99-0100
Using a high frequency data-set of advertised prices in the personal computer industry, we find that firms which introduced Pentium computers late in the "buy Direct" segment of the market command a higher price premium compared to early entrants. This is true even among firms which have the same price premium for their 486 computers, but is more pronounced for high quality firms. Over time, the difference in the Pentium price premia of the late versus the early entrants decline to levels of the difference in the corresponding 486 price premia. The decline in the relative Pentium price premia contributes to a decline in overall price dispersion, while price dispersion for 486 computers remains constant. These results suggest that late entrants reap short run rents from these consumers that are loyal enough to them to have waited until their entry in order to purchase. They also suggest a rapidly declining price premium for quality over the product cycle. In light of these findings, brand coefficients in hedonistic regressions using high frequency data should not be interpreted as capturing unobserved quality only.

99-0101
We introduce a goodness of fit process for quantile regression analogous to the conventional R² statistic of least squares regression. Several related inference processes designed to test composite hypothese about the combined effect of several covariates over an entire range of conditional quantile functions are also formulated. The approach is illustrated with some hypothetical examples, an application to recent empirical models of international economic growth, and some Monte-Carlo evidence.

99-0102
Estimation of composed error frontier models is generally conducted under certain strict assumptions. In practice however, these assumptions are not tested thoroughly. This is probably because simple workable tests are not yet available for these models. This paper develops easily computable specification tests for half-normal composed error frontier models. The tests are based on the information matrix (IM) and moment test principles. These tests are applied to the well – known Cowing (1970) steam-electric data set. Our tests reveal no serious misspecification of the cost model, while for the output model the null hypothesis of correct specification of rejected strongly.

99-0103
In the present paper, we analyze the effect of unemployment benefits on unemployment. We do this by elaborating on a model developed by Miyagiwa (1988) in several respects. First, we establish Walras’ law and give an explicit consideration to the government budget balance. We also incorporate unemployment benefits indexed by the competitive wage rate. Second, we use the correspondence principle a la Samuelson for our tax incidence analysis, taking a local stability condition into account. These considerations lead to an opposite conclusion to that of Miyagiwa.

99-0105
Offering a variety of products is important for a firm to attract different consumer segments. However, high product variety increases production and distribution costs. Modular product design and parts commonality are approaches used to counter this trend in cost and still offer a variety of products. This paper develops a model to examine when modular products should be introduced and how much modularity to offer. The model looks at a market consisting of a high segment and a low segment. Customers choose the product that maximizes their surplus, which is defined as the product’s utility minus its price. Presence of commonality affects the utility of a product. Greater commonality decreases production cost but makes the products more indistinguishable from one another. This makes the products more desirable for the low segment but less desirable for the high segment. The firm’s objective is to design the products and set the prices so as to maximize its profit.

99-0106
This paper explores the origins and evolution of product markets from a socio-cognitive perspective. Product markets are defined as socially-constructed knowledge structures (i.e., product conceptual systems) that are shared among producers and consumers – sharing that allows consumers and producers to interact in the market. Our fundamental thesis is that product markets are neither imposed nor orchestrated by producers or consumers, but evolve from producer-consumer interaction feedback effects. Starting as unstable, incomplete, and disjointed conceptual systems held by market actors – which are revealed in the cacophony of uses, claims, and product standards that characterize emerging product markets – we propose that product markets become coherent as a result of consumers and producers making sense of one another’s behaviors. We further argue that the sensemaking process is revealed in the stories that consumers magazines and producers tell one another in published media, such as industry newspapers and consumer magazines, which we use as date sources. Specific hypothesis pertaining to the use of product category labels in published sources and the acceptability of different product category members throughout the development process are tested for the minivan market between 1982 and 1988. Our findings suggest that category stabilization causes significant differences between consumers and producers in how they use product category labels for emerging and pre-existing categories. Our findings also show that as stabilization occurred around a category prototype, the acceptability of particular models changed without any physical changes to the models.

99-0107
Tiebout’s basic claim was that when public goods are local, competition between jurisdictions solves the free riding problem in the sense that equilibria exist and are always Pareto efficient. Unfortunately, the literature does not quite support this conjecture. For finite economies, one must choose between notions of Tiebout equilibrium which are Pareto optimal but which may be empty, or which are nonempty but may be inefficient. This paper introduces a new equilibrium notion called migration-proof Tiebout equilibrium which we argue is a natural refinement of Nash equilibrium for a multijusrisdictional environment. We show for sufficiently large economies with homogeneous consumers, such an equilibrium always exists, is unique, and is asymptotically Pareto efficient.

99-0108
The appealing simple example of multi-unit uniform-price auctions with constant, uniformly distributed marginal values has atypically many equilibria.

99-0109
In an economy with a continuum of individuals, each individual has a stochastic, continuously evolving endowment process. Individuals are risk averse and would therefore like to insure their endowment processes. It is feasible to obtain insurance by pooling endowments across individuals because the processes are mutually independent. We characterize the payoff from an insurance contracting scheme of this type, and we investigate whether such a scheme would survive as an equilibrium in a noncooperative setting.

99-0110
This paper provides a comprehensive economic analysis of scheduling decisions in an airline network. Although it is widely believed that the growth of hub-and-spoke networks has raised fight frequencies, the only analysis of this question is contained in a recent paper by Berechman and Shy (1998), who analyze an incomplete model. The present analysis shows that flight frequency is higher in a hub-and-spoke (HS) network than in a fully-connected (FC) network, confirming the conventional wisdom. It is also shown that some passengers who could make a connecting trip under the HS network may find the existing flights not sufficiently convenient given their long duration, thus choosing not to travel. By contrast, all passengers choose to travel under the FC network. The welfare analysis shows that the airline provides excessive flight frequency relative to the social optimum in both the FC and HS cases, and that its choice of network type exhibits an inefficient bias toward the HS network.

99-0111
This century and the history of modern statistics began with Karl Pearson's, [181], (1900) goodness-of-fit test, one of the most important breakthroughs in science. The basic motivation behind this test was to see whether an assumed probability model adequately described the data at hand. Then, over the first half of this century we saw the developments of some general principles of testing, such as Jerzy Neyman and Egon Pearson's,[159], (1928) likelihood ratio test, Neyman's,[155], (1937) smooth test, Abraham Wald's test in 1943 and C.R. Rao's score test in 1948. All these tests were developed under the assumption that the underlying model is correctly specified. Trygve Haavelmo,[99], (1944) termed this underlying model as the priori admissible hypothesis. Although Ronald Fisher,[80], (1922) identified the "Problem of Specification" as one of the most fundamental problems in statistics much earlier, Haavelmo was probably the first to draw the attention to the consequences of misspecification of the priori admissible hypothesis on the standard hypothesis testing procedures. We will call this the type-III error. In this paper, we will deal with a number of ways that an assumed probability model can be misspecified, and discuss how some of the standard tests could be modified to make them valid under various misspecification.

99-0112
Agency problems in inter-firm trading relationships are severe in developing and transitional economies because of the limited decentralized information that can support contract enforcement and because the timing of intermediate goods production and payment differ. We derive the consequences for the equilibrium distribution of firm structures, production, prices, profits and trade in developing and transitional economies. Within a multi-market setting, we characterize equilibrium outcomes both for firms that are directly affected by contracting problems and those that are not. The equilibrium features both excessive vertical and excessive development of small scale retail enterprises; and insufficient, inefficient inter-firm trade. Average profits of vertically integrated firms are higher and those of small scale retail enterprises and intermediate suppliers are lower than they would be were enduring trading relationships more easily established.

99-0113
This paper looks at the strategic behavior of multinational corporations (MNCs) in less developed countries. We start with the premise that MNCs have superior technologies, and that domestic firms lack informational access to this superior technology. Workers trained on the MNC technology can transmit the information to competing or start-up domestic firms. We derive conditions under which multinationals strategically offer their workers higher wages than domestic firms to prevent domestic firms form poaching their workforce and learning their trade secrets. With quantity competition in the domestic market, MNC’s offer higher wages if and only if their technology advantage is sufficiently great and the output goods are sufficiently close substitutes. With price competition, the MNC always offers the wage premium. We also derive conditions under which multinationals inefficiently divide job tasks between workers in order to raise the number of trained workers that the domestic form must acquire to learn the MNC’s trade secrets.

99-0114
On the NYSE and exchanges that feature open limit order books, larger orders receive worse prices. Accordingly, market microstructure theory has focused on developing consistent models. However, on exchanges such as the London Stock Exchange, NASDAQ and FX markets, larger orders receive better prices on average. In this paper, we argue that differences in market design can explain this finding. On the LSE and NASDAQ, in sharp contrast to the NYSE or exchanges that feature open limit order books, competition between dealers is largely intertemporal: a trader identifies a particular dealer and negotiates a final price with only the intertemporal threat to switch dealers imposing pricing discipline on the dealer. We show that dealers will offer greater price improvement to more regular customers, and, in turn, these customers optimally choose to submit larger orders.

Hence empirically, we predict that there should be a striking difference between the relationship between price impact and trade size on exchanges where all orders are immediately exposed to price competition, such as the NYSE, where price impact and trade size should be positively correlated, and exchanges where competition is largely intertemporal, such as London, where price impact and trade size should be negatively correlated. We derive the implications for inter-dealer trade, dealer profits, and find testable restrictions for pricing across different traders and order sizes. We test the predictions using data from the LSE. The results offer strong support for our hypothesis that on the LSE, broker-dealer relationships drive pricing.

99-0115
This paper derives and tests the implications of relative performance incentives for the forecasts of financial analysts. If, in addition to compensation for absolute forecast accuracy, analysts are compensated on the basis of how their forecasts compare with those of other analysts, then earlier forecasts affect later announcements. The theoretical predictions regarding the direction of bias are tested using data on individual analysts’ forecasts of earnings per share (EPS). We find very strong evidence that the last analyst to report a forecast "over-emphasizes" his private information by reporting a contrarian forecast that overshoots the consensus (mean) forecast. We also find modest evidence that investors do not unravel biases in the forecasts of firms followed by fewer analysts.