Regulators and firms often use incentive schemes to attract skillful agents and to induce them to put forth effort in pursuit of the principals’ goals. Incentive schemes that reward skill and effort, however, may also punish agents for adverse outcomes beyond their control. As a result, such schemes may induce inefficient behavior, as agents try to avoid actions that might make it easier to directly associate a bad outcome with their decisions. In this paper, we study how such caution on the part of individual agents may lead to inefficient market outcomes, focusing on the context of natural gas procurement by regulated public utilities. We posit that a regulated natural gas distribution company may, due to regulatory incentives, engage in excessively cautious behavior by foregoing surplusincreasing gas trades that could be seen ex post as having caused supply curtailments to its customers. We derive testable implications of such behavior and show that the theory is supported empirically in ways that cannot be explained by conventional price risk aversion or other explanations. Furthermore, we demonstrate that the reduction in efficient trade caused by the regulatory mechanism is most severe during periods of relatively high demand and low supply, when the benefits of trade would be greatest

During the summer of 2005, the Big Three U.S. automobile manufacturers offered a customer promotion that allowed customers to buy new cars at the discounted price formerly offered only to employees. The initial months of the promotion were record sales months for each of the Big Three firms, suggesting that customers thought that the prices offered during the promotions were particularly attractive. In fact, such large rebates had been available before the employee discount promotion that many customers paid higher prices following the introduction of the promotions than they would have in the weeks just before. We hypothesize that the complex nature of auto prices, the fact that prices are negotiated rather than posted, and the fact that buyers do not participate frequently in the market leads customers to rely on “price cues” in evaluating how good current prices are. We argue that the employee discount pricing promotions were price cues, and that customers responded to the promotions as a signal that prices were discounted.

New car customers who use a trade-in engage in two transactions with a new car dealer; they buy new cars from the dealer and sell their existing cars to the dealer. Car dealers are willing to trade off profits made on the new car versus profits made on the trade-in. Customers may or may not view the transactions this way. In this paper, we investigate whether both parties view themselves as negotiating over a single surplus amount that can be divided across two transactions. If so, new car and trade-in profit margins should be be negatively correlated: the better the deal the customer gets on a new car, the less good deal one should expect the customer to get on the trade-in. An alternative is that customers or dealers—-or both-—view the transaction as two separate negotiations. If this is the case, then customers should either todo well in both the new car and the trade-in negotiations, or do poorly in both. If this is the case, then one should expect to see new car and trade-in margins be positively correlated, among similar transactions.

Many environmental regulations encourage the use of "clean" inputs. When the suppliers of such an input have market power, environmental regulation will affect not only the quantity of the input used but also its price. We investigate the effect of the Title IV emissions trading program for sulfur dioxide on the market for low-sulfur coal. We find that the two railroads transporting coal were able to price discriminate on the basis of environmental regulation and geographic location. Delivered prices rose for plants in the trading program relative to other plants, and by more at plants near a low-sulfur coal source.

Automobile manufacturers frequently use promotions involving cash incentives. While payments are nominally directed to either customers or dealers, the ultimate beneficiary of the promotion depends on the outcome of price negotiation. We use program evaluation methods to compare the incidence of these two types of promotions. Customers obtain 70 to 90 percent of a customer rebate, but only 30 to 40 percent of a dealer discount promotion, a $500 difference for a typical promotion. Our leading hypothesis is that pass-through rates differ because of information asymmetries: customer rebates are well-publicized to customers, while dealer discount promotions are not.

We examine the effect of competition on second-degree price discrimination in display advertising in Yellow Pages directories. Our main empirical finding is that while competition is associated with lower prices, the association is not proportional along the range of product offerings. Instead, directories that face more competitors offer price schedules that display a greater degree of curvature than directories facing less competition. This means that purchasers of the largest ads pay less per ad size relative to purchasers of small ads in more-competitive directories.

This paper examines determinants of Olympic success at the country level. Does the United States win its fair share of Olympic medals? Why does China win only 6% of the medals even though it has one-fifth of the world's population? We consider the role of population and economic resources in determining medal totals from 1960 to 1996. At the margin, population and income per capita have similar effects, suggesting that both a large population and high per capita GDP are needed to generate high medal totals. We also provide out-of-sample predictions for the 2000 Olympics in Sydney.

A firm that knows that cutting price may trigger a price war must weigh present versus future gains and losses when considering such a move. The firm's financial situation can affect how it values such tradeoffs. Using data on 14 major airlines between 1985 and 1992, I test the hypothesis that firms in worse financial condition are more likely to start price wars. Empirical results suggest that this is true, particularly for highly leveraged firms. The article also explores which firms join existing price wars and finds that a firm is more likely to enter a price war the greater the share of its traffic on routes served by the price-war leader.

Empirical studies have confirmed the prediction of theoretical models that contact in multiple markets may enhance firms' abilities to tacitly collude and consequently achieve higher prices and profits. It has remained largely unexplored, however, how firms coordinate their actions. This paper identifies a method of pricing in the cellular telephone industry that seems to enable firms to coordinate their actions across markets. This pricing pattern is found to raise prices by approximately 7–10%, and cannot be attributed to a variety of noncooperative explanations.

We investigate how gasoline prices a ffect automobile purchases. We find that the adjustment of equilibrium market shares and prices in response to changes in usage cost varies dramatically between new and used markets. In the new car market, the adjustment is primarily in market shares, while in the used car market, the adjustment is primarily in prices. The e ffects are largest for the most- and least-fuel efficient cars. We argue that the di fference in how gasoline costs aff ect new and used automobile markets can be explained by di fferences in the supply characteristics of new and used cars.

An industry adage held that “there are two types of rental car companies: those that lose money and Enterprise.” The company that would become Enterprise Rent-A-Car was started in 1957 in St. Louis, Missouri, by Jack Taylor. Taylor set up Enterprise offices in neighborhoods rather than at airports because he believed that Americans would welcome a local option for renting cars when their own vehicles were being repaired. In 2010 Enterprise had more than 6,000 rental locations in the United States and a fleet of 850,000 cars in service. Its parent, Enterprise Holdings (comprising Enterprise, National, and Alamo brands) accounted for nearly half of the car rental market and was more than twice the size of Hertz, the number two competitor. Enterprise’s competitive advantage was the result of the combination of its practices in hiring, training, compensation, organization, customer service, IT, and fleet management, among others.

Founded in 1971 and acquired by CEO Howard Schultz in 1987, Starbucks was an American success story. In forty years it grew from a single-location coffee roaster in Seattle, Washington to a multibillion-dollar global enterprise that operated more than 17,000 retail coffee shops in fifty countries and sold coffee beans, instant coffee, tea, and ready-to-drink beverages in tens of thousands of grocery and mass merchandise stores. However, as Starbucks moved into new market contexts as part of its aggressive growth strategy, the assets and activities central to its competitive advantage in its retail coffee shops were altered or weakened, which made it more vulnerable to competitive threats from both higher and lower quality entrants. The company also had to make decisions on vertical integration related to its expansion into consumer packaged goods.