Arthur Fishman

Product Innovation by a Durable-Good Monpoly

We consider a durable-good monopolist that periodically introduces new models, each new model representing an improvement upon its predecessor. We show that if the monopolist is able neither to exercise planned obsolescence (i.e., artificially shorten the lift of its products) nor to give discounts to repeat customers, the rate of product introductions is too slow -- in comparison with the social optimum. On the other hand, if the monopolist is able to artificially shorten the durability of its products or to offer price discounts to repeat customers, it can raise its profit and, at the same time, implement the social optimum.

Is Bigger Better? Customer Base Expansion through Word‐of‐Mouth Reputation

A model of gradual reputation formation through a process of continuous investment in product quality is developed. We assume that the ability to produce high‐quality products requires continuous investment and that as a consequence of informational frictions, such as search costs, information about firms’ past performance diffuses only gradually in the market. This leads to a dual process of growth of a firm’s customer base and an increase in the firm’s investment in quality. The model predicts, therefore, that the longer its tenure as a high‐quality producer, the more a firm invests in quality. We relate this finding to empirical work on online commerce as well as on traditional industries.

The Division of Labor, Inequality and Growth

We present a model that links the division of labor and economic growth with the division of wealth in society. When capital market imperfections restrict the access of poor households to capital, the division of wealth affects individual incentives to invest in specialization. In turn, the division of labor determines the dynamics of the wealth distribution. A highly concentrated distribution of wealth leads to a low degree of specialization, low productivity, and low wages. In that case workers are unable to accumulate enough wealth to invest in specialization. Hence, in a highly unequal society, there is a vicious cycle in which the degree of specialization, productivity and wages stay low, wealth and income inequality stays high and the economy stagnates. By contrast, greater equality increases investment in specialization and leads to a greater division of labor and higher long run development.

The 'perverse' effects of wage and price controls in search markets*

Abstract This paper examines the effects of price ceilings and minimum wages on the performance of markets in which agents must invest in costly search to become informed about prices or wages. In this context it is found that the market equilibrium may respond to changes in policy instruments in strikingly counterintuitive ways. In particular, the imposition of price ceilings and minimum wages may respectively result in consumer price increases and wage decreases. Thus an important implication of our analysis is that when unions fight to increase wages by raising the minimum wage, they may, paradoxically, actually be reducing the average wage of its members.

The Size of Firms and R&D Investment

We construct an industry-equilibrium model in which it is costly for consumers who have previously purchased from one firm to switch to competitors. This gives firms a certain degree of market power over their established customers. The equilibria we identify under these conditions have the following properties: (1) there is a nontrivial size distribution of firms, although firms are intrinsically identical, (2) larger firms make higher profits, (3) larger firms spend more on R&D, (4) larger firms charge (on average) lower prices, and (5) profits are positively correlated over time. These properties match empirical regularities concerning the manufacturing and retail sectors in the U.S. economy. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

The Economics of Collective Brands

We consider the consequences of a shared brand name such as geographical names used to identify high quality products, for the incentives of otherwise autonomous firms to invest in quality. We contend that such collective brand labels improve communication between sellers and consumers, when the scale of production is too small for individual firms to establish reputations on a stand alone basis. This has two opposing effects on member firms’ incentives to invest in quality. On the one hand, it increases investment incentives by increasing the visibility and transparency of individual member firms, which increases the return from investment in quality. On the other hand, it creates an incentive to free ride on the group’s reputation, which can lead to less investment in quality. We identify parmater values under which collective branding delivers higher quality than is achievable by stand alone firms.

Search with Learning and Price Adjustment Dynamics

We present a model of consumer search with learning in which cost shocks have different short- and long-range effects on prices. In the short run, consumers confuse general cost shocks, common to all firms in the industry, with firm-specific shocks. In the case of a general cost increase, this promotes an excessive propensity to search, restraining the amount by which prices increase in the short run. Conversely, in the case of an idiosyncratic cost increase, consumers search too little, causing the prices of high-cost firms to overshoot.

Entry Deterrence in a Finitely-Lived Industry

The Ghemawat and Nalebuff (1985) exit model is extended to include an entry stage. Demand is high at the time of entry but is expected to eventually decline. It is shown that equilibrium entry decisions may be critically affected by the prospect of a future decline in demand, even when the latter is scheduled to occur in the arbitrarily distant future, or is expected to be of arbitrarily short duration. In all cases, a unique perfect equilibrium for the entry game exists. This equilibrium exhibits counterintuitive features. For example, the incumbents (and sometimes even the industrys) output may be larger if the incumbent is a monopoly than if faced with a potential entrant.

Investment in quality under asymmetric information with endogenously informed consumers

Abstract When sellers are privately informed about quality, signaling models can successfully explain an equilibrium correlation between prices and exogenous quality but do not account for incentives to invest in quality improvement. This paper shows that sellers may be motivated to invest in quality if consumers, though initially uninformed, may acquire costly information before buying. The equilibrium has the attractive feature that incentives to invest are greater the less costly it is for consumers to become informed.

Search Prominence and Recall Costs

Although it is widely held that sellers prefer to appear early in a consumer’s search, some evidence from online markets suggests this need not be the case. We develop a model which incorporates costly search and costly recall and demonstrate that when both frictions are small, appearing later may be better. When recall is free, prominence is desirable by standard logic, however costly recall induces a tradeoff – it benefits the prominent seller by reducing the initial search but also benefits the later seller by preventing return conditional on search. We show that later can be better whenever values are sufficiently correlated, or whenever values are drawn independently from a distribution in which two draws are likely to be near one another.