Market definition and product segmentation for household credit

This article integrates several basic theoretical ideas on the nature of markets and product substitutability to develop an empirical method for defining markets using price data. The method is illustrated by an example of product market definition for a specific geographic area.     

COMMENT ON "THE IRREDUCIBLE ROLE OF DERIVED MARGINAL UTILITY IN DYNAMIC STOCHASTIC PROGRAMMING"

This comment shows why the Lagrange method can be simpler than dynamic programming in solving dynamic optimization problems.     

Homeownership as a Constraint on Asset Allocation

Personal preferences and financial incentives make homeownership desirable for most families. Once a family purchases a home they find it impractical (costly) to frequently change their ownership of residential real estate. Thus, by deciding how much home to buy, a family constrains their ability to adjust their asset allocation between residential real estate and other assets. To analyze the impact of this constraint on consumption, welfare, and post-retirement wealth, we first investigate an individual’s optimal asset allocation decisions when they are subject to a “homeownership constraint.” Next, we perform a “thought experiment” where we assume the existence of a market where a homeowner can sell, without cost, a fractional interest in their home. Now the housing choice decision does not constrain the individual’s asset allocations. By comparing these two cases, we estimate the differences in post-retirement wealth and the welfare gains potentially realizable if asset allocations were not subject to a homeownership constraint. For realistic parameter values, we find that the homeowner would require a substantial increase in total net worth to achieve the same level of utility as would be achievable if the choice of a home could be separated from the asset allocation decision. The robustness of the analysis is evaluated with respect to the model’s parameters and initial state variables. We find that changes in the values of the constraint (i.e., the value of the home) and the expected real rate of home value appreciation are the only state variables or parameter that is associated with a large change in asset allocation and/or the burden imposed by the housing constraint. This finding suggests the importance of a detailed examination of the impact of inter-regional differences in home prices and expected rates of appreciation on asset allocation and post-retirement wealth.     

An Introduction to the Symposium on the Use of Simulation in Applied Industrial Organization

Simulation offers a rigorous methodology for addressing policy or litigation issues that require a comparison of an observed state of the world with an unobserved one. Simulation employs a calibrated, structural oligopoly model to describe the unobserved state of the world. Calibration involves reliance on real-world observations to set the key parameter values in the model. Simulation is an increasingly important tool of the industrial organization economist, particularly in analyzing the competitive effects of mergers. Papers in this symposium illustrate merger simulations in a variety of contexts and one other application of simulation.     

How Corporate Diversity and Size Influence Spinoffs and Other Breakups

In recent months, the list of large diversified companies that have decided they would be worth more as several smaller, focused companies has grown sharply. In many of these cases, it has been outside pressure from activist investors that has motivated these actions by management—and with some pretty favorable results. But what is driving these strategic actions and what is most important in determining whether breakups create value? To answer this fundamental questions, it is critical to decide whether large, diversified companies have a value recognition problem or a value creation problem. In this article, the authors present and try to integrate the findings of two separate but related research studies on business diversity and size with the aim of identifying their implications for corporate strategy and helping company executives create more value for their investors. The specific reasons for underperformance by large diverse companies vary greatly, but there are a number of potential problems discussed in this article, including organizational “distance,” capital allocation, human capital allocation, cross subsidies, and ineffective governance. Instead of waiting for activist investors to demand a breakup, executives of large diverse companies should be proactive in addressing the potential weaknesses of their organizations. Private equity firms understand how to make diversification work and many of today's executives could learn some valuable lessons from these firms. Large diverse businesses should embrace “Internal Capitalism,” a corporate culture and set of practices that emphasizes the importance of strategic decision‐making that is linked through continuous performance assessment to the corporate goals of boosting efficiency and sustainable growth.     

Exploring a Regional Technical Efficiency Frontier in the Former USSR

Using 1971–90 panel data from a Siberian province, two econometric methods are used side by side to examine technical inefficiency with a suggestion as to how the methods might be used in sequence. Estimates derived from a random effects method reveal that technical inefficiency is both substantial and not time invariant. Results using either a random or fixed effects method suggest that existing estimates of technical inefficiency in centrally planned economies may be biased downward because of the choice of the estimation method. Using either method, the increasing technical inefficiency found is likely to be one cause of the decline in the performance of centrally planned economies and their regions.