The price of quality claims

Quality claims and quality in fact of financial and industrial products as well as financial and business services are essential to entice and attract customers. For these reasons, firms are often tempted to assert claims that might or might not be met. These claims have risks which cannot always be prevented when interpreted as a ‘sure thing’ while in fact, quality performance is probabilistic. This paper considers a financial (utility based) approach to pricing a quality claim. To do so, we assume that ex‐ante, a true quality performance is defined by a density function while claims are advertised—setting expectations for a quality performance. On the basis of these assumptions we determine the price associated with such claims. Copyright © 2010 John Wiley & Sons, Ltd.     

Australian electricity market and price volatility

Australian Electricity Market has experienced high price volatility since the deregulation in early 1990s. In this exploratory and preliminary analysis of 2010 data from South Australian electricity market we identify and exhibit a number of phenomena which, arguably, contribute to (A) high cost of electricity supply to consumers and (B) volatility in spot prices. These phenomena include: (i) Distinct bidding patterns of some generators occurring in trading intervals corresponding to periods of low, medium and high spot prices, (ii) Low correlation between electricity demand and spot prices on days when spot price spikes are observed, (iii) Failure of the lottery model and associated Markowitz-type optimisation approaches to adequately explain the shifting structure of generators’ bids and (iv) Unexpectedly high contribution to the consumers costs and risks from the relatively small number of trading intervals where spot price spikes were observed.     

BSDEs in utility maximization with BMO market price of risk

This article studies quadratic semimartingale BSDEs arising in power utility maximization when the market price of risk is of BMO type. In a Brownian setting we provide a necessary and sufficient condition for the existence of a solution but show that uniqueness fails to hold in the sense that there exists a continuum of distinct square-integrable solutions. This feature occurs since, contrary to the classical Itô representation theorem, a representation of random variables in terms of stochastic exponentials is not unique. We study in detail when the BSDE has a bounded solution and derive a new dynamic exponential moments condition which is shown to be the minimal sufficient condition in a general filtration. The main results are complemented by several interesting examples which illustrate their sharpness as well as important properties of the utility maximization BSDE.     

The effect of market segmentation with demand leakage between market segments on a firm’s price and inventory decisions

In this paper, we address the simultaneous determination of price and inventory replenishment in a newsvendor setting when the firm faces demand from two or more market segments in which the firm can set different prices. We allow for demand leakage from higher-priced segments to lower-priced segments and assume that unsatisfied demand can be backlogged. We examine the case where the demands occur concurrently without priority and are met from a single inventory. We consider customer’s buy-down behavior explicitly by modeling demand leakage as a function of segment price differentiation, and characterize the structure of optimal inventory and pricing policies.     

Valuation of European options in the market with daily price limit

A valuation problem of the European style contingent claim in the market with daily price movement limit is studied. Unlike the one leading to the well known Black-Scholes formula, this problem depicts considerable conceptual difficulty and anomaly created by the presence of various arbitrage opportunities inherently built in the model due to the daily price movement limit. The presence of arbitrage makes it go against the grain of the well established arbitrage pricing theory. In this paper, how these complications arise are discussed and then a valuation approach devised, which is called the ‘vanishing transaction cost technique,’ of getting around the difficulty.     

The dynamics of price, quality and productivity improvement decisions

Although quality has received significant attention during the last decades and its economic benefits are beyond any doubt, lots of questions have remained unanswered as to how much, when, and in what to invest to maintain sustainable competitive advantage. A model is introduced here to guide a firm in addressing these questions. The firm produces a single product and operates in a market where monopolistic competition is effective. Demand for the product in the industry depends on both price and performance quality. Increasing productivity knowledge decreases unit production cost, but demand for the company’s product decreases over time, as competitors will be able to offer products with similar performance. Productivity and quality knowledge can be developed through induced and autonomous learning in order to strengthen company position. The paper provides an optimal control formulation of the problem and develops necessary conditions for optimality and characterizes the dynamics of optimal price, quality and investment decisions.     

The model of security market when the security price is a continuous semimartingale

In this paper, we set the stock price model in security market when the price process is a continuous semartingale, and find a unigue solution of price process model.     

Local and global dynamics in a duopoly with price competition and market share delegation

This paper aims at studying a nonlinear dynamic duopoly model with price competition and horizontal product differentiation augmented with managerial firms, where managers behave according to market share delegation contracts. Ownership and management are then separate and managers are paid through adequate incentives in order to achieve a competitive advantage in the market. In this context, we show that complexity arises, related both to the structure of the attractors of the system and the structure of their basins, as multistability occurs. The study is conducted by combining analytical and numerical techniques, and aims at showing that slight different initial conditions may cause very different long-term outcomes.     

Convergence of estimated option price in a regime switching market

In an observed semi-Markov regime, estimation of transition rate of regime switching leads towards calculation of locally risk minimizing option price. Despite the uniform convergence of estimated step function of transition rate, to meet the existence of classical solution of the modified price equation, the estimator is approximated in the class of smooth functions and furthermore, the convergence is established. Later, the existence of the solution of the modified price equation is verified and the point-wise convergence of such approximation of option price is proved to answer the tractability of its application in Finance. To demonstrate the consistency in result a numerical experiment has been reported.     

Supply quality management with wholesale price and revenue-sharing contracts under horizontal competition

In a number of industries (e.g., the airplane industry, aerospace industry, auto industry, or computer industry), certain suppliers essentially have a monopoly on the production technology for key components, and inevitably manufacturers in these industries have common suppliers. A key part of manufacturers’ work with suppliers concerns improving the quality of their respective products, which gives rise to a collaborative activity usually termed as “supply quality management”. When the manufacturers are competitors, they do not wish to see a common supplier dividing his involvement in quality improvement unequally between themselves and their rivals. However, as the suppliers collaborate with several manufacturers, it is highly questionable whether their efforts will be strictly equivalent for each manufacturer. In this paper, a non-cooperative dynamic game is formulated in which a single supplier collaborates with two manufacturers on design quality improvements for their respective products. The manufacturers compete for market demand both on price and design quality. The paper analyzes how each party should allocate resources for quality improvement over time. In order to take into account the potential coordinating power of the compensation scheme adopted in this type of decentralized setting, we compare the possible outcomes under a wholesale price contract and a revenue-sharing contract.     

基于极端分位回归模型的原油股市动态相依关系研究

针对国际原油价格对股市波动影响效果,提出极端分位回归的模型检验方法.利用金融时间序列数据,通过加入结构突变,构建分位回归模型分析股票收益问题,根据中国等原油进出口国家股市收益进行实证分析,研究变量之间的相依关系.研究结果表明动态尾部相依普遍存在于国家股市中,国际原油对国家股市的冲击存在明显的异质性,原油可以较好的对冲风险投资.随着石油价格的波动,国家股票收益会因此受到影响,不同国家股市在不同分位点随着石油价格变化的波动出现异质性.     

Measuring brand equity in the car market: a hedonic price analysis

This paper designs and implements a hedonic model to investigate brand-name effects in the car market. The proposed model provides considerable empirical evidence in support of model-name premia, after controlling for observed product differentiation. Such premia incorporate not only manufacturer equity but also effects that are specific to individual models. The estimated price premia are remarkably intuitive and consistent across carmakers and models. The results yield important implications for brand and range management in the car market and suggest directions for future research.     

The stochastic EOQ model with random sales price

The article deals with a stochastic economic order quantity (EOQ) model over a finite time horizon where uniform demand over the replenishment period is price dependent. The selling price is assumed to be a random variable that follows a probability density function. As demand is probabilistic, stock out situation may occur. Based on the partial backlogging and lost sale cases during stock out period, the author develops the criterion for the optimal solution for the replenishment size such that the integrated expected profit is maximized. Moreover, the article suggests a new function regarding price dependent demand. Finally, numerical examples and its sensitivity analysis of key parameters are given to illustrate the proposed model.     

The newsvendor problem with an in-season price adjustment

Consider a retailer stocking a seasonal item facing a stochastic demand where information about the demand becomes more accurate as the selling season progresses. The retailer places orders before the start of the season and in-season reorders are not possible. This article extends the classical newsvendor model by allowing the retailer to make an in-season price adjustment after conducting a review and using the realized demand to obtain an accurate estimate of the remaining demand. Our results include answers to the following questions. What price should the retailer choose? How much should the retailer have ordered at the start of the season given the option of adjusting prices in-season? This model was motivated by a problem in car rental revenue management and has applications in perishable assets revenue management (PARM), where price adjustments are needed towards the end of the selling season.     

The prenucleolus and the reduced game property: Equal treatment replaces anonymity

In his paper, Sobolev [1975] characterized the prenucleolus as the unique solution concept, defined over the class of cooperative games that satisfies single valuedness, anonymity, covariance under strategic equivalence and reduced game property (consistency).In this paper we show that anonymity can be weakened and replaced by a requirement of equal treatment (symmetry).     

Oligopoly models for market price of electricity under demand uncertainty and unit reliability

Several oligopoly models have been proposed for representing strategic behavior in electricity markets, which include Bertrand, Cournot, and Supply Function Equilibrium (SFE). For the most part, these models are deterministic, with the exception of the SFE originally developed by Klemperer and Meyer. However, their model does not include supply side uncertainties. In this paper, we consider both load and supply side uncertainties (resulting from generator availabilities). We obtain Nash equilibrium solutions for Cournot and SFE models, in which asymmetric firms (whose generating units have different costs and capacities) submit their bids so that each firm’s expected profit is maximized.     

Selection of contract suppliers under price and demand uncertainty in a dynamic market

In this paper, we consider a supply contracting problem in which the buyer firm faces non-stationary stochastic price and demand. First, we derive analytical results to compare two pure strategies: (i) periodically purchasing from the spot market; and (ii) signing a long-term contract with a single supplier. The results from the pure strategies show that the selection of suppliers can be complicated by many parameters, and is particularly affected by price uncertainty. We then develop a stochastic dynamic programming model to incorporate mixed strategies, purchasing commitments and contract cancellations. Computational results show that increases in price (demand) uncertainty favor long-term (short-term) suppliers. By examining the two-way interactions of contract factors (price, demand, purchasing bounds, learning and technology effect, salvage values and contract cancellation), both intuitive and non-intuitive managerial insights in outsourcing strategies are derived.     

Improving prediction market forecasts by detecting and correcting possible over-reaction to price movements

We examine the impact of price trends on the accuracy of forecasts from prediction markets. In particular, we study an electronic betting exchange market and construct independent variables from market price (odds) time series from 6058 individual markets (a dataset consisting of over 8.4 million price points). Using a conditional logit model, we find that a systematic relationship exists between trends in odds and the accuracy of odds-implied event probabilities; the relationship is consistent with participants over-reacting to price movements. In particular, in different time segments of the market, increasing and decreasing odds lead, respectively, to under- and over-estimation of odds-implied probabilities. We develop a methodology to detect and correct the erroneous forecasts associated with these trends in odds in order to considerably improve the quality of forecasts generated in prediction markets.     

Optimal spot market inventory strategies in the presence of cost and price risk

We consider a firm facing random demand at the end of a single period of random length. At any time during the period, the firm can either increase or decrease inventory by buying or selling on a spot market where price fluctuates randomly over time. The firm’s goal is to maximize expected discounted profit over the period, where profit consists of the revenue from selling goods to meet demand, on the spot market, or in salvage, minus the cost of buying goods, and transaction, penalty, and holding costs. We first show that this optimization problem is equivalent to a two-dimensional singular control problem. We then use a recently developed control-theoretic approach to show that the optimal policy is completely characterized by a simple price-dependent two-threshold policy. In a series of computational experiments, we explore the value of actively managing inventory during the period rather than making a purchase decision at the start of the period, and then passively waiting for demand. In these experiments, we observe that as price volatility increases, the value of actively managing inventory increases until some limit is reached.     

Spatial mapping of price competition using logit-type market share models and store-level scanner-data

This paper proposes a methodology to obtain reliable spatial maps of price competition using store-level scanner data. Specifically, a procedure to obtain a symmetric matrix of similarities between brands considering their substitutability depending on price variations is proposed. The matrix is derived from a market response model where price cross-effects are split into two components. The first component accounts for the fact that price variation in one brand can have different effects to price variation in other brands (ie j → j′≠j′ → j). The second component accounts for the fact that the price of each brand can have different effects across competing brands (ie j → j′≠j → j^″). The matrix is obtained by imposing symmetry on this second component of price cross-effects. The parameterization of this symmetric matrix of similarities as the distances between the spatial representations of brands allows us to obtain the positioning maps. The proposed approach is illustrated through an empirical application.