Market Power
Trouble in Store: Probes, Protests, and Store Openings by Wal‐Mart, 1998-2007
Paul Ingram, Lori Qingyuan Yue & Hayagreeva Rao
American Journal of Sociology, July 2010, Pages 53-92
Abstract:
The authors consider how uncertainty over protest occurrence shapes the strategic interaction between companies and activists. Analyzing Wal‐Mart, the authors find support for their theory that companies respond to this uncertainty through a "test for protest" approach. In Wal‐Mart's case, this consists of low‐cost probes in the form of new store proposals. They then withdraw if they face protests, especially when those protests signal future problems. Wal‐Mart is more likely to open stores that are particularly profitable, even if they are protested. This uncertainty‐based account stands in sharp contrast to full‐information models that characterize protests as rare miscalculations.
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Deal or No Deal: Hormones and the Mergers and Acquisitions Game
Maurice Levi, Kai Li & Feng Zhang
Management Science, forthcoming
Abstract:
Young male CEOs appear to be combative: they are 4% more likely to be acquisitive and, having initiated an acquisition, they are over 20% more likely to withdraw an offer. Furthermore, a young target male CEO is 2% more likely to force a bidder to resort to a tender offer. We argue that this combative nature is a result of testosterone levels that are higher in young males. Testosterone, a hormone associated with male dominance seeking, has been shown to influence prospects for a cooperative outcome of the ultimatum game. Specifically, high-testosterone responders tend to reject low offers even though this is against their interest. It has been argued that this is consistent with a low offer being seen as dominance seeking. The acts of attempting or resisting an acquisition can be viewed as striving to achieve dominance. We argue that the evidence reported in this paper is consistent with the presence of a significant hormone effect in mergers and acquisitions.
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Juliano Laran, Amy Dalton & Eduardo Andrade
Journal of Consumer Research, forthcoming
Abstract:
Five experiments demonstrate that brands cause priming effects (i.e., behavioral effects consistent with those implied by the brand), whereas slogans cause reverse priming effects (i.e., behavioral effects opposite to those implied by the slogan). For instance, exposure to the retailer brand name "Walmart," typically associated with saving money, reduces subsequent spending, whereas exposure to the Walmart slogan, "Save money. Live better." increases it. Slogans cause reverse priming effects and brands cause priming effects because people perceive slogans, but not brands, as persuasion tactics. The reverse priming effect is driven by a nonconscious goal to correct for bias and can occur without any conscious mediation (i.e., following subliminal exposure to the word "slogan"). These findings provide evidence that consumer resistance to persuasion can be driven by processes that operate entirely outside conscious awareness.
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The Role of Mortgage Brokers in the Subprime Crisis
Antje Berndt, Burton Hollifield & Patrik Sandås
NBER Working Paper, July 2010
Abstract:
Prior to the subprime crisis, mortgage brokers originated about 65% of all subprime mortgages. Yet little is known about their behavior during the runup to the crisis. Using data from New Century Financial Corporation, we find that brokers earned an average revenue of $5,300 per funded loan. We decompose the broker revenues into a cost and a profit component and find evidence consistent with brokers having market power. The profits earned are different for different types of loans and vary with borrower, broker, regulation and neighborhood characteristics. We relate the broker profits to the subsequent performance of the loans and show that brokers earned high profits on loans that turned out to be riskier ex post.
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Robot traders can prevent extreme events in complex stock markets
Nicolas Suhadolnik, Jaqueson Galimberti & Sergio Da Silva
Physica A: Statistical Mechanics and its Applications, forthcoming
Abstract:
If stock markets are complex, monetary policy and even financial regulation may be useless to prevent bubbles and crashes. Here, we suggest the use of robot traders as an anti-bubble decoy. To make our case, we put forward a new stochastic cellular automata model that generates an emergent stock price dynamics as a result of the interaction between traders. After introducing socially integrated robot traders, the stock price dynamics can be controlled, so as to make the market more Gaussian.
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Reputation, Price, and Death: An Empirical Analysis of Art Price Formation
Heinrich Ursprung & Christian Wiermann
Economic Inquiry, forthcoming
Abstract:
We analyze how an artist's death influences the market prices of her works of art. Death has two opposing effects on art prices. By irrevocably restricting the artist's oeuvre, prices, ceteris paribus, increase when the artist dies. On the other hand, an untimely death may well frustrate the collectors' hopes of owning artwork that will, as the artist's career progresses, become generally known and appreciated. By frustrating expected future name recognition, death impacts negatively on art prices. In conjunction, these two channels of influence give rise to a hump-shaped relationship between age at death and death-induced price changes. Using transactions from fine art auctions, we show that the empirically identified death effects indeed conform to our theoretical predictions. We derive our results from hedonic art price regressions, making use of a dataset which exceeds the sample size of traditional studies in cultural economics by an order of magnitude.
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The Underdog Effect: The Marketing of Disadvantage and Determination through Brand Biography
Neeru Paharia, Anat Keinan, Jill Avery & Juliet Schor
Journal of Consumer Research, forthcoming
Abstract:
We introduce the concept of an underdog brand biography (UBB) to describe an emerging trend in branding in which firms author a historical account of their humble origins, lack of resources, and determined struggle against the odds. We identify two essential dimensions of an underdog biography: external disadvantage, and passion and determination. We demonstrate that an UBB can increase purchase intentions, real choice, and brand loyalty. We argue that UBBs are effective because consumers react positively when they see the underdog aspects of their own lives being reflected in branded products. Four studies demonstrate that the UBB effect is driven by identity mechanisms: we show that the effect is a) mediated by consumers' identification with the brand, b) greater for consumers who strongly self-identify as underdogs, c) stronger when consumers are purchasing for themselves vs. others, and d) stronger in cultures in which underdog narratives are part of the national identity.
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Capitalism and the Politics of Resignation
Peter Benson & Stuart Kirsch
Current Anthropology, August 2010, Pages 459-486
Abstract:
Anthropologists since the 1990s have paid greater attention to the state and governmentality than to one of the most consequential forms of power in our time, the corporation. The lack of attention to corporations is especially problematic when the harm they cause is readily apparent and substantial. We propose to reorient the study of power in anthropology to focus on the strategies corporations use in response to their critics and how this facilitates the perpetuation of harm. We identify three main phases of corporate response to critique: denial, acknowledgement and token accommodation, and strategic engagement. In case studies of the tobacco and mining industries, we show how corporate responses to their critics protect these industries from potential delegitimization and allow them to continue operating in favorable regulatory environments. Finally, we connect these corporate strategies to pervasive feelings of discontent about the present and the perceived inability to change the future. Although corporations usually benefit from the politics of resignation, we argue that widespread dissatisfaction with corporate practices represents an important starting point for social change.
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Christy Ford Chapin
Studies in American Political Development, October 2010, Pages 143-167
Abstract:
This narrative demonstrates how public and private power interacted during the post-World War II era to create America's unique health care system, a system based on a high-cost, corporate model financed and managed by insurance companies. The article compares the divergent political, organizational, and economic strategies of the American Medical Association (AMA), which represented physicians, and the Health Insurance Association of America (HIAA), which represented for-profit insurance firms. Even after the defeat of President Harry Truman's plan for a universal, government-managed system, policymakers in both parties attempted to reform the health care market, because most observers recognized that the embryonic insurance-company-funded model had inherent cost problems. In order to defeat numerous reform proposals, AMA and HIAA leaders allied to rapidly develop the market around insurance-company financing. Insurers and physicians constructed overlapping institutions to manage their increasingly close financial relationship, thus creating a pseudocorporate arrangement. In an attempt to control costs, insurance companies expanded their function beyond simply underwriting the risks associated with medical services consumption to also assuming a supervisory role, albeit distant, over health care delivery. When policymakers designed Medicare, they adopted the organizational framework that private health interests had already created, thereby legitimizing the previously contested high-cost model.
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eBay's Crowded Evenings: Competition Neglect in Market Entry Decisions
Uri Simonsohn
Management Science, July 2010, Pages 1060-1073
Abstract:
Do firms neglect competition when making entry decisions? This paper addresses this question analyzing the time of day at which eBay sellers set their auctions to end. Consistent with competition neglect, it is found that (i) a disproportionate share of auctions end during peak bidding hours, (ii) such hours exhibit lower selling rates and prices, and (iii) peak listing is more prevalent among sellers likely to have chosen ending time strategically, suggesting disproportionate entry is a mistake driven by bounded rationality rather than mindlessness. The results highlight the importance for marketing researchers of assessing rather than assuming the rationality of firm behavior.
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Do consumers switch to the best supplier?
Chris Wilson & Catherine Waddams Price
Oxford Economic Papers, October 2010, Pages 647-668
Abstract:
This paper demonstrates that the ability of consumers to choose the best alternative supplier is limited even in a relatively simple and transparent market. Across two independent datasets from the UK electricity market we find, on aggregate, that those consumers switching exclusively for price reasons appropriated less than a half of the gains available. While such outcomes can be explained by high search costs, the observation that at least 17% of consumers actually reduced their surplus as a result of switching cannot. We rule out an explanation of incorrect demand prediction, and test for others including mis-selling.
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Donald Bergh & Patrick Gibbons
Journal of Management Studies, forthcoming
Abstract:
Drawing from signaling theory, this study examines how the stock market reacts to the public announcement of the hiring of management consultants and whether it differentially valuates clients on the basis of their financial profitability and the brand-name of the engaged consultant. An event study analysis of 118 client firms that publicly announced the hiring of management consulting firms finds that the stock market, on average, responded positively and significantly to the engagement news. Regression analysis further reveals that the stock market reaction tended to be the highest for client firms that had the highest profitability levels. In addition, the stock market reaction to the hiring announcement was not related to the consultant's brand-name reputation; clients engaging the most reputable consultants (e.g., McKinsey & Company, Bain, Boston Consulting Group, Booz-Allen Hamilton) did not realize any different market response than those clients that employed the other consultants. Overall, most client firms that publicly announced the hiring of management consultants experienced a rise in their market value and those that had the highest financial profitability realized the highest increase. Further, the findings imply that there may be boundaries to reputational spillover benefits in partnering relationships.
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Can More Consumers Lead to Lower Profits? A Model of Multi-Product Competition
Ofer Azar
Journal of Economic Behavior & Organization, forthcoming
Abstract:
The article analyzes the optimal pricing strategy of duopoly retailers who sell two goods to three consumer segments: two segments that are interested in one good, and one that wants to buy both goods. The analysis suggests that the markup on one of the goods might be negative and that the existence of consumers who buy both goods can either increase or decrease markups. Surprisingly, the addition of the consumers who buy both goods (unchanging the number of the other consumers) might decrease profits, and increasing the number of consumers who buy one good might also reduce profits. This suggests that firms should consider carefully how additional customers might affect the competitive environment and the equilibrium before attempting to attract them to the market.
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Are Consumers Affected by Durable Goods Makers' Financial Distress? The Case of Auto Manufacturers
Ali Hortaçsu, Gregor Matvos, Chad Syverson & Sriram Venkataraman
NBER Working Paper, July 2010
Abstract:
The financial decisions of durable goods makers can impose spillovers on their consumers. Namely, durable goods provide a consumption stream that frequently depends on services provided by the manufacturer (e.g., warranties, parts, and maintenance). Manufacturer bankruptcy, or even the possibility thereof, threatens this service provision and can substantially reduce the value of its products to their current owners. We test this hypothesis in one of the largest durable goods markets, automobiles, using data on millions of used cars sold at wholesale auctions around the U.S. during 2006-8. We find that an increase in an auto manufacturer's financial distress results in a contemporaneous drop in the prices of its cars at auction, controlling for a host of other influences on price. The estimated effects are statistically and economically significant. Furthermore, cars with longer expected service lives (those within manufacturer warranty, having lower mileage, or in better condition) see larger price declines than those with shorter remaining lives. These patterns do not seem to be driven solely by reduced demand from auto dealers affiliated with the troubled manufacturers or by contemporaneous declines in new car prices. Our estimates imply a potentially large indirect cost of financial distress on car manufacturers.
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Leasing, Lemons, and Moral Hazard
Justin Johnson & Michael Waldman
Journal of Law and Economics, May 2010, Pages 307-328
Abstract:
A number of recent papers have analyzed leasing in the new‐car market as a response to the adverse‐selection problem in the used‐car market originally explored in the seminal 1970 paper by George Akerlof. In this paper we consider a model characterized by both adverse selection, as in these earlier papers, and moral hazard concerning the maintenance choices of new‐car drivers. We show that this approach provides explanations for a number of empirical findings concerning real‐world new‐ and used‐car markets, including that leasing has become more popular over time, very high income new‐car drivers lease more, and used cars that were leased when new sell for more than used cars that were purchased when new. We also compare and contrast our approach to new‐car leasing with alternative approaches.
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Alexander Stremitzer
Journal of Law, Economics, and Organization, forthcoming
Abstract:
If a seller delivers a good nonconforming to contract, European and US warranty laws allow consumers to choose between some money transfer and termination. Termination rights are, however, widely criticized, mainly for fear that the buyer may use nonconformity as a pretext for getting rid of a contract he no longer wants. We show that this possibility of "opportunistic termination" might actually have positive effects. Under some circumstances, it will lead to redistribution in favor of the buyer without any loss of efficiency. Moreover, by curbing the monopoly power of the seller, a regime involving termination might increase welfare by enabling a more efficient output level in a setting with multiple buyers. These potential benefits are absent if renegotiation is possible.
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Effect of price quoting on financial asset prices: An experimental analysis
Tal Shavit, Shosh Shahrabani & Uri Benzion
Applied Economics Letters, August 2010, Pages 1219-1222
Abstract:
Stock options are usually sold in bundles of 100 units, and their price can be quoted either per unit or per bundle. In this article, the effect of different methods of quoting financial asset prices on the subjective value of a contract was examined experimentally. In particular, we examined differences in participants' Willingness-To-Pay and Willingness-To-Accept for financial assets depending upon whether prices are quoted per unit or per bundle. We found that participants bid (ask) a higher price when prices are quoted per unit than when they are quoted per bundle. The results indicated that different quoting methods affect the bidding price for risky assets. These results can have important implications for trading on financial markets.
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The Effects of Stock Lending on Security Prices: An Experiment
Steven Kaplan, Tobias Moskowitz & Berk Sensoy
NBER Working Paper, September 2010
Abstract:
Working with a sizeable, anonymous money manager, we randomly make available for lending two-thirds of the high-loan fee stocks in the manager's portfolio and withhold the other third to produce an exogenous shock to loan supply. We implement the lending experiment in two independent phases: the first, from September 5 to 18, 2008, with over $580 million of securities lent; and the second, from June 5 to September 30, 2009, with over $250 million of securities lent. The supply shocks are sizeable and significantly reduce lending fees, but returns, volatility, skewness, and bid-ask spreads remain unaffected. Results are consistent across both phases of the experiment and indicate no adverse effects from securities lending on stock prices.