

Petra Moser
Journal of Law and Economics, February 2012, Pages 43-74

Abstract:
This paper introduces a unique historical data set of more than 8,000 British and American innovations at world's fairs between 1851 and 1915 to explore the relationship between patents and innovations. The data indicate that the majority of innovations - 89 percent of British exhibits in 1851 - were not patented. Comparisons across British and U.S. data also show that patenting decisions were unresponsive to differences in patent laws. Cross-sectional evidence suggests that high-quality and urban exhibits were more likely to be patented. The most significant differences, however, occurred across industries: inventors were most likely to use patents in industries in which innovations are easy to reverse engineer and secrecy is ineffective relative to patents. In the late nineteenth century, scientific breakthroughs, including the publication of the periodic table, reduced the effectiveness of secrecy in the chemical industry. Difference-in-differences regressions suggest that this change resulted in a significant shift toward patenting.

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Market Power Screens Willingness-to-Pay

Glen Weyl & Jean Tirole
Quarterly Journal of Economics, forthcoming

Abstract:
What is the best way to reward innovation? While prizes avoid deadweight loss, intellectual property selects high social surplus projects. Optimal innovation policy thus trades off the ex-ante screening benefit and the ex-post distortion. It solves a multidimensional screening problem in the private information held by the innovator: research cost, quality and market size of the innovation. The appropriate degree of market power is never full monopoly pricing and is determined by measurable market characteristics, the inequality and elasticity of innovation supply, making the analysis open to empirical calibration. The framework has applications beyond IP policy to the optimal pricing of platforms or the optimal procurement of public infrastructure.

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Geography of Firms and Propagation of Local Economic Shocks

Gennaro Bernile, George Korniotis & Alok Kumar
University of Miami Working Paper, August 2012

Abstract:
This study shows that the geographical distribution of publicly-traded firms generates an economic network that links the economic environments of all U.S. states. Using a novel measure of economic linkages among publicly-traded firms, we build a geographical network of state-level economic connections and show that local economic shocks propagate through this economic network. Specifically, for each state, we identify U.S. states that are economically relevant for firms headquartered in that state and show that economic conditions in economically relevant states predict the economic environment in the headquarters state. The evidence of predictability is stronger if two states are culturally similar but remains unaffected by geographical or industrial proximity. These results do not merely reflect the impact of omitted common national macroeconomic shocks. Using monetary losses from state-level natural disasters as an instrument, we show that state-level economic shocks propagate through the economic network generated by public companies.

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Promotional Reviews: An Empirical Investigation of Online Review Manipulation

Dina Mayzlin, Yaniv Dover & Judith Chevalier
NBER Working Paper, August 2012

Abstract:
Online reviews could, in principle, greatly improve the match between consumers and products. However, the authenticity of online user reviews remains a concern; firms have an incentive to manufacture positive reviews for their own products and negative reviews for their rivals. In this paper, we marry the diverse literature on economic subterfuge with the literature on organizational form. We undertake an empirical analysis of promotional reviews, examining both the extent to which fakery occurs and the market conditions that encourage or discourage promotional reviewing activity. Specifically, we examine hotel reviews, exploiting the organizational differences between two travel websites: Expedia.com, and Tripadvisor.com. While anyone can post a review on Tripadvisor, a consumer could only post a review of a hotel on Expedia if the consumer actually booked at least one night at the hotel through the website. We examine differences in the distribution of reviews for a given hotel between Tripadvisor and Expedia. We argue that the net gains from promotional reviewing are likely to be highest for independent hotels that are owned by single-unit owners and lowest for branded chain hotels that are owned by multi-unit owners. Our methodology thus isolates hotels with a disproportionate incentive to engage in promotional reviewing activity. We show that hotels with a high incentive to fake have a greater share of five star (positive) reviews on Tripadvisor relative to Expedia. Furthermore, we show that the hotel neighbors of hotels with a high incentive to fake have more one and two star (negative) reviews on Tripadvisor relative to Expedia.

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Learning from the Crowd: Regression Discontinuity Estimates of the Effects of an Online Review Database

Michael Anderson & Jeremy Magruder
Economic Journal, September 2012, Pages 957-989

Abstract:
Internet review forums increasingly supplement expert opinion and social networks in informing consumers about product quality. However, limited empirical evidence links digital word-of-mouth to purchasing decisions. We implement a regression discontinuity design to estimate the effect of positive Yelp.com ratings on restaurant reservation availability. An extra half-star rating causes restaurants to sell out 19 percentage points (49%) more frequently, with larger impacts when alternate information is more scarce. These returns suggest that restaurateurs face incentives to leave fake reviews but a rich set of robustness checks confirm that restaurants do not manipulate ratings in a confounding, discontinuous manner.

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Mine Your Own Business: Market-Structure Surveillance Through Text Mining

Oded Netzer et al.
Marketing Science, May/June 2012, Pages 521-543

Abstract:
Web 2.0 provides gathering places for Internet users in blogs, forums, and chat rooms. These gathering places leave footprints in the form of colossal amounts of data regarding consumers' thoughts, beliefs, experiences, and even interactions. In this paper, we propose an approach for firms to explore online user-generated content and "listen" to what customers write about their and their competitors' products. Our objective is to convert the user-generated content to market structures and competitive landscape insights. The difficulty in obtaining such market-structure insights from online user-generated content is that consumers' postings are often not easy to syndicate. To address these issues, we employ a text-mining approach and combine it with semantic network analysis tools. We demonstrate this approach using two cases - sedan cars and diabetes drugs - generating market-structure perceptual maps and meaningful insights without interviewing a single consumer. We compare a market structure based on user-generated content data with a market structure derived from more traditional sales and survey-based data to establish validity and highlight meaningful differences.

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Attendance Effects of Star Pitchers in Major League Baseball

Russell Ormiston
Journal of Sports Economics, forthcoming

Abstract:
While the determinants of Major League Baseball attendance have been thoroughly researched, the literature is conspicuously incomplete in regard to the attendance effects of star players. Addressing two concerns in the research, this study develops two measures of players' star power and, analyzing within-season fluctuations in game attendance from 1969-2010, demonstrates a positive and statistically significant relationship between attendance and varying gradations of star power of the home and visiting teams' starting pitchers. Using over four decades worth of data, the results of this study also suggest that fan responsiveness to star players has declined considerably over time.

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The Economic Value of Celebrity Endorsements

Anita Elberse & Jeroen Verleun
Journal of Advertising Research, Spring 2012, Pages 149-165

Abstract:
What is the pay-off to enlisting celebrity endorsers? Although effects on stock returns are relatively well documented, little is known about any impact on sales - arguably a metric of more direct importance to advertising practitioners. This study of athlete endorsements finds there is a positive pay-off to a firm's decision to sign an endorser, and that endorsements are associated with increasing sales in an absolute sense and relative to competing brands. Furthermore, sales and stock returns jump noticeably with each major achievement by the athlete. However, whereas stock-return effects are relatively constant, sales effects exhibit decreasing returns over time. Implications for practitioners are outlined.

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The Innovation Effect of User Design: Exploring Consumers' Innovation Perceptions of Firms Selling Products Designed by Users

Martin Schreier, Christoph Fuchs & Darren Dahl
Journal of Marketing, September 2012, Pages 18-32

Abstract:
The authors study consumer perceptions of firms that sell products designed by users. In contrast with the traditional design mode, in which professional designers employed by firms handle the design task, common design by users involves the firm's user community in creating new product designs for the broader consumer market. In the course of four studies, the authors find that common design by users does not decrease but actually enhances consumers' perceptions of a firm's innovation ability. This "innovation effect of user design" leads to positive outcomes with respect to purchase intentions, willingness to pay, and consumers' willingness to recommend the firm to others. The authors identify four defining characteristics of common design by users that underlie this innovation inference; namely, the number of consumers, the diversity of their background, the lack of company constraints, and the fact that consumer designers actually use the designed product all contribute in building positive perceptions. Finally, the authors identify consumer familiarity with user innovation and the design task's complexity as important moderators that create boundary conditions for the innovation effect of user design.

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The Impact of Contract Manufacturing on Inventory Performance: An Examination of U.S. Manufacturing Industries

Liang-Chieh (Victor) Cheng et al.
Decision Sciences, October 2012, Pages 889-928

Abstract:
In recent years, a growing number of original equipment manufacturers (OEMs) have transferred their manufacturing processes to specialized firms, known as contract manufacturers. In so doing, contract manufacturers can reduce an OEM's production costs and provide OEMs with flexibility in the production process. We examine another potential reason for the use of contract manufacturing-the potential for efficiency gains from inventory reductions. Employing econometric models and data representing manufacturing industries in the USA, we provide statistical evidence that contract manufacturing can lead to lower industry-wide inventory levels, after controlling for other relevant factors. Key managerial implications are derived from the analysis.

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Angry Customers, e-Word-of-Mouth and Incentives for Quality Provision

Anthony Heyes & Sandeep Kapur
Journal of Economic Behavior & Organization, forthcoming

Abstract:
Emotions are a significant determinant of consumer behavior. A customer may get angry if he feels that he is being treated unfairly by his supplier and that anger may make him more likely to switch to an alternative provider. We model the strategic interaction between firms that choose quality levels and anger-prone customers who pick their supplier based on their expectations of suppliers' quality. Strategic interaction can allow for multiple equilibria including some in which no firm invests in high quality. Allowing customers to voice their anger on peer-review fora can eliminate low-quality equilibria, and may even support a unique equilibrium in which all firms choose high quality.

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Intellectual property law compliance in Europe: Illegal file sharing and the role of social norms

Måns Svensson & Stefan Larsson
New Media & Society, November 2012, Pages 1147-1163

Abstract:
The current study empirically demonstrates the widely discussed gap between copyright law and social norms. Theoretically founded in the sociology of law, the study uses a well-defined concept of norms to quantitatively measure changes in the strength of social norms before and after the implementation of legislation. The ‘IPRED law' was implemented in Sweden on 1 April 2009, as a result of the EU IPR Enforcement Directive 2004/48/EC. It aims at enforcing copyright, as well as other IP rights, when they are violated, especially online. A survey was conducted three months before the IPRED law came into force, and it was repeated six months later. The approximately one thousand respondents between fifteen and twenty-five years-of-age showed, among other things, that although actual file-sharing behaviour had to some extent decreased in frequency, social norms remained unaffected by the law.

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Competition in a Status Goods Market

Dmitri Kuksov & Ying Xie
Journal of Marketing Research, October 2012, Pages 609-623

Abstract:
Consumers value status goods because of the impression status-product ownership makes on other consumers, and this impression depends on the actual distribution of ownership in population. Explicitly modeling consumer value of status products as coming from the information the product ownership conveys to other consumers, the authors show that a status-product manufacturer can benefit from a competitor's cost reduction because of the competitor's price reduction associated with it. In other words, they show that two status products that are (imperfect) substitutes in the consumer utility function may be complements in the profit function. As a consequence, competition could lead to higher prices than the optimal ones under monopoly ownership of both products. The authors confirm the assumptions that consumer value of a status good depends positively on the proportion of desirable type among owners and negatively on the proportion of the desirable type among nonowners in one experiment. Moreover, they find empirical support for the positive effect of a price reduction of one product on the demand for the other product from another experiment. 

By KEVIN LEWIS | 09:00:00 AM