Showing papers on "Fixed price published in 1999"

Bundling Information Goods: Pricing, Profits, and Efficiency

Abstract: We study the strategy of bundling a large number of information goods, such as those increasingly available on the Internet, and selling them for a fixed price. We analyze the optimal bundling strategies for a multiproduct monopolist, and we find that bundling very large numbers of unrelated information goods can be surprisingly profitable. The reason is that the law of large numbers makes it much easier to predict consumers' valuations for a bundle of goods than their valuations for the individual goods when sold separately. As a result, this "predictive value of bundling" makes it possible to achieve greater sales, greater economic efficiency, and greater profits per good from a bundle of information goods than can be attained when the same goods are sold separately. Our main results do not extend to most physical goods, as the marginal costs of production for goods not used by the buyer typically negate any benefits from the predictive value of large-scale bundling. While determining optimal bundling strategies for more than two goods is a notoriously difficult problem, we use statistical techniques to provide strong asymptotic results and bounds on profits for bundles of any arbitrary size. We show how our model can be used to analyze the bundling of complements and substitutes, bundling in the presence of budget constraints, and bundling of goods with various types of correlations and how each of these conditions can lead to limits on optimal bundle size. In particular we find that when different market segments of consumers differ systematically in their valuations for goods, simple bundling will no longer be optimal. However, by offering a menu of different bundles aimed at each market segment, bundling makes traditional price discrimination strategies more powerful by reducing the role of unpredictable idiosyncratic components of valuations. The predictions of our analysis appear to be consistent with empirical observations of the markets for Internet and online content, cable television programming, and copyrighted music.

Servicizing the Chemical Supply Chain

Abstract: Summary Servicizing—the transformation from product-to service-based enterprise—is a major force in changing how firms manage material input, throughput, and output. Redefinition of the firm as a service provider instead of a product manufacturer means that function, not form, is the source of added value delivered to the customer. To realize the dematerialization benefits of such a transformation requires a fundamental realignment of the supplier-customer relationship. Instead of the traditional incentives to maximize the volume of physical product sold, servicizing requires a partnership wherein the financial rewards of reduced material consumption are shared between supplier and customer. We illustrate this partnership concept with the example of chemical management services (CMS), an approach that is gaining momentum in the automobile and electronics sector. Compensation and gain-sharing based on chemical efficiency and chemical use reduction, often tied to fixed price mechanisms, lie at the core of the CMS model. Diffusion of the servicizing model holds much promise for driving dematerialization while reducing the environmental burden of product manufacturers.

The effects of offering method and trading location on the pricing of IPOs in Singapore

Abstract: In this study, we look at the effects of using different offering methods and examine whether the auction system is a better way of rationing IPOs in the sense of reducing the degree of underpricing. Preliminary findings show that IPOs offered via the auction system appear to have lower underpricing. However this is not confirmed by cross-sectional regression analysis. Results show that only the subscription rate is significantly associated with the degree of underpricing. The other variables such as the market of listing, the price earnings ratio at time of issue and the first day relative volume are not significantly related to the underpricing. The second part of the study compares fixed price initial public offerings (IPOs) listed on the Stock Exchange of Singapore Dealing and Automated Quotation System (SESDAQ), the second tier stock market in Singapore, with fixed price IPOs listed on the Main Board. The PE ratios at time of issue and subscription rates of SESDAQ IPOs are significantly lower than Ma...

Procurement Contracts: Fixed Price vs. Cost Plus

Abstract: Economists have applied the methodology of information economics and contract theory (mechanism design) to problems in procurement and regulation. With the standard adverse selection and moral hazard components, the principal should offer a menu of incentive contracts from which the employed firm (agent) will select a contract that reveals its hidden information. In reality, such menus are not observed. Researchers in engineering management have also studied the costs and benefits of alternative contractual arrangements. In this literature, time to completion, project complexity, construction change orders, and risk management are the fundamental problems in the contracting environment. A central conclusion is that "cost-plus" contracts minimize total completion time, while "fixed-price" contracts minimize total project costs. We develop a parsimonious model that formalizes these results and shed new light on the procurement process.

A consumer decision-making aid for electricity purchases by possibility regression and fuzzy decision

Abstract: Introduces a decision-making aid for retail consumers of electricity who now have a choice of bilateral transactions and market-based purchases under the recent deregulated environment. Direct transactions between a supplier and the consumer may become attractive in some situations because of a fixed price, while in a power exchange market, gaming and speculation by participants may push up electricity prices unacceptably. In this approach, uncertain market prices are represented by a set of fuzzy numbers containing the highest/lowest price range in a time series. The consumer's somewhat vague preferences are also defined by a separate fuzzy set. The differences in the offered price for a bilateral contract and the market prices are compared with a preference index. The overall grade of matching the price differential and the consumer's preference indicates the value of the offered price for the bilateral transaction. Numerical examples illustrate the procedure of this approach.

An early action proposal with known costs: a sensible and realistic option for emissions trading in Australia

Abstract: In a number of papers, McKibbin and Wilcoxen (1997a,1997b,1999) have proposed to tackle rising greenhouse emissions by using an internationally coordinated system of domestic permit trading schemes with a fixed price rather than a fixed cap on greenhouse emissions. This paper argues that early action by Australia alone is difficult to justify. However, if early action on the Kyoto Protocol is deemed to be warranted then the McKibbin- Wilcoxen Proposal for a permit trading system with a low fixed permit price is a sensible early action policy for Australia, especially if many countries implement it at the same time and particularly if by implementing this proposal as an early action policy, it ultimately replaces the Kyoto Protocol. The paper sets out some important lessons from model research that are crucial for designing an early action policy for Australia. The paper also sets out the original McKibbin-Wilcoxen proposal as a more realistic approach to climate change than the Kyoto Protocol, as well as explaining how this proposal could work as an early action policy.

Incentives versus Transaction Costs: A Theory of Procurement Contracts

Abstract: November 2, 1999 Inspired by facts from the private sector construction industry, we develop a model that explains many of the stylized facts about procurement contracts. The buyer in our model incurs a cost of providing a comprehensive design, and is faced with a trade-off between providing incentives and reducing ex post transaction costs due to costly renegotiation. We show that cost plus contracts are preferred to fixed price contracts when a project is more complex or when time-to-completion is more valuable. We also show when fixed-price or cost-plus contracts would be preferred to other incentive contracts, explaining the prevalence of these simple contracts. We then apply our model to the make-or-buy procurement decision and conclude that internal production dominates market procurement when the product is more complex, providing foundations for Transaction Cost Economics. (JEL D23, D82, L14, L22, L74)

Macroeconomic Stabilisation: Fixed Exchange Rates vs Inflation Targeting vs Price Level Targeting

Abstract: We argue that the traditional question ‘fixed vs. flexible exchange rates?’ is not well-defined, because ‘flexible exchange rates’ does not explicitly specify any particular monetary policy. In traditional analyses, ‘flexible exchange rates’ was interpreted as implying a fixed money supply. But fixing the money supply (or fixing its growth rate at k%) is rarely advocated nowadays. To reflect today’s policy debate, the traditional question should be replaced by the question ‘fixed exchange rates vs. inflation targeting vs. price level targeting?’. We then build a simple macroeconomic model of a small open economy. The model incorporates an ‘outside lag’ in the effect of monetary policy on aggregate demand, so that inflation targeting and price level targeting are always imperfect. We use this model to compare the stabilisation properties of three different monetary rules: a fixed exchange rate, a fixed inflation target, and a fixed price level target. We show that price level targeting is best for stabilising output, the real exchange rate and the real interest rate, relative to their natural rates.

The income transfer effect of crop estimates: Implications for food security 1

Abstract: Since the introduction of the Marketing of Agricultural Products Act (no 47 of 1996) South Africa has deregulated all its former control boards. This, together with the move towards a more liberalized market, has brought about a freer market environment for agricultural products in which prices are determined by a variety of factors. Within this dynamic environment producers and agri-business are not only exposed to production risks, but also to greater price risk and increased competition. This off course entails that much more emphases are put on planning in respect of how much to produce, where to produce, how much inputs to procure at what price, etc. Eventually decisions on these issues will be absorbed in the marketing system where prices of final products are determined. The price setting arena has become one of the most important aspects of marketing. Not only has it an influence on the returns of farmers and agri-business, but it has wider implications for national welfare – and taking a narrower focus – also on household food security. It was estimated by the Committee for the Development of a Food and Nutrition Strategy for Southern Africa (1990) that there were around 16,3 million people in South Africa with an income lower that the minimum subsistence level. According to the Ministry of Agriculture and Land Affairs (1996) some 30 to 50 per cent of the South African population has insufficient food, or is exposed to an imbalanced diet, as a result of low income. In an economy where real income tended to move side ways due to unstable economic growth “wrong” price signals can seriously impede on efforts by government to address food security at national and household level. Eicher and Staatz (1990) states that food security is related to both pricing policy and technological change in agriculture and are best addressed within a framework that takes account of the linkages among the various sectors of the economy. They went further by stating that research and empirical experience during the 1980s demonstrated that focusing on only one side of the food security equation failed to alleviate food insecurity, i.e. both the demand and the access side need to be addressed. Taking cognisance of the aforementioned the aim of this paper is to enhance the debate concerning food security in South Africa by focusing on the implications and importance of a proper crop estimate for South Africa. The paper does not attempt to evaluate the accuracy and difficulty in estimating crops in South Africa since it justifies a study on its own. Furthermore, this study will mainly focus on white maize due to its strategic importance for South Africa in terms of food security. Crops estimates and its role in the South African white maize market The crop estimates done by the National Crop Estimating Committee (NCEC) did not play a major role in agriculture, and in the price formulation of white maize in the previous dispensation. Surpluses or shortfalls were covered by the marketing schemes governed through, amongst others, the Maize Board, and government assumed responsibility for all imports and exports. The price risks involved were for the account of government. The fixed price schemes governed by the Maize Board guaranteed a fixed price to the farmer, as well as, to the consumer. The market was not allowed to operate on fluctuations, decline in demand, or increase in supplies. It was purely manipulated by the government. Even the composition of the National Crop Estimates Committee did not matter in the old dispensation, the Crop Estimates Committee under the auspices of the National Department of Agriculture consisted of officials of the grain control boards, producer organisations, co-operatives and officials of Agricultural Research Council institutes. At the time when the new Marketing of Agricultural Products Act of 1996 came into effect and the demise of the grain control boards, a whole new dispensation appeared. This presents new challenges for all role players.

Do Contracting Incentives Matter

Abstract: Agency theory explanations for agricultural contract designs are often observationally equivalent to perfect information explanations. Further in order to test properly the hypothesis that moral hazard is important one must first test and accept the hypothesis that agents respond to contract incentives. If agents do not respond to contract incentives then it is unlikely that moral hazard is significant. Accordingly we move beyond contract design and focus on whether or not we can reject the hypothesis that moral hazard is important by examining growers responses to price incentives for processing tomato quality. We utilize a natural experiment. In our data set growers deliver processing tomatoes under a price incentives contract and for a fixed price per ton. We compare the quality of the tomatoes delivered under the two arrangements. Our results suggest that growers indeed do respond to price incentives by improving tomato quality.

Empirical evidence on book-building method and IPO underpricing

Abstract: Over the past few decades, the phenomenon of under-pricing in initial public offerings ("IPOs") has been widely studied. Many theories have been proposed in an attempt to solve the well-known mystery of IPO under-pricing. In this paper, I will conduct a brief survey on some profound IPO studies. Some major research areas and findings will be discussed. In particular, I will study the impact of the US book-building method on the IPO's short-term performance. Up to now, there has been relatively little research attempting to relate the US styled book-building method and the pronounced under-pricing of new issues. Built on the traditional theories of information asymmetry, I do expect that the degree of IPO under-pricing should be reduced when the book-building method is adopted to "arrow" the information gap between the investors, issuers, and the underwriter. According the theories of information asymmetry, information gap between the issuer and the underwriter lead to share under-pricing so as to compensate the underwriter for bearing the additional perceived risk. Lesser degree of under-pricing is expected on the book-building method where more market information, e.g. market demand, about the shares is revealed to the concerned parties. Underwriters will have a better idea on the prospective market demand on the issues through meeting with the institutional investors, conducting roadshows as well as other advertising programs. Considering the book-building method is an effective means of conveying valuable signal to the investor, I proposed that the book-building method might reduce the degree of under-pricing of new issues in two perspectives. First, it reduces the perceived uncertainty on the true value of the new issue. Assuming investors are risk-averse, the required rate of return decreased and degree of under-pricing reduced. Second, the book-building method does not only reduce the perceived uncertainty of the new issue, but also acted as an effective means to reveal the true type of the firm to the investor. It is because only good firms are willing to "burn the money" (the book-building method is costly) and the bad type firm will find it too costly to mimic the good firm as there is always a chance that their true type is revealed to the public during the process. Therefore, firms going book-building can be interpreted as a good signal to the investors. In this paper, I will, in particular, study the effect of the book-building method on the degree of IPO under-pricing with the use of IPO data in Hong Kong. The Hong Kong IPO data was used because its unique regulatory feature regarding the methods of issuing new shares. The primary market of Hong Kong is special in a sense that it allows both the US styled book-building method and the UK styled fixed price offer to be used. In this study, 246 Hong Kong IPO data from 1993 to 1997 were selected and reviewed. Unlike most of the previous studies where the initial returns of IPOs are adjusted by the market return over a one-day period, the initial returns…

Bargaining with a Possibly Committed Seller

Abstract: We analyze bilateral bargaining with one-sided offers where the buyer has private information about his valuation but does not know whether the seller is committed to a known fixed price or whether it pays to hold out until he possibly reduces his offer. We make the `gap' assumption that there is a sure gain from trade, but we are mainly interested in the case where the gap becomes arbitrarily small and where the length between periods vanishes. In this case the outcome of the game with a possibly committed seller resembles (almost) perfectly the equilibrium if it is common knowledge that the seller is committed.

Farmer’s Choice about Market and Contract with Price Risk

Abstract: In transactions, agents may face two kinds of risk, one on price another on quantity. For agricultural products some mechanisms such as commodity future markets or commodity options are used or could be used to reduce these risks. On an other hand contracting is an alternative to market mechanisms. For example often processed food industries want to secure their input demand. So they propose contracts to farmers which entail an ex-ante fixed price inferior to expected price on the market. Risk averse farmers will accept if the amount of risk on price is important. This situation could become more and more frequent in the future in countries where public support on price will become less important than it is today. For example, this could be true for developing countries which have to implement structural adjustment policy, and for developed countries as in Europe after the G.A.T.T. agreement and the C.A.P. reform.