ORI HEFFETZ, Cornell University - S.C. Johnson Graduate School of Management
Email: oh33@cornell.edu
MOSES SHAYO, Hebrew University of Jerusalem - Department of Economics
Email: mshayo@huji.ac.il

Elementary consumer theory assumes that prices affect demand only because they affect the budget constraint (BC). By contrast, several models suggest that prices can affect demand through other channels (e.g. because they signal quality). This alternative conjecture is consistent with evidence from marketing studies. However, neither theory nor evidence is informative regarding the magnitude of non-BC effects. The key econometric challenge arises from the fact that a change in price typically also changes the BC. This paper uses a lab and a field experiment to disentangle BC from non-BC effects of prices on demand. Results suggest that while prices positively affect subjective evaluations of goods, non-BC effects on actual choices are rather modest compared with BC effects. Indeed, they may be too small to be detectable in natural economic settings. We also find little support for the hypothesis that non-BC effects are due to incomplete information.

CHRISTOPH ENGEL, Max Planck Institute for Research on Collective Goods
Email: engel@coll.mpg.de

Much of behavioural research, both in economics and in psychology, is limited in one respect: it tests isolated individuals. In many practically relevant situations, there are discernible actors, but these actors are not individuals. Rather firms, regulatory bodies, associations, countries or international organisations become active. The social problem at hand is best understood if one attributes judgement and decision making to higher level aggregates of individuals. Which elements from the rich body of behavioural evidence transfer to these corporate actors? Are there other deviations from the predictions of the rational choice model, not present or studied in individuals? This paper surveys the empirical literature from experimental economics, psychology, sociology and law. While some building blocks, like the behaviour of managers and of ad hoc groups, are relatively well understood, our knowledge about the effects of more elaborate internal structure on the dealings of corporate actors with the outer world is still relatively limited.

JEROEN L.G. BINKEN, Erasmus University Rotterdam (EUR)
S. STREMERSCH, Erasmus University Rotterdam (EUR) - Erasmus School of Economics
Email: stremersch@few.eur.nl

Systems are composed of complementary products (e.g., video game systems are composed of the video game console and video games). Prior literature on indirect network effects argues that, in system markets, sales of the primary product (often referred to as 'hardware') largely depend on the availability of complementary products (often referred to as 'software'). Mathematical and empirical analyses have almost exclusively operationalized software availability as software quantity. However, while not substantiated with empirical evidence, case illustrations show that certain 'superstar' software titles of very high quality (e.g., Super Mario 64) may have had disproportionately large effects on hardware unit sales (e.g., Nintendo N64 console sales). In the context of the U.S. home video game console market, we show that the introduction of a superstar increases video game console sales on average by 14%, over a period of 5 months. Software type does not consistently alter this effect. Our findings imply that scholars who study the relationship between software availability and hardware sales, need to account for superstar returns, and their decaying effect over time, over and above a mere software quantity effect. Hardware firms should maintain a steady flow of superstar introductions, as the positive effect of a superstar only lasts for 5 months, and make, if need be, side-payments to software firms, as superstars dramatically increase hardware sales. Obtaining exclusivity over superstars, by hardware firms, does not provide an extra boost to their own sales, but it does take away an opportunity for competing systems to increase their sales.

PEHR-JOHAN NORBÄCK, Research Institute of Industrial Economics (IFN)
Email: PJN@IUI.SE
LARS PERSSON, Research Institute of Industrial Economics (IFN)
Email: lars.persson@ifn.se

This paper studies how the surplus generated by the globalization process is divided between MNEs and owners of domestic assets. We construct an oligopoly model where the equilibrium acquisition pattern, the acquisition price and firms' greenfield investments are endogenously determined. Acquisition entry is shown to be more likely when the complementarity between domestic and foreign assets is high. However, we show that such acquisitions might have a low profitability, since the bidding competition over the domestic assets is then so fierce that the firms involved would be better off not starting a bidding war. Risks associated with different entry modes are also examined.

JEAN-CHARLES ROCHET, University of Toulouse I - Institut d'Economie Industrielle (IDEI), Centre for Economic Policy Research (CEPR)
Email: rochet@cict.fr
JEAN TIROLE, University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ), University of Toulouse 1 - Industrial Economic Institute (IDEI), Centre for Economic Policy Research (CEPR)
Email: tirole@cict.fr

Payment card associations offer both debit and credit cards and, until recently, engaged in a tie-in on the merchant side through the so-called honour-all-cards (HAC) rule. The HAC rule came under attack on the grounds that the credit and debit card markets are separate markets and that the associations lever their market power in the 'credit card market' to exclude on-line debit cards and thereby monopolize the 'debit card market'. This article analyzes the impact of the HAC rule, using a simple model with two types of transactions (debit and credit) and two platforms. In the benchmark model, in the absence of HAC rule, the interchange fee (IF, the transfer from the merchant's bank to the cardholder's bank) on debit is socially too low, and that on credit is either optimal or too high (depending on downstream members' market power). In either case, the HAC rule not only benefits the multi-card platform but also raises social welfare, due to a rebalancing effect: The HAC rule allows the multi-card platform to better perform the balancing act by raising the IF on debit and lowering it on credit, ultimately raising volume. The paper then investigates a number of extensions of the benchmark model, including varying degrees of substitutability between debit and credit; merchant heterogeneity; and platform differentiation. While the HAC rule may no longer raise social welfare under all values of the parameters, the basic and socially beneficial rebalancing effect unveiled in the benchmark model is robust.

SOHNKE M. BARTRAM, Lancaster University
Email: s.m.bartram@lancaster.ac.uk
GREGORY W. BROWN, University of North Carolina at Chapel Hill - Finance Area
Email: gregwbrown@unc.edu
BERNADETTE A. MINTON, Ohio State University - Department of Finance
Email: minton.15@osu.edu

Theoretical research suggests many firms should have considerable exchange rate exposure. However, empirical research has not documented consistently strong relations between exchange rates and stock prices. To examine this discrepancy, we extend prior theoretical results to model a global firm's exchange rate exposure. Using this model and a global sample of 1,150 manufacturing firms from 16 countries, we show empirically that firms pass part of currency changes through to customers, utilize operational hedges (e.g., matching foreign sales with foreign production), and employ financial risk management strategies. For a typical firm pass-through and operational hedging each reduce exposure by 10% to 15% and financial hedging reduces exposure by about 45%. The combination of these factors can explain the observed levels of exchange rate exposure.

KARIN JOEVEER, Charles University, Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

This study explores the significance of firm-specific, institutional, and macroeconomic factors in explaining variation in leverage using a sample of firms from nine Eastern European countries. Country-specific factors are the main determinants of variation in leverage for small unlisted companies, while firm-specific factors explain most of the variation in leverage for listed and large unlisted companies. Around half of the variation in leverage related to country factors is explained by known macroeconomic and institutional factors, while the remainder is explained by unmeasurable institutional differences (e.g. law and enforcement). These findings are in line with the results for Western European countries in Jõeveer (2005) and show that country characteristics are not more significant determinants of leverage in these transition economies.

EMILIE ALBEROLA, Université Paris X Nanterre
Email: emilie.alberola@caissedesdepots.fr
JULIEN CHEVALLIER, EconomiX - CNRS, Université Paris X Nanterre
Email: jchevall@u-paris10.fr
BENOÎT CHÈZE, Université Paris X Nanterre
Email: benoit.cheze@u-paris10.fr

This article critically examines the impact of industrial production for sectors covered by the EU Emissions Trading Scheme (EU ETS) on emissions allowance spot prices during Phase I (2005-2007). Using sector production indices and CO2 emissions compliance positions defined by a ratio of allowance allocation relative to baseline emissions, we show that the effect of industrial activity on EU carbon price changes shall be analysed in conjunction with production peaks and compliance net short/long positions at the sector level. The results extend previous literature by showing that carbon price changes react not only to energy prices forecast errors and extreme temperatures events, but also to industrial production in three sectors covered by the EU ETS: combustion, paper and iron.