Discrete choice models of firms’ strategic decisions

This paper outlines the methods and applications related to the nascent area of empirical discrete games in marketing. Many key strategic decisions firms make involve discrete choices such as deciding the location of a new store, determining where in product space to position a product, or what options to offer in a service contract. These decisions are fairly complex and typically involve the consideration of a number of demand, cost, and competitive factors. What makes these discrete choices particularly interesting (and challenging to analyze) is that they are interrelated with the choices of other firms because firms take into account the actions of their competitors when making their own decisions. We describe the basic problem of dealing with interrelated discrete choices in a game-theoretic framework and present the various estimation methods available. A discussion of the existing applications and future research opportunities concludes the article.     

Understanding the Development of IOS-Based Trading Partner Relationships: A Structural Model with Empirical Validation

This study develops a research model that explains the interorganizational system (IOS) network development process in the buyer-supplier relationship. Particular attention is paid to the antecedents and consequences of two types of influence strategies— exercising power and offering IOS support—that a buyer firm often uses in increasing IOS usage with its suppliers. The research model is empirically tested with data obtained through a field survey from a sample of 233 suppliers, each exchanging electronic data interchange (EDI) documents with a nationally known retailing buyer in the United States. We find that the buyer's decision to offer EDI-related support to a supplier is negatively associated with the transaction volume with the supplier but positively with the supplier's IT capabilities as well as the supplier's transaction-specific investments made toward the relationship with the buyer. On the other hand, the buyer's decision to exercise power to a supplier is found to be negatively associated with the transaction volume between the trading partners. Our findings also indicate that offering EDI support, rather than exercising power, is more effectual in inducing greater EDI usage between the trading partners. Finally, the buyer's EDI support is found to be positively associated with suppliers' perceived benefits of using EDI in the relationship that, in turn contributes to more voluntary use of EDI with the buyer.     

The impact of local unemployment rates on reservation wages and the duration of search for a job.

Evidence about the relationship of local unemployment rates and individuals' reservation wages and duration of search for a job if unemployed is sparse and mixed. This study uses US data from the Panel Study of Income Dynamics (PSID) to test whether relatively high local unemployment rates reduce the reservation wages of area residents or increase the duration of search. Labour search theory provides the grounding for the sample selection corrected simultaneous equations econometric model. In neither OLS nor 2SLS results is evidence found that local unemployment rates affect either reservation wages or the duration of search. These results suggest that policies targeted at alleviating unemployment should focus on increasing the demand for labour rather than hope that such policies will be beneficial if pursued in high-unemployment areas because of their effects on labour force characteristics.     

Advertising Spending and Perceived Quality

Marketing Letters - In this paper we examine the relationship between advertising spending and perceived product quality. The questions we ask are: Does a product's advertising spending...     

Is reversal of large stock‐price declines caused by overreaction or information asymmetry: Evidence from stock and option markets

The role of option markets is reexamined in the reversal process of stock prices following stock price declines of 10% or more. A matched pair of optionable and nonoptionable firms is randomly selected when their price declines by 10% or more on the same date. The authors examine the 1,443 and 1,018 matched pairs of New York Stock Exchange/American Stock Exchange (AMEX) and National Association of Securities Dealers Automated Quotations firms over the period from 1996 to 2004. It was found that the positive rebounds for nonoptionable firms are caused by an abnormal increase in bid–ask spread on and before the large price decline date. On the other hand, the bid–ask spreads for optionable firms decrease on and before the large price decline date. An abnormal increase in the open interest and volume in the option market on and before the large price decline date was also found. Overall, the results suggest that the stock‐price reversal neither is a result of overreaction nor can it be simply explained by the bid–ask bounce. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:348–376, 2009     

TIME-VARYING TERM PREMIA AND THE BEHAVIOR OF FORWARD INTEREST RATE PREDICTION ERRORS

In this paper I examine the time-varying expected term premium argument for the failure of the expectations hypothesis of the term structure of U.S. interest rates. Using an unobserved components model to estimate expected term premia from March 1951 to January 1991, I find considerable variation in estimated premia and significant persistence in their volatility over time.     

Innovation pathway to profitability: the role of entrepreneurial orientation and marketing capabilities

Drawing from the marketing capabilities and innovation literatures, we identify aprocess by which a firm’s entrepreneurial orientation impacts profits and show that it is dependent on marketing capabilities. Using a half-longitudinal design we integrate survey data with performance metrics over two time periods, from a sample of 190 firms. While the effect of entrepreneurial orientation (EO) on innovation is enhanced by architectural marketing capabilities, the effect of innovation outcomes on profits is enhanced by specialized marketing capabilities. Ultimately, the pathway from EO to performance, mediated by innovation, is positively significant at higher levels of both marketing capabilities. The results uncovered using Bayesian conditional process modeling, are robust to alternate model specifications, endogeneity tests, and provide insights into the capabilities-based understanding of entrepreneurism-marketing interface. We discuss resource allocation implications for managers as they attempt to maximize profits through innovation.     

Distributing Start‐Up Equity: A Theoretical Foundation for an Emerging Practice

We use agency theory to model equity division in venture capital financing with three complementary value‐creation factors—the entrepreneur's effort, the venture capitalist's advising/monitoring service, and the investment amount. While considering that investors often base their funding decisions on gut feeling, even as they employ rational decision‐making processes, we derive closed‐form expressions for optimal ownership sharing. Our findings provide theoretical explanation to support the recent call for practitioners to allocate ownership equity based on the relative potential contributions of the entrepreneur and the venture capitalist to generate value for the new investment prospect.     

CDS and the Resolution of Financial Distress

The dramatic growth of Credit Default Swaps (CDS)—contracts that allow creditors to hedge their default exposure or take leveraged credit positions—threatens to complicate the resolution of financial distress in ways that existing reorganization methods and institutions have yet to adapt to. CDS contracts undermine a major premise that underlies current reorganization methods—namely, that the holder of legal rights has, and is motivated by, corresponding economic interests. Because hedging in the CDS markets immunizes creditors from the debtor's financial condition, they effectively separate their legal rights and economic interests. In this article, the authors discuss the challenges this separation poses for the resolution of distress both in and out of bankruptcy, and consider ways in which “on‐ground” realities may be reconciled with the legal structure that underlies the resolution of distress. At a minimum, disclosure of CDS positions in times of financial distress—along the lines of the disclosures presently required of equity investors under the Williams Act—are an essential first step toward a solution.