W. David Walls

Motion picture profit, the stable Paretian hypothesis, and the curse of the superstar

Abstract This paper investigates the stable distribution as a model of profit in motion pictures. The skew of this distribution and its Paretian tails capture with great fidelity the statistics of the movies. Features of the business such as the “nobody knows principle,” the “curse of the superstar,” the “angels nightmare,” the instability of profit, and the form of artist contracts follow from the properties of the stable distribution.

Cointegration analysis of spot electricity prices: insights on transmission efficiency in the western US

Abstract The US Energy Policy Act of 1992 promoted the development of spot markets for electric power by requiring utilities to open their transmission systems to wholesale power sales. In this paper, we specify and estimate a vector error correction model using peak and off-peak electricity spot prices during 1994–1996 covering 11 regional markets in the western United States and test these prices for evidence of market integration. The results show evidence of an efficient and stable wholesale power market.

Increasing returns to information: evidence from the Hong Kong movie market

We examine a sample of 300 movies that appeared on the top-10 charts in Hong Kong. We apply an empirical test proposed by Ijiri and Simon (1974) and find that movie revenues in the territory of Hong Kong are consistent with the hypothesis of increasing returns to information. This empirical result confirms the results of De Vany and Walls (1996) who found evidence of increasing returns to information in their analysis of movie data from the US Top-50 charts.

Laboratory markets in counterfeit goods: Hong Kong versus Las Vegas

“Black markets” represent an extreme challenge to empirical researchers due to the almost insurmountable obstacle of obtaining high-quality data. The dearth of high-precision data precludes not only empirical analysis—including the quantification of various elasticities—but also the informed policy analysis that results from the integration of empirical results with government, market, and social institutions. We propose and conduct a controlled laboratory market in counterfeit goods on several groups of subjects in Hong Kong and Las Vegas. The data generated in the experiments are used to estimate a random-effects model of individual choice behavior. The main empirical findings are that subjects in Hong Kong are more likely to purchase the counterfeit good than are subjects in Las Vegas; the price and penalty elasticities are substantially larger (in absolute value) in Las Vegas than in Hong Kong; and that in both locations the price effects of legitimate and counterfeit goods are asymmetrical in the monetary price and expected penalty cost. An equal increase in the price of an authentic good and the expected penalty cost of a counterfeit good increases the probability that a consumer will purchase the authentic good.

Price Dynamics in a Network of Decentralized Power Markets

In this paper, we model the dynamic behavior of prices in a network of interconnected, but decentralized, electric power markets—an architecture very different from the centralized exchanges and power pools currently being implemented by many state regulators. We estimate dynamic equations of unregulated, wholesale power prices at spot markets scattered over an eleven-state trading region. The results indicate that this decentralized system of power and transmission trading produces prices that are efficient and dynamically stable over this vast network. Price convergence in the power market is similar to what has been observed in the recently deregulated natural gas market.

Natural gas industry transformation, competitive institutions and the role of regulation: Lessons from open access in US natural gas markets

Abstract Open access pipeline transport transformed the US natural gas industry. In this paper we examine the role that transport rights played in the industrys transformation. We document the convergence of gas field prices, pooling area prices and city gate prices that has occurred since the adoption of open access. Our analysis suggests the most important reasons for this convergence to be the fact that direct dealing between gas suppliers and users has replaced the pipeline merchant; that gas transactions are made within a competitive market institution; and that transport trading has created an interconnected grid of pipelines in place of the closed and disconnected grid that preceded open access. This open and interconnected grid supplied the means for price arbitrage. These changes have made natural gas markets contestable. We draw general conclusions about the type of transmission rights that would complete the transition to a competitive gas industry. Our conclusions about the role of regulation in an industry organized around transferable transport rights extend to natural gas markets beyond those in North America.

A Cointegration Rank Test of Market Linkages with an Application to the U.S. Natural Gas Industry

This research applies recently developed cointegration techniques to the measurement of market linkages when the data are nonstationary. Likelihood based tests for cointegration are applied to data from natural gas spot markets. The results indicate that natural gas spot markets at dispersed locations in the pipeline network are strongly connected. Most of the market pairs examined in the gas pipeline network satisfy a more stringent condition for perfect market integration.

DECISION COSTS AND BETTING MARKET EFFICIENCY

In this research we examine empirically the linkage between decision costs and market efficiency in the context of racetrack betting markets. We analyze more than 10,000 horse races and demonstrate that metrics of non-optimizing behavior are inversely related to the volume of betting: we are less likely to observe evidence of non-optimizing behavior when examining data from racetracks with larger betting pools. The analysis provides empirical support for the decision-cost model in which departures from the predictions of rational economic behavior are explained in terms of the cost of non-optimizing decisions. The decision-cost model reconciles the disparate findings on the efficiency of racetrack betting markets reported in previous research.

Competition in a Repeated Spatial Auction Market with an Application to Timber Sales

In this paper we develop a model of a repeated spatial auction market. The auction model contributes to the literature on spatial competition by considering the sale of goods in a market with spatial and temporal dimensions, and in which goods are sold by an auction institution instead of a posted-price institution. In the Nash equilibrium of the spatial auction model, each bidder is found to have a dominance solvable strategy to bid below his net (of transportation costs) valuation for the first unit of the good because there is an option value to not winning, namely that the following units may be locationally preferred to the first unit. The equilibrium bidding strategies lead to the possibility of non–Pareto-efficient outcomes. The auction model is applied to data from U.S. Forest Service timber sales.

Broken odds and the favourite-longshot bias in parimutuel betting: a direct test

This research examines empirically the effect using broken odds - the rounded off odds reported by horse track operators - on statistical tests of market efficiency in parimutuel gambling. It finds that using rounded-off odds to test for market efficiency, instead of using the exact values, introduces a downward bias in the test statistics for favourite horses. Previous studies, because they relied on the rounded-off odds data, may have overstated the extent of the favourite-longshot bias in parimutuel wagering markets.