ADVERTISING AS A PRIVATELY SUPPLIED PUBLIC GOOD

In this paper we take a view of advertising and certain other nonprice competition as public goods. This leads to a new fundamental justification of the zero price distribution of advertising, coupled with a mark-up of the advertised good as a disguised form of price discrimination which approximates that required for efficient pricing of a public good. Further, we present a numerical counterexample wherein the commonly-observed zero price distribution of advertising is shown to lead to higher consumer and seller welfare than its separate sales at cost.     

THE INCENTIVES FOR RESALE PRICE MAINTENANCE UNDER IMPERFECT INFORMATION

This paper considers both the incentives for and the welfare effects of resale price maintenance (RPM) in retail markets characterized by imperfect consumer information. In markets where point-of-sale information on the product is essential for sales and information on prices is costly, RPM permits manufacturers with some monopoly power to resolve two incentive conflicts with retailers. First, because retailers with price-setting powers do not appropriate the gains in profit to an upstream manufacturer from actions taken to increase demand, their incentives to inform consumers of the product and to set low prices are inadequate. This purely vertical externality results in the classic "double mark-up" of final prices. Second, when consumers' costs of price search vary, stores offering low prices and no information can exist in the market equilibrium. These discount houses free-ride on the informational services of high-price informing retail outlets — a horizontal externality. In the imperfect information setting of this paper, (1) administered pricing improves monopolists' profits by resolving the incentive conflict; (2) the profitable use of a price floor reduces the maximum retail price charged and may reduce the average retail price; (3) price floors or administered prices can be Pareto-improving and more likely welfare (surplus)-improving; (4) price floors are welfare-improving.     

DOES RELATIVE THINKING EXIST IN REAL‐WORLD SITUATIONS? A FIELD EXPERIMENT WITH BAGELS AND CREAM CHEESE

Many experiments show that consumers consider relative price differences even when only absolute price differences are relevant from an economic perspective, a phenomenon that was denoted “relative thinking.” These experiments, however, were conducted using hypothetical questions. To test whether the relative thinking bias also exists in real‐world situations, a field experiment where subjects could purchase either a bagel or a bagel with cream cheese was conducted. The monetary addition for the cream cheese was kept constant ($0.20) in both treatments, but the bagel's price varied ($0.05 in one treatment and $0.30 in the other). Relative thinking then implies that more people should add the cream cheese when the bagel's price is higher, because the relative price increase for the cream cheese is then smaller. However, the results did not document any relative thinking—more people (in percentage of those who purchase) added the cream cheese when the bagel's price was lower (the difference between the treatments, however, was not statistically significant). A replication of the experiment as a hypothetical‐scenario experiment did document relative thinking, suggesting that introduction of financial incentives might alleviate relative thinking. (JEL C93, D01, D10, L00, M31)     

RIDING THE WAVE AND CLAIMING OWNERSHIP OVER ISSUES: THE JOINT EFFECTS OF ADVERTISING AND NEWS COVERAGE IN CAMPAIGNS

Using a realistic experimental design, this article tests twohypotheses concerning the relative effectiveness of campaignadvertising. The first (issue-ownership) hypothesis predictsthat candidates gain the most from advertising on issues overwhich they can claim "ownership." The second (riding-the-wave)hypothesis predicts that candidates are better off when theysynchronize their advertising with news coverage. Our two studiesyield support for the issue-ownership hypothesis, but no evidenceof interactive effects between advertising and news.     

EFFICIENT TAX REPORTING: THE EFFECTS OF TAXPAYER LIABILITY INFORMATION SERVICES

The complexity of the individual income tax system can give rise to both under‐ and overreporting of liability, thus creating a wedge between taxpayer perceptions of the price of public services and their actual cost, and potentially leading to budget misallocations and associated efficiency losses. This study uses theory and experiments to evaluate the effectiveness of taxpayer service programs that endeavor to resolve uncertainty over tax liability. To do so, we induce uncertainty over tax liability and investigate the effects of both service accuracy and reliability. We find participants are less likely to file when tax liability is uncertain but the provision of information offsets this effect; furthermore, it appears that simply providing a service, even one that imperfectly reveals liability, increases the propensity to file and the accuracy of the filing. When a service that promises to resolve uncertainty completely is requested but not delivered, the result is underreporting even more severe than in a setting where no service is available. (JEL H2, H26, C91)     

Do buyers and sellers evaluate air pollution reduction differently? Experimental evidence from China

This paper is the first study to investigate the good dealness account of the endowment effect in non-market goods. We designed a within-subjects experiment to measure the value of air pollution reduction through the evaluation of a market good, PM 2.5 filters. We divided the subjects into buyers and sellers and asked them to trade four PM 2.5 filters using the Becker–DeGroot–Marschak auction under two treatments: a) a drop in air quality, which served to increase the market price of the filters; and b) the receipt of information on the relationship between death rates and air pollution, which served to increase the intrinsic value of the filters. Our results show that buyers’ willingness to pay for pollution reduction did not increase when air pollution worsened but did increase when informed of the possibility of health damage from air pollution. Sellers’ willingness to accept for air quality deterioration increased when pollution worsened but remained the same upon receiving information about health damage. We conclude that sellers are more sensitive to changes in market price, while buyers are more sensitive to changes in intrinsic value. Our findings support the theory of seeking a good deal in explaining the endowment effect.     

THE EFFECT OF UNIT FEES ON THE CONSUMPTION OF QUALITY

A law-of-demand explanation to the Alchian-Allen, or "shipping the good apples out," proposition rests on a change in the relative price of quality when a unit fee is introduced. However, the manner in which quality is consumed is crucial. In some cases, for instance, there is no substitution between the quality attribute and the priced, quantity-measured attribute. This paper shows that in these cases the relative price of quality is unchanged by a unit fee. Nevertheless, while the "unit fee" proposition fails to obtain for individual choice, it does hold in aggregate.     

MEDIA CONCENTRATION AND CONSUMER PRODUCT PRICES

This article examines the interaction of commercial media and retail producers of well-known consumer products when advertising is used to differentiate brands. In particular, I address how competition in the media market affects choices of advertising and program quality. The results suggest counterintuitively that advertisers may actually prefer media markets with less competition for audiences. Product differentiation through advertising is more effective when media markets are less competitive, leading to higher prices for advertised products. As a result, media concentration may lead to higher profits for advertising firms if the additional revenue exceeds the higher advertising costs associated with media concentration. (JEL L11 , L82 , M37 )     

INFORMATION AND THE PROVISION OF QUALITY DIFFERENTIATED PRODUCTS

Governments often enact information provision policies to overcome asymmetric information of product qualities. We show that increasing awareness among consumers of the quality of a good can (but will not always) encourage firms to produce goods with higher levels of quality. Even if product qualities increase, social welfare may fall as information provision results in too much product differentiation. We show that the effectiveness of emission taxes and output subsidies are affected by the level of consumer knowledge of product quality, and we identify conditions under which information provision is welfare enhancing relative to these price instruments. ( JEL L1 5, Q58)     

Issues of quality and consumer rights in the health care market

This Issue Brief describes how the structure of the health care market has changed in the recent years. It outlines the growth in managed care and the changes in the types of managed care plans available. In addition, it discusses the issue of quality in the health care market. It also includes an overview of the legislative topics and issues relating to quality and consumer rights that policymakers are currently considering. Growth in national health expenditures, the medical care price index, and employer health care costs has slowed significantly since 1990. This decreased growth has coincided with substantial increases in managed care plan enrollment. The percentage of employees enrolled in managed care plans increased from 48 percent to 85 percent from 1992 to 1997. Quality is a multidimensional concept. Although individuals may agree on its components, they may disagree on the relative importance of these components. Therefore, disagreement exists not only on how to measure quality but also on how it is defined. Consequently, policy decisions need to be based on an evaluation of a particular law's effect as opposed to its stated goal or intent. This distinction is important because a law that addresses access or consumer rights does not necessarily address the quality of care a consumer receives. Ultimately, whether an individual believes that a law truly addresses quality will depend in a large part on his or her subjective opinion of what quality entails. To date, comparison of the quality of managed care plans with that of fee-for-service plans has not produced results that uniformly differentiate between these two plan types in either a positive or a negative way. In addition, it is important to note that the current debate on the quality of care provided in the health care market is not new to the present managed care era. The regulations and mandates discussed in this report would not guarantee increased quality in the health care market, unless quality is defined as easier access for those with health insurance. However, if quality is defined as the success of the outcomes of health services provided, the effect of these regulations on quality is in need of further research. Yet, the regulations would have some impact on the costs of health benefits and insurance. This impact has been estimated to be relatively small to substantial, depending on the interpretation of the mandates and assumptions derived from that interpretation. Regardless of the magnitude of the estimated increases, some research has shown that these regulations could have serious implications for the likelihood of small businesses offering health benefits. While these health plan regulations effect on quality depends on one's definition of quality, costs would increase regardless of the definition one uses. Consequently, these regulations would come at a price. Thus, legislators must decide between: (a) imposing regulation that would increase access and consumer "rights" for those with insurance but would be of questionable value to the quality of outcomes, and (b) allowing existing market forces to improve quality through experimentation and competitive forces.     

DISCOUNT PRICING

We investigate the practice of framing a price as a discount from an earlier price, with information such as “was $200, now $100.” We discuss two reasons why a discounted price—rather than a merely low price—can make a consumer more willing to purchase. First, a high initial price can indicate the seller has chosen to supply a high-quality product. Second, when a seller with limited stock runs a clearance sale, later consumers infer that unsold stock has higher expected quality when its initial price was higher. We also suggest a behavioral explanation, which is that consumers with reference-dependence preferences are more likely to buy if they perceive the price as a bargain relative to the earlier price. Discount pricing is therefore an effective marketing technique, and a seller may wish to deceive potential customers by offering a false discount. The welfare effects of regulation to prevent fictitious pricing are subtle, with potential unintended consequences, and depend on whether consumers are sophisticated or naive. (JEL D18, D42, D83, L15, M31)     

STRATEGIC INFORMATION DISCLOSURE: THE CASE OF MULTIATTRIBUTE PRODUCTS WITH HETEROGENEOUS CONSUMERS

We examine the incentives for firms to voluntarily disclose otherwise private information about the quality attributes of their products. In particular, we focus on the case of differentiated products with multiple attributes and heterogeneous consumers. We show that there exist certain configurations of consumers' multidimensional preferences under which a firm, no matter whether producing a high‐ or low‐quality product, may choose not to reveal the quality even with zero disclosure costs. The failure of information unraveling arises when providing consumers with more information results in more elastic demand, which triggers more intensive price competition and leads to lower prices and profits for competing firms. As a result, the equilibrium in which disclosure is voluntary may diverge from that in which disclosure is mandatory. (JEL L15, L5)     

How changes in price and salary affect economic satisfaction: Information integration models and inference processes

Preliminary studies demonstrated the interactive effects of changes in salary and inflation rate on feelings of personal satisfaction, and showed that the effects of price increases in different cost categories could he described by a weighted average model. Participants in the main study were presented with varying hypothetical economic situations which included salary changes (raises) as well as specific price changes. A ratio model was found to describe how raise levels and price increases were combined. The rationality of this model was discussed in terms of how variations in price and income would affect the amount of a given commodity that could he purchased. On some trials only partial information was presented. Low ratings of personal satisfaction were produced when information about raises was missing, and high ratings were produced when information about price increases was missing. These results were discussed in terms of inferences people make when a key source of information is missing.     

INFORMATION STRUCTURES OF PRODUCT MARKETS

Buyers demand continuing information flows to guide their choices among competing product brands. They select portfolios of information types, some supplied by sellers of the branded goods, some not. This paper investigates the determinants of businesses' outlays on information (media advertising, sales force, other sales promotion). They include buyers' overall demands for information, buyers' access to sources not controlled by the seller, the relative efficiency of seller-supplied information, and competitive conditions in the product market. The hypotheses about effects on sellers' total information outlays are strongly supported. Some evidence appears on determinants of the mixture of information types they provide.     

COLLUSION FACILITATING AND COLLUSION BREAKING POWER OF SIMULTANEOUS ASCENDING AND DESCENDING PRICE AUCTIONS

This article demonstrates that a robust tacit collusion evolves quickly in a "collusion incubator" environment but is destroyed by the simultaneous descending price auction. Theories of collusion-producing behavior, along with the detail of the states on which strategies are conditioned, lead to a deeper understanding of how tacit collusion evolves and its necessary conditions. These theories explain how the descending price auction destroys the collusion. The experiments proceed by conducting simultaneous ascending price auctions in the collusion incubator. Then, once the tacit collusion developed, changing to the descending auction. The change moved prices from collusive levels to near-competitive levels. ( JEL C71, C92, D43, D44)     

Effect of content type on impact: editorial vs. advertising

This article examines the effect of content type whether news editorial surpass advertising. An anticipated finding was that news editorial would be more believable than advertising. However, this is not supported by the results of this study. For strong arguments, news editorial demonstrated an effect similar to that of advertising. However, for the weak argument, advertising had a stronger effect than did news editorial. Although message believability may be an important determinant of attitude toward the product under some circumstances, in others, argument quality may be even more important than content type.     

Young adolescents, tobacco advertising, and smoking

BACKGROUND: In adolescents aged 12-14, we measured attitudes to tobacco advertising. Our purpose is to understand the relation of these attitudes to tobacco use and identify the groups most influenced by the advertising. METHODS: Survey of adolescents on Gran Canaria Island, Spain, about aspects of family, school, peers, tobacco consumption, and tobacco advertising. The subjects of the double-stratified cluster sample were 1910 students at the same grade level in 33 schools; 86.6% were 13 or 14 years old, and 51.2% were boys. We generated measures for attitudes to tobacco advertising from replies to seven questions with ordinal scales by an analysis of categorical principal components. To relate attitude to tobacco advertising and the profiles of these adolescents, we used multiple regression and logistic regression models. RESULTS: Attitudes to tobacco advertising are related to some home and school factors, but most significantly to tobacco and alcohol consumption, to amount of time at home without adults, and to peer influence. CONCLUSIONS: It is possible to draw up profiles of the students most vulnerable to tobacco advertising, and to cluster them in two groups, the "vitalists" and the "credulous." The effect of cigarette ads is different between these groups. This study can help to orientate smoking prevention.     

IMPOSED HEALTH INSURANCE IN MONOPOLISTIC MARKETS: A THEORETICAL ANALYSIS

The impact of public health insurance on price and output of medical care is analyzed within the context of monopolistic markets for health services. An important result, which is not obtained in competitive markets, is that indemnity benefits cause smaller price increases than service benefits, both directly and indirectly through the effect of benefit structure on the production of information. Various types of price regulation are considered, including limitation to "usual, customary, and prevailing" levels, a frequently used technique. With a simple dynamic model this type of regulation is shown to cause chronic price inflation.     

Paying for no reason? (Mis-)perceptions of product attributes in separate vs. joint product evaluation

Consumer decision-making involves the evaluation of options either in isolation or in relation to other alternatives present at the environment. According to Hsee’s evaluability hypothesis, it is easier to evaluate product attributes when they are juxtaposed (i.e., presented jointly) than when they are presented in isolation from each other. Recent research has provided some support to the evaluability hypothesis for the attribute of perceived product quantity. The present research tests the hypothesis in relation to the attribute of perceived fairness. In two experiments, we show that when participants evaluate products in isolation from each other, they err in their judgment of product quantity, and, consequently, they mis-attribute fairness to the seller. In a third experiment, we further show that the inclusion of constant yet unfair price information does not affect the fairness and price judgments. These findings provide evidence for the psychological plausibility of the evaluability hypothesis for the attributes of fairness and product quantity. Moreover, they suggest that isolated product evaluation may be systematically suboptimal for consumers, even when pricing information is included. Therefore, effective consumer decision-making will benefit by allowing the joint evaluation of alternatives.