Vertical product differentiation under demand uncertainty

In this paper, I examine a quality-then-price game in a fully covered market where firms are uncertain about consumer tastes regarding quality. The equilibrium is characterized under the fixed costs and variable costs of quality improvement, respectively. It is shown that the uncertainty is a differentiation force, and the quality differentiation increases more under variable costs than under fixed costs. In addition, an increase in uncertainty leads to higher profits and higher social welfare regardless of whether under fixed or variable costs. This result contrasts with the lower welfare in the Hotelling model with uncertainty. Finally, an analysis of the case of partial market coverage with uncertainty completes this paper.     

Some international evidence on the stability of aggregate import demand function

This paper empirically analyses the stability of the aggregate import demand function for G7 countries. The standard cointegration test and a test developed by Gregory and Hansen are performed. The results of standard cointegration tests suggest that there is no stable cointegrating relation between real import, real GDP and relative import price for all G7 countries. The cointegrating relation is empirically supported for France and Germany if structural change for cointegrating vector is explicitly taken into consideration. The cointegrating relation is empirically rejected for Canada, Italy, Japan, the UK and the USA. Thus, the stimulation of domestic business conditions will not necessarily link the quantity of imports for these five countries.     

Estimating the import demand function for China

This paper estimates the import demand elasticity for China using three fully efficient cointegrating regressions and the autoregressive distributed lag (ARDL) method. This paper is the first to accommodate the perception of global risk in an investigation of the information transmission mechanism between the relationship import demand and its determinants in China. The empirical results show that real imports are cointegrated with domestic economic activity, real effective exchange rate, and the perception of global risk. Domestic income is found to have a significantly positive effect on imports. Contrary to theory, the real effective exchange rate carries negative coefficients, which suggests that a decrease in external competitiveness (appreciation) will decrease the level of imports in the case of China. One of the reasons for this may be the tied anti-dumping duty on some import items. Since the perception of global risk adversely affects China's aggregated imports, policy-makers should consider the degree to which the perception of global risk affects the implementation of trade policies.     

Vertical product differentiation and entry deterrence

I study how a potential entrant influences quality in a model of vertical product differentiation with quality-dependent production costs. With identical costs, the incumbent will always deter entry if possible, i.e., if fixed costs are high. Quality will be set at a level lower than or equal to the optimal quality under either duopoly or monopoly. Results are completely different when the entrant has substantially lower costs. They are explained by the relative location of the entrant's quality best response to the incumbent's optimal quality choice in monopoly. This sheds new light on the influence of industrial policy on market conduct.     

Vertical product differentiation and two-sided markets

We model platform competition in a market where products are characterized by cross network externalities. Consumers differ in their valuation of these externalities. Although the exogenous set-up is entirely symmetric, we show that platform competition induces a vertical differentiation structure that allows for the co-existence of asymmetric platforms in equilibrium. We establish this result in two set-ups: in the first one platforms commit to prices, in the second one they commit to network sizes.     

The import price index with trade barriers: theory and evidence

The standard economic import price index hinges on an assumption of free trade. Applying the index to situations with barriers to trade yields biased results compared to a true import price index. To circumvent this problem, it is common to use average prices, such as unit values, as an aggregator function. However, the use of average prices is not rooted in economic theory. In this paper, I generalise the economic import price index to allow for barriers to trade in the form of quantity constraints. To illustrate the theoretical framework, I use the case of imports of textiles to Norway from 1988 to 1997. I find that a standard economic import price index, such as the Laspeyres index, grossly overstates import costs and that this bias is significantly reduced by using unit values.     

A cost function analysis of import demand for Nigeria

The article uses a translog cost function to examine the substitution relations among capital, labour and imports. The results show that capital has a substitute relation with domestic labour and import. However, labour and import have complementary relationship. The implication of this finding is that liberalization policies, if pursued vigorously, could impart positively on the demand for labour. In addition, it suggests that economic growth could be enhanced through trade liberalization.     

Price equilibrium in address models of product differentiation: unit-elastic demand

Summary. I present a class of address models of product differentiation with unit-elastic individual demand and show the existence of Nash equilibrium in prices under assumptions on utility functions and the taste and income heterogeneity across consumers. This paper complements the work by Caplin and Nalebuff (1991, Econometrica), who analyze unit demand models of product differentiation. Received: December 28, 1998; revised version: September 5, 2001     

A cost function analysis of import demand and growth in South Africa

This study investigates the substitutability relationships among capital, labor, and imported inputs for South Africa, utilizing the estimates obtained from an aggregate cost function. Our results are consistent with the hypothesis that capital is a substitute for both domestic labor and imports, but that labor and imports are complementary inputs. This latter result suggests that relaxing South African trade restrictions may have a positive impact, in both the long and the short run, on the demand for domestic labor. Other results suggest that the reduction of market impediments may also positively impact the production of investment goods and economic growth.     

A general theory of demand for information about product quality

The purpose of this paper is to construct a general theory—analogous to the neoclassical theory of consumer demand—of demand for information about product quality. The model proposed here introduces uncertain product quality by assuming that commodities possess attributes which consumers desire and that an uncertain commodity possesses are unknown quantity of some attribute. It is assumed that information about the quality of uncertain products is available. The consumer's utility function of information is derived and his information demand function is obtained.Partial analogues of the neoclassical theorems are proved for information demand. Roughly, we find that the Slutsky matrix is symmetric and that a submatrix is negative definite. The negative definite submatrix contains those terms which measure the effect of (income compensated) changes in information prices on information demand.The analysis employed to obtain these results parallels—with some important modifications—the neoclassical analysis of commodity demand. The method used to obtain expressions for the Slutsky substitution terms is an extension of the approach introduced by McKenzie [10] and later used by Hurwicz and Uzawa [6]. This approach uses an “income compensation” function to arrive at an “income compensated” demand function.     

Effects of financial innovations on the money demand function: a Canadian evidence

A money demand function for the Candian economy has been estimated to explore if recent financial innovations have caused any significant change in the structural relationship between the demand for money and its determinants. Two sets of estimation results have been analysed: the first set is obtained by estimating a standard money demand function for several overlapping sample periods and the other set is obtained by estimating a modified version which included a dummy or a ratchet variable to capture the effects of innovations. The estimated equations have been used to generate ex-post simulations and forecasts. The results suggest that innovations have displaced the money demand function in the early 1980s. It also appears that the incorporation of approriate innovation variables improves the predictive performance of the money demand function.     

Advertising bans and product demand: how does marketing affect demand for a differentiated product?

Applied economists have made extensive use of product category time series studies to investigate the effects that an advertising ban might have on markets for potentially harmful products such as tobacco and alcohol. This paper argues that such studies can cast little light on the question, partly because they contain no plausible hypothesis of how advertising influences demand in a market for differentiated products. This paper extracts such an hypothesis from literature on the psychology of consumer behaviour, and uses it in simple economic model of a differentiated product market. The analytical results are sensitive to the precise assumptions made about the competitive structure of the market. This apparently negative conclusion is an important warning against making over-generalized predictions about the effects of an advertising ban. Finally, the paper makes several proposals about how its hypothesis could be tested empirically.     

Elasticities of import demand and economic development: The Irish Experience

In their paper on Venezuela, Melo and Vogt suggested two hypotheses concerning the relationship between the elasticities of import demand and economic development. In this paper these hypotheses are tested in relation to the experience of the Republic of Ireland, which it is argued closely approximated the conditions described by the Melo-Vogt hypotheses. Both hypotheses are rejected in the case of the Republic of Ireland, where it is argued special factors, such as the nature of the development strategy pursued and proximity to a large dominant trading partner, undetermined the conditions underlying the Melo-Vogt hypotheses.     

Aggregated and disaggregated import demand in China: An empirical study

This paper re-estimates both the aggregated and disaggregated import demand functions for China. We consider six groups of goods for the disaggregated imports based on the Standard International Trade Classification (SITC). The empirical findings from the dynamic ordinary least squares and autoregressive distributed lag regressions indicate that there are positive effects of the domestic income on imports. Second, contrary to theory but in line with previous studies, we obtain negative coefficients for the real effective exchange rate—a real appreciation in the Renminbi (RMB) would reduce import demand. Third, the period of the great global recession is negatively associated with the import demand in China. Fourth, the perception of tail risk negatively affects demand for the aggregated imports and five of six groups for the disaggregated imports. Fifth, the exchange rate reform had a positive impact on the aggregated imports, but our estimations report mixed results for the disaggregated imports. Finally, our results indicate that there is no aggregation bias for import demand in China.     

U.S. consumer demand for prize-linked savings: New evidence on a new product

We report on the potential American demand for prize-linked savings, a savings account that also awards prizes. Our survey data suggests significant interest among individuals with little actual savings, without regular saving habits, who play lotteries extensively, and are optimistic.     

LIML estimation of import demand and export supply elasticities

I apply limited-information maximum likelihood (LIML) to estimate import demand and export supply elasticities for a range of eurozone countries. The results highlight inconsistencies in the parameters estimated by LIML relative to an estimator that is robust to heteroskedasticity. The nature of the structural equations reveals complications generated by the limiting behavior of the parameters that can be replicated in finite samples. The results of simulations underscore improvements in parameter estimates in a three-dimensional panel, suggesting that the problem of limiting behaviour can be overcome in larger dataset/panels.     

Foreign exchange reserves and import demand in a developing economy: the case of Pakistan

Conventional specifications of import demand in LDCs have commonly been plagued by implausible and unstable parameter estimates. This paper shows the importance of imposing long‐run income homogeneity and of including foreign exchange reserves when estimating import demand function for an LDC. Using several cointegration techniques, it is shown that there is one linear relationship among real imports, real income, relative import prices and real foreign exchange reserves. In addition, by employing stability tests for cointegrated systems by Hansen (1992a), the paper shows that only when foreign exchange reserves and long‐run unit‐income homogeneity are accounted for does a constant parameter, long‐run equilibrium relation emerge for Pakistan. Also, the ensuing short‐run dynamic model is constant and data‐coherent. Finally, the study provides information on the speed of adjustment to equilibrium and the median and mean time lags of adjustments of real imports to changes in their determinants. The results indicate a quick response of real imports to changes in their determinants.     

Non-stationarity and the import demand for virgin olive oil in the European Union

The aim of this study is to analyse the importation of virgin olive oil to European Union countries, paying special attention to the Spanish export contribution. The method used is based on the estimation of an imports demand system. The novelty of the paper lies not in the modelling approach but in the explicit consideration of the univariate characteristics of series that is included in the analysis. Since prices are non-stationary, cointegration among them has been tested. Results indicate that they are cointegrated and that homogeneity holds. As a result, relative prices are included in the imports demand system. Structural change is also considered so as to account for the entrance of both Spain and Greece into the EU during the period studied. Results demonstrate the leadership of Spain within the EU virgin olive oil market as well as the increasing competitiveness of Greek oil.