Pricing Damaged Goods

Companies with market power occasionally engage in intentional quality reduction of a portion of their output as a means of offering two qualities of goods for the purpose of price discrimination, even absent a cost saving. This paper provides an exact characterization in terms of marginal revenues of when such a strategy is profitable, which, remarkably, does not depend on the distribution of customer valuations, but only on the value of the damaged product relative to the undamaged product. In particular, when the damaged product provides a constant proportion of the value of the full product, selling a damaged good is unprofitable. One quality reduction produces higher profits than another if the former has higher marginal revenue than the latter

The Names of Us English: Valley Girl, Cowboy, Yankee, Normal, Nasal, and Ignorant

A commonplace in United States (hereafter US) linguistics is that every region supports its own standard; none is the locus (or source) of the standard. Historically that is a fair assessment, for no long-term centre of culture, economy and government has dominated in the US

Consumption inequality and partial insurance

This paper examines the transmission of income inequality into consumption inequality and in so doing investigates the degree of insurance to income shocks. Panel data on income from the PSID is combined with consumption data from repeated CEX cross-sections to identify the degree of insurance to permanent and transitory shocks. In the process we also present new evidence of the growth in the variance of permanent and transitory shocks in the US during the 1980s. We find some partial insurance of permanent income shocks with more insurance possibilities for the college educated and those nearing retirement. We find little evidence against full insurance for transitory income shocks except among low income households. Tax and welfare benefits are found to play an important role in insuring permanent shocks. Adding durable expenditures to the consumption measure suggests that durable replacement is an important insurance mechanism, especially for transitory income shocks

Decomposing changes in income risk using consumption data

This paper concerns the decomposition of income risk into permanent and transitory components using repeated cross-section data on income and consumption. Our focus is on the detection of changes in the magnitudes of variances of permanent and transitory risks. A new approximation to the optimal consumption growth rule is developed. Evidence from a dynamic stochastic simulation is used to show that this approximation can provide a robust method for decomposing income risk in a nonstationary environment. We examine robustness to unobserved heterogeneity in consumption growth and to unobserved heterogeneity in income growth. We use this approach to investigate the growth in income inequality in the UK in the 1980s

Dynamic pricing with constant demand elasticity

The model of Gallego and van Ryzin (1994) is specialized to the case of constant elasticity of demand. A closed form is developed, which has an even simpler form than that arising with exponential demand, and possesses an excellent approximation. It is shown in this environment that monopoly is efficient, which means that all the behavior usually attributed to monopoly pricing is actually a consequence of efficient pricing and would arise even in a perfectly competitive environment. If the initial supply is not too large, it is shown that consumers have no incentive to delay their purchases in order to get a lower price at the average inventory prevailing at any time

Income risk and consumption inequality: a simulation study

This paper assesses the accuracy of decomposing income risk into permanent and transitory components using income and consumption data. We develop a specific approximation to the optimal consumption growth rule and use Monte Carlo evidence to show that this approximation can provide a robust method for decomposing income risk. The availability of asset data enables the use of a more accurate approximation allowing for partial self-insurance against permanent shocks. We show that the use of data on median asset holdings corrects much of the error in the simple approximation which assumes no self-insurance against permanent shocks