Pricing average price advertising options when underlying spot market prices are discontinuous

Advertising options have been recently studied as a special type of guaranteed contracts in online advertising, which are an alternative sales mechanism to real-time auctions. An advertising option is a contract which gives its buyer a right but not obligation to enter into transactions to purchase page views or link clicks at one or multiple pre-specified prices in a specific future period. Different from typical guaranteed contracts, the option buyer pays a lower upfront fee but can have greater flexibility and more control of advertising. Many studies on advertising options so far have been restricted to the situations where the option payoff is determined by the underlying spot market price at a specific time point and the price evolution over time is assumed to be continuous. The former leads to a biased calculation of option payoff and the latter is invalid empirically for many online advertising slots. This paper addresses these two limitations by proposing a new advertising option pricing framework. First, the option payoff is calculated based on an average price over a specific future period. Therefore, the option becomes path-dependent. The average price is measured by the power mean, which contains several existing option payoff functions as its special cases. Second, jump-diffusion stochastic models are used to describe the movement of the underlying spot market price, which incorporate several important statistical properties including jumps and spikes, non-normality, and absence of autocorrelations. A general option pricing algorithm is obtained based on Monte Carlo simulation. In addition, an explicit pricing formula is derived for the case when the option payoff is based on the geometric mean. This pricing formula is also a generalized version of several other option pricing models discussed in related studies.Comment: IEEE Transactions on Knowledge and Data Engineering, 201

Strategic Decision Support for Smart-Leasing Infrastructure-as-a-Service

In this work we formulate strategic decision models describing when and how many reserved instances should be bought when outsourcing workload to an IaaS provider. Current IaaS providers offer various pricing options for leasing computing resources. When decision makers are faced with the choice and most importantly with uneven workloads, the decision at which time and with which type of computing resource to work is no longer trivial. We present case studies taken from the online services industry and present solution models to solve the various use case problems and compare them. Following a thorough numerical analysis using both real, as well as augmented workload traces in simulations, we found that it is cost efficient to (1) have a balanced portfolio of resource options and (2) avoiding commitments in the form of upfront payments when faced with uncertainty. Compared to a simple IaaS benchmark, this allows cutting costs by 20%

Prominent Numbers, Indices and Ratios in Exchange Rate Determination and Financial Crashes: in Economists’ Models, in the Field and in the Laboratory

The prior paper in this sequel, Pope (2009) introduced the concept of a nominalist heuristic, defined as a focus on prominent numbers, indices or ratios. In this paper the concept is used to show three things in how scientists and practitioners analyse and evaluate to decide (conclude). First, in constructing theories such as purchasing power and interest parity to predict exchange rates and to advocate floating exchange rates, economists unwittingly employ nominalist heuristics. Second, nominalist heuristics have influenced actual exchange rates through the centuries, and this finding is replicated in the laboratory. Third, nominalist heuristics are incompatible with expected utility theory which excludes the evaluation stage, and are also incompatible with prospect theory which assumes that, while the evaluation stage can involve systematic mistakes, the overall decision situation is ultra simple. It is so simple that: a) economists and psychologists can mechanically model and identify what is a mistake, and b) decision makers can maximise. However, contrary to prospect theory, in the typical complex situation, neither a) nor b) holds. Assuming that a) and b) hold has resulted in the 1988 crisis from applying the Black Scholes formulae to forward exchange rates and contributed to sequel financial crises including that of 2007-2009. What is required is a fundamentally different class of models that allow for the progressive anticipated changes in knowledge ahead faced under risk and uncertainty, namely models under the umbrella of SKAT, the Stages of Knowledge Ahead Theory. The paper’s findings support a single world currency rather than variable unpredictable exchange rates subjected to the vagaries of how prominent numbers, ratios and indices influence events via the models of scientists and practitioners.nominalism, money illusion, heuristic, unpredictability, experiment, SKAT the Stages of Knowledge Ahead Theory, prominent numbers, prominent indices, prominent ratios, transparent policy, nominal equality, historical benchmarks, complexity, decision costs, evaluation, maximisation, Black Scholes, Lehmann Brothers, sub-prime crisis, central bank swaps

Strategic Product Placement and Pricing in Markets with Inattentive Consumers

This dissertation contains three seperate chapters. In the first chapter we model a market with hidden product details and systematic consumer biases in which firms have the possibility to unshroud and thereby to rectify such market obliquities. While the classical view was that firms will have an incentive to unshroud, Gabaix and Laibson (2006) show that there exist constellations in which firms prefer to leave the market shrouded. Building on that model we introduce a more strategic and long-term dimension of unshrouding which turns out to fundamentally alter the underlying incentives to unshroud. In particular, we show that there exists an incentive to unshroud that stems from differences in add-on profitability and that it is dependent on parameter constellations whether a more profitable or a less profitable firm will want to unshroud. In the second chapter we investigate the impact of consumer myopia on competition and firm behavior. In our model, firms repeatedly sell a primary good and a respective add-on. We study the impact of consumer myopia in the add-on market on pricing and on the ability of firms to engage in collusion. We show that in a situation in which firms cartelize and charge monopoly prices, limited attention makes deviation from such collusive behavior less rewarding and hence facilitates collusion. In particular, we determine the incentives of firms to educate consumers. We find that a shrouded market in which no firm educates consumers is a sign for cartelization. Hence, if obfuscation is observed in a market, it can serve as a proxy signal for illegal industry agreements. In the third chapter we analyze how firms design their product lines when facing customers with limited attention. We assume that consumers simplify complex decision problems by neglecting several of the relevant aspects. Whether and to what extent a customer pays attention to an attribute of a product depends on the importance of the attribute as well as its dispersion in the set of alternatives. A firm may thus influence its customers' attention through the range of products it makes available. We show that a firm can increase its profit by introducing goods that have the sole function of manipulating consumer attention. We derive several results on how a firm can profitably employ such manipulating goods. In particular, even with a homogenous consumer population our model can explain product differentiation

Analyzing new profit opportunities: a guide to making business projects financially successful

This book presents a simple, yet very powerful, conceptual framework, which can be used to estimate market sizes, prices and their interdependency for new products based on historical market data for existing products in related areas. Even in situations where insufficient data is available the methods can be used in a semi-quantitative manner to evaluate the market potential for a given product or find ways to improve upon the product to make it more successful in the marketplace. The methods are explained in detail, examples of practical applications are provided; and the foundation in existing economic theory is discussed

Social and economic research with consumer panel data: proceedings of the first ZUMA Symposium on Consumer Panel Data, 5 and 6 October 1999

"Eine von der Abteilung Einkommen und Verbrauch von ZUMA organisierte Arbeitsgruppe hat sich mit datentechnischem Handling und Analysepotential von komplexen Verbraucherpaneldaten, am Beispiel des ConsumerScan Haushaltspanels der Gesellschaft für Marktforschung (GfK, Nürnberg) beschäftigt und die Ergebnisse in einem Symposium im Oktober 1999 vorgestellt. Die überwiegende Zahl der vorgetragenen Arbeiten, die man als Werkstattberichte ansehen kann, sind in diesem Band 7 der ZUMA-Nachrichten Spezial abgedruckt. Neben einem detallierten Einblick in die Praxis und das Datenerhebungsprogramm von Verbraucherpanels, wie sie z.B. bei der Marktforschungen der GfK unterhalten werden, enthält der Band Untersuchungen zu Fragen der Flexibilität von Preisbildungsvorgängen, des Lebensstils im alltäglichen Konsums, der Gesundheitsorientierung im Konsumverhalten, der Umweltorientierung und ihrer Umsetzung im Kauf alltäglicher Haushaltungsprodukte, der Gewohnheitsbildung und Risikoorientierung bei Kaufentscheidungen sowie der sozio-ökonomischen Einbettung des Kaufs spezieller Produkte wie z.B. alkoholischer Getränke. Diese Untersuchungen bieten zahlreiche Anknüpfungspunkte für grundlagen- und anwendungsorientierte Fragen der Konsumforschung mit Verbraucherpaneldaten." (Autorenreferat). Inhaltsverzeichnis: Hans-Georg Prester: Consumer Panel Research of GfK; Hartmut Lüdtke, Jörg Schneider: Can patterns of everyday consumption indicate lifestyles? A secondary analysis of expenditures for fast moving goods and their social contexts; John Thögersen: Is a sustainable consumption pattern gradually emerging in Germany? Gradual changesin the sustainability of the consumption pattern analyzed by means of a consumer panel; Dieter Ohr: Purchasing healthy food in germany. An empirical analysis of its attitudinal andsocio-economic antecedents; Matthias Fengler, Joachim Winter: Price-setting and price-adjustment behavior for fast-moving consumer goods; Norbert F. Schneider, Doris Rosenkranz, Kerstin Hartmann: Living arragements and consumption. Plead for lifestyle oriented market research; Georgios Papastefanou: Household's income situation and consumption of alcoholic beverages; Roger Berger: Consumer panel data and rational chocie based theories of myopic habit formation. An empirical analysis; Uwe Fachinger: Continuity or discontinuity in the decision of the application of income of private households?; Yasemin Boztug, Lutz Hildebrand: Nonparametric modeling of buying behavior in fast moving consumer goods markets; Georgios Papastefanou: The ZUMA data file version of the GfK ConsumerScan Household Panel; Terms of Agreement/ Einverständniserklärung