Neuroeconomics: Why Economics Needs Brains

Neuroeconomics uses knowledge about brain mechanisms to inform economic theory. It opens up the “black box” of the brain, much as organizational economics opened up the theory of the firm. Neuroscientists use many tools—including brain imaging, behavior of patients with brain damage, animal behavior and recording single neuron activity. The key insight for economics is that the brain is composed of multiple systems which interact. Controlled systems (“executive function”) interrupt automatic ones. Brain evidence complicates standard assumptions about basic preference, to include homeostasis and other kinds of state‐dependence, and shows emotional activation in ambiguous choice and strategic interaction.     

Mobile Termination: What is the “Right” Charge?*

The regulation of fixed-to-mobile (F2M) termination charges has become increasingly important in Europe, Australia, and New Zealand under the Calling Party Pays principle. In the absence of any regulation, mobile operators have an incentive to set F2M termination charges “too high”. We show that the setting of the optimal F2M termination charges depends on the significance of network externalities, the intensity of competition in the mobile sector, and the distribution of customer preferences. We also discuss the merits of possible remedies which are not very intrusive. Tommaso Valletti has advised the European Commission and the UK regulator (OFCOM) on mobile termination and Frontier Economics has acted as advisor to a number of mobile operators on the same issue. The views expressed in this paper are those of the authors alone. We thank Carlo Cambini, Yulia Kossykh, participants to the 15th Biennial International Telecommunications Society Conference, the 3rd International Conference on Applied Infrastructure Research in Berlin, for their comments. We also thank the editor Michael Crew and two anonymous referees for many suggestions that have greatly improved the paper.     

Product differentiation, cost‐reducing mergers, and consumer welfare

Abstract.  Cost synergies are an explicitly recognized justification for a two‐firm merger, and empirical techniques are now widely used to assess the impact of cost‐reducing mergers on prices and welfare in the post‐merger market. We show that if the merger occurs in a vertically product differentiated market, then the merger will lead to a reduction in product offerings that limits the usefulness of pre‐merger empirical estimates. Indeed, we further show that in such markets, two‐firm mergers will typically lead to higher prices regardless of the merger's cost savings. JEL classification: L10, L41     

Stress and consumer behavior

Although stress research has received increased attention in the behavioral and social sciences, it has been virtually ignored by marketing researchers. This paper attempts to advance the stress perspective as a useful framework in consumer research. First, the author presents theoretical and conceptual foundations of stress research. Second, the author develops a general conceptual model of the causes and consequences of stress on the basis of theory and research. The model serves as a blueprint for presenting theory and research on stress, organizing and interpreting findings of consumer studies in the context of stress theory, and developing propositions for needed research. Finally, the author provides a research agenda to guide future studies in this area.     

Combining choice modelling and multi-criteria analysis for technology diffusion: An application to the uptake of electric vehicles

Efforts to reduce greenhouse gas emissions in the residential sector by adopting technologies such as solar photovoltaics and electric vehicles (EVs) have major implications for the capacity of electricity distribution networks, particularly at local areas with high uptake. Consumer decisions to purchase these technologies are also influenced by several complex criteria such as costs/benefits, performance, appeal/status, risk, psychographics, and demographics. This complexity motivated the development of an innovative diffusion model, incorporating features of multi-criteria analysis and choice modelling, to estimate the adoption of these technology options spatially across the landscape of heterogeneous consumers. We test the model to forecast market share of EVs through to 2030, using the vehicle stock across all 1.5 million households in Victoria, Australia. Seven financial and non-financial criteria were included and calibrated via focus groups and a large‐scale survey. Annual change of criteria values and their elasticity to adoption were incorporated. Geographical differences in uptake of EVs were primarily due to driving distance, employment status and household income, with urban areas having about three times the proportional uptake. By testing the model for a range of incentives, we demonstrate its capability to inform and evaluate policy options.     

Why the structure of capital and the useful lives of its components matter: A test based on a model of Austrian descent

This paper centers on the structure of capital and the useful lives of its components by considering an economy with two representative firms, one producing a necessity and another producing a luxury. This difference determines their reinvestment opportunities. Therefore, while the one applies replacement, the other adopts scrapping. However, as these capital policies lead to different service lives, the analysis confronts the issues raised by Miller (Review of Income and Wealth 29:284–296, 1982, Review of Income and Wealth 36:67–82, 1990) and deals with them by drawing on Haavelmo’s (A study in the theory of investment, Chicago: The University of Chicago Press, 1960) suggestions regarding the aggregation of capital. Among other findings, it turns out that the simulation results are highly robust, thus demonstrating that real-world implications may be even stronger than strictly suggested by the model.

Liquidity traps, learning and stagnation

We examine global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome we recommend augmenting normal policies with aggressive monetary and fiscal policy that guarantee a lower bound on inflation. In contrast, policies geared toward ensuring an output lower bound are insufficient for avoiding deflationary spirals.     

Economics in the pre-college curricluum

This study analyzes the effects of integrating economics into the social studies curriculum and the effects of participation in the Stock Market Game (SMG) on the Maryland School Performance Assessment Program (MSPAP) economics outcome scores. The study was carried out using state summary and disaggregated data and summary data for each school system in Maryland. The 1992 and 1994 MSPAP economics outcome scores for grades 3, 5, and 8 constituted the dependent variable with the level of integration of economics in the curriculum and the level of participation in the SMG being the main explanatory variables. Using comparative static analysis, two related but separate questions were addressed. The first question asks how school systems with different levels of integration of economics in the curriculum and with different levels of participation in the SMG compare to the state average. The second question asks how these groupings compare to each other. It is this second question that lends itself to more rigorous hypothesis testing.Funding for this project was provided in part by the Securities Industry Foundation for Economic Education, the Council on Economic Education in Maryland, and the Towson State University Faculty Development and Research Committee.     

A New Test of the Real Interest Rate Parity Hypothesis: Bounds Approach and Structural Breaks

The real interest rate parity hypothesis is tested using data for the group of seven industrialized countries (G7) over the period 1970–2008. The contribution is two‐fold. First, the paper utilizes the bounds approach in order to overcome uncertainty about the order of integration of real interest rates. Second, a test is made for structural breaks in the underlying relationship using a multiple structural breaks test. The results indicate significant parameter instability and suggest that, despite the advances in economic and financial integration, real interest rate parity has not fully recovered from a breakdown in the 1980s.     

The future of the mobile phone business

One of the fastest growing technologies of our times is that of mobile phones. In this article we use the assumption that the diffusion of mobile technology, as measured by the number of active mobile accounts, follows the well known S-curve of natural growth in competition systems. The accuracy of the logistic fit is tested against actual data for the whole world, Europe, China and the GSM system. Using the produced models predictions concerning the future of mobile business are deliberated.According to these models active mobile accounts around the globe are expected to grow from 1.7 billion in 2004 to approximately 2 billion in 2008, reaching a peak penetration of 29.2%. Growth barriers, apart from the age of the potential user, are also low income and extreme poverty. Europe, early adopter of mobile technology and leader in active mobile accounts against all other regions in the world, has apparently reached a peak with almost every European, apart from the very young or very old, using a mobile phone. The mobile market in China is anticipated to exceed 500 million active accounts and may increase even further depending on the economic and social reform that is currently under way in that part of the world. GSM will most likely remain the leading mobile technology in the future as it is today.The growth process for the world, Europe, and the GSM system is almost completed and during this stage instabilities may occur before the potential emergence of a new wave of growth.