Non-Separable, Quasiconcave Utilities are Easy -- in a Perfect Price Discrimination Market Model

Recent results, establishing evidence of intractability for such restrictive utility functions as additively separable, piecewise-linear and concave, under both Fisher and Arrow-Debreu market models, have prompted the question of whether we have failed to capture some essential elements of real markets, which seem to do a good job of finding prices that maintain parity between supply and demand. The main point of this paper is to show that even non-separable, quasiconcave utility functions can be handled efficiently in a suitably chosen, though natural, realistic and useful, market model; our model allows for perfect price discrimination. Our model supports unique equilibrium prices and, for the restriction to concave utilities, satisfies both welfare theorems

Trade Warfare: Tariffs and Cartels

National governments have incentives to intervene in international markets, particularly in encouraging export cartels and in imposing tariffs on imports from imperfectly competitive foreign firms. Although the optimal response to foreign monopoly is usually a tariff, a specific subsidy will be optimal if demand is very convex, as with constant elasticity demand. If ad valorem tariffs or subsidies are considered, a subsidy is optimal if the elasticity of demand increases as consumption increases.The critical conditions in both ad valorern and specific cases hold generally for Cournot ologopoly. Noncooperative international policy equilibrium will be characterized by export cartels and rent-extracting tariffs.

Destructive Creation

"Destructive Creation" is the deliberate introduction of new, perhaps improved generations of durable goods that destroy, directly or indirectly, the usage value of units previously sold inducing consumers to repeat their purchase. This paper discusses this practice by a single seller in an infinite-horizon, discrete time model with heterogeneous consumers. Despite the lack of commitment power over future prices and introduction policies, this practice restores partially or totally market power even though consumers anticipate opportunistic behavior. However, the monopoly resorts "too much" to this mechanism from an ex-ante, profit maximizing perspective. High prices in earlier periods allow the seller to commit to defer innovation and therefore to maintain buyers' confidence over "durability". The paper characterizes the equilibrium properties of the resulting innovation cycles such as existence, uniqueness and asymptotic stability and discusses potential regulatory remedies in those instances where destructive creation generates economic inefficiencies. This theory applies, among others, to markets characterized by network externalities, compatibility issues, standard setting, social consumption and signal provision and may help explain many restrictive aftermarket practices as well as excessive add-on pricing without relying on any leverage hypothesis.durable goods; aftermarkets; planned obsolescence;

Compulsory Licensing of Patented Pharmaceutical Inventions: Evaluating the Options

In this Comment, the author traces the relevant legislative history pertaining to compulsory licensing of patented pharmaceuticals from the TRIPS Agreement of 1994 to the 2003 waiver to, and later proposed amendment of, article 31, which enables poor countries to obtain needed medicines from other countries that possess manufacturing capacity. The Comment then evaluates recent, controversial uses of the relevant legislative machinery as viewed from different critical perspectives. The Comment shows how developing countries seeking access to esential medicines can collaborate in ways that would avoid undermining incentives to innovation and other social costs attributed to compulsory licensing. It ends by defending the legality of recent measures taken to promote public health in developing countries, and by reminding developed countries that unilateral retaliation against such measures is demonstrably illegal under WTO foundational law and jurisprudence

Quality economics in total quality control.

The purpose of this research is to develop a general approach to quality economics in Total Quality Control. Based on microeconomics theory and the development of prevailing quality control approaches, the research develops a set of economic quality concepts which provide a solid theoretical base for economic design and evaluation in quality control. A number of quality economics modeling procedures are established in the phases of both the consumer\u27s and the producer\u27s decision makings on product quality as well as their interactions. In the context of a total quality control approach, the research first analyzes consumer behavior under quality discrimination and derives expected quality value, consumer quality loss function, consumer quality surplus, and the consumer quality decision model. Results will provide a useful means for measurement of quality loss and its effect on consumer welfare as well as information on consumer assessment of product quality. This research also analyzes the producer\u27s behavior under quality risk in an increasingly competitive market and provides both general and approximate forms of the production loss function. Conventional approaches to the analysis of the producer\u27s optimal behavior may not be adequate to illustrate product quality setting and producer behavior in quality competition. A consumer-based approach is established and employed to implement multi-competitive advantages in higher quality setting, lower cost and better consumer satisfaction. The effects of producers\u27 production/market quality strategies, with which the producer affects consumers\u27 quality decisions, is studied and modeled. This research provides theoretical guidance for quality activity in an environment of increased competition. It also offers a set of simplified and computable functions to be applied in quality control practices

Pricing and Marketing Rules with Brand Loyalty

Many firms face a dynamic trade-off: if price is reduced, the firm attracts new customers who will yield profits in the future, but it also forgoes the opportunity to squeeze profits now from loyal customers. This paper identifies a rule that represents the optimal resolution of this trade-off, in terms of an intuitive modification to the static Lerner rule. We find that the “effective” price elasticity depends on the discount rate used by the firm, on the rate of depreciation of the clientele through exit from the stock of repeat purchasers, and on a weighted sum of the price elasticities of the flow of entries into the stock of repeat-purchasers and the flow of exits from the stock of repeat-purchasers. None of these factors enter the optimal pricing strategy for a firm facing a conventional demand function with instantaneous adjustment, i.e. where consumers are “fast switchers”, rather than repeat-purchasers. We also find optimal rules for marketing investment and for quality of service, which are extensions of the Dorfman-Steiner conditions. The paper shows that our rules, with suitable modifications, are valid for many market structures, including monopolistic competition, pure monopoly and strong cartels, dominant firms and oligopolists that have full commitment ability. In the case of dominant firms and oligopolists that cannot commit to their strategy paths, these simple optimal pricing and marketing rules do not apply.