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on Utility Models and Prospect Theory |
| By: | Fabian Herweg; Konrad Mierendorff |
| Abstract: | We consider a model of firm pricing and consumer choice, where consumers are loss averse and uncertain about their future demand. Possibly, consumers in our model prefer a flat rate to a measured tariff, even though this choice does not minimize their expected billing amount—a behavior in line with ample empirical evidence. We solve for the profit-maximizing two-part tariff, which is a flat rate if (a) marginal costs are not too high, (b) loss aversion is intense, and (c) there are strong variations in demand. Moreover, we analyze the optimal nonlinear tariff. This tariff has a large flat part when a flat rate is optimal among the class of two-part tariffs. |
| Keywords: | Consumer loss aversion, flat-rate tariffs, nonlinear pricing, uncertain demand |
| JEL: | D11 D43 L11 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:012&r=upt |
| By: | Adi Schnytzer (Department of Economics, Bar Ilan University); Sara Westreich (Bar-Ilan University) |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:biu:wpaper:2010-14&r=upt |
| By: | Herriges, Joseph A.; Bhattacharjee, Subhra; Kling, Catherine L. |
| Abstract: | Manski (1999) proposed an approach for dealing with a particular form respondent uncertainty in discrete choice settings, particularly relevant in survey based research when the uncertainty stems from the incomplete description of the choice scenarios. Specifically, he suggests eliciting choice probabilities from respondents rather than their single choice of an alternative. A recent paper in IER by Blass et al. (2010) further develops the approach and presents the first empirical application. This paper extends the literature in a number of directions, examining the linkage between elicited choice probabilities and the more common discrete choice elicitation format. We also provide the first convergent validity test of the elicited choice probability format vis-\`a-vis the standard discrete choice format in a split sample experiment. Finally, we discuss the differences between welfare measures that can be derived from elicited choice probabilities versus those that can obtained from discrete choice responses. |
| Keywords: | discrete choice; Elicited Choice Probabilities |
| JEL: | C25 Q51 |
| Date: | 2011–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:32626&r=upt |
| By: | Cespa, Giovanni; Vives, Xavier |
| Abstract: | We propose a theory that jointly accounts for an asset illiquidity and for the asset price potential over-reliance on public information. We argue that, when trading frequencies differ across traders, asset prices reflect investors' Higher Order Expectations (HOEs) about the two factors that influence the aggregate demand: fundamentals information and liquidity trades. We show that it is precisely when asset prices are driven by investors' HOEs about fundamentals that they over-rely on public information, the market displays high illiquidity, and low volume of informational trading; conversely, when HOEs about fundamentals are subdued, prices under-rely on public information, the market hovers in a high liquidity state, and the volume of informational trading is high. Over-reliance on public information results from investors' under-reaction to their private signals which, in turn, dampens uncertainty reduction over liquidation prices, favoring an increase in price risk and illiquidity. Therefore, a highly illiquid market implies higher expected returns from contrarian strategies. Equivalently, illiquidity arises as a byproduct of the lack of participation of informed investors in their capacity of liquidity suppliers, a feature that appears to capture some aspects of the recent crisis. |
| Keywords: | Average expectations; Beauty Contest; Expected returns; Multiple equilibria; Over-reliance on public information |
| JEL: | G10 G12 G14 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8303&r=upt |
| By: | Matthias Messner; Nicola Pavoni; Christopher Sleet |
| Abstract: | Many separable dynamic incentive problems have primal recursive formulations in which utility promises serve as state variables. We associate families of dual recursive problems with these by selectively dualizing constraints. We make transparent the connections between recursive primal and dual approaches, relate value iteration under each and give conditions for it to be convergent to the true value function. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:381&r=upt |