278 research outputs found
Nonconvex Production Technology and Price Discrimination
A modern firm often employs multiple production technologies based on distinct engineering principles, causing non-convexities in the firm's unit cost as a function of product quality. Extending the model of Mussa and Rosen (1978), this paper investigates how a monopolist's product line design may crucially depend on the non-convexities in the unit cost function. We show that the firm does not offer those qualities where the unit cost exceeds its convex envelope. Consequently, there are "gaps" in its optimal quality choice. When the firm is only permitted to offer a limited number of quality levels (due to possible fixed costs associated with offering each quality), the optimal location of quality levels still lies within those regions of the quality domain where the unit cost function coincides with its convex envelope. We further show that the firm's profit is a supermodular function of its quality levels, and characterize a necessary condition for the optimal quality locationPrice Discrimination, Product Line Design, Nonconvex Production
Bayesian Analysis and Model Revision for kĆ¢th Order Markov Chains with Unknown k.
mass 1 concentrated on the true process, provided that the prior probability measure
has full support and the true process is irreducible. Second, I extend this result to the
case in which k is unbounded (but finite), which requires that the Bayesian decisionmaker
(DM) construct a prior on an infinite-dimensional parameter space. Finally, in
an alternative approach to this case, I suppose that the DM considers a succession of
models corresponding to larger and larger values of k. Each time the DM revises his
model he extends his prior probability measure to the new - and larger - parameter
space in a way that is "consistent" with the previous prior, and recomputes his posterior
probability measures. I show that, roughly speaking, if the DM does not revise
his model Ć¢too frequently,Ć¢ then he will be increasingly confident that the current
posterior is increasingly concentrated on the true process. I motivate the procedure
of model revision by considerations of bounded rationality.Information Systems Working Papers Serie
Bounded Rationality, Indeterminacy, and the Theory of the Firm
Information Systems Working Papers Serie
Profit Maximization with Bankruptcy and Variable Scale
In a diffusion model of an enterprise with variable scale, sufficient
conditions are given for the maximization of expected profit (expected
total discounted withdrawals) to lead to eventual bankruptcy with probability
one. The optimal withdrawal policy is an "overflow policy," in which the withdrawal
rate is equal to zero if the asset level is below a "barrier," and equal
to the maximum rate if the asset level is greater than or equal to the barrier.
The optimal policy for the control of the drift (yield) and volatility (risk) of
the earnings process is derived as the solution of a differential equation, and a
formula is given for the corresponding value function. The optimality of the
constructed policy is demonstrated using the standard "Bellman Conditions."Information Systems Working Papers Serie
Viscous Demand
In many markets, demand adjusts slowly to changes in
prices, i.e., demand is "viscous." For such a market, the time path of a firm's
prices acquires added significance, compared with the case of instantaneous
demand response. In this paper I explore some problems in strategic dynamic
pricing of a service, in the presence of viscous demand, for simple models of a
monopoly and a duopoly.Information Systems Working Papers Serie
Notes on Implementing Sustainable Development
"Sustainable Development" refers to a set of issues relating
to two general questions: (1) Are the presently prevailing technologies and lifestyles
of economic development so destructive of the earth's natural resources
and environment that the current pace of development cannot be maintained?
(2) If so, what combinations of technology, life-style, and rate of growth are
sustainable in the 'long-run,' and what mechanisms of cooperation and incentives
can be devised to implement them? After providing some introductory
background material for newcomers to the subject, and concluding that the answer
to the first question is "yes." I sketch some challenges to economic theory
implied by the second question. In particular, I argue that, for transnational issues
like global warming, the 'standard' approaches of mechanism design theory
are inadequate in the absence of a world government or equivalent institution
for enforcing cooperative agreements. On the other hand, the typical large
multiplicity of noncooperative equilibria of such global dynamic "games" creates
a role for analysts to discover (invent?) equilibria that are superior to
the status-quo equilibrium, if indeed the current situation can reasonably be
interpreted as a (dynamic) equilibrium. I explore this idea in the context of an
oversimplified model of the "Global Warming Game."Information Systems Working Papers Serie
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