Marginal Revenue Research Articles

Time for upgrades? In time for consumers and competition

An upward line extension is a new, improved product within an existing product category for the high-end market. Many manufacturers pursue line-extension strategies, but they carry risks due to uncertain consumer taste, the internal competition between products, and the external competition between firms. We use game theory to answer when a firm should allocate production capacity for an upward line extension under competition and consumer taste uncertainty. The firm can either act early when taste is still uncertain to benefit from the first-mover advantage or wait until consumer taste realizes. We measure consumer taste risk by the correlation between the average consumer taste and the density of consumer taste, with a strong correlation meaning a considerable risk exposure, foreshadowing a more likely hit-or-miss result for the new product. The firm’s competitive advantage is based on both firms’ expected marginal revenues of capacity allocation, considering the internal and external competition. We show how the competitive advantage will amplify exponentially in the face of consumer taste uncertainty and characterize the firm’s decision policy by deriving a threshold for the risk index against the competitive advantage index. When the threshold is exceeded, it implies that the firm’s competitive advantage is not significant enough, so it should postpone allocating capacity. Otherwise, it should act early. We apply our results to two industry examples and provide practical guidelines to manufacturers for determining the right capacity timing for an upward line extension.

Research on the Emission Reduction Decision of Cost-Sharing Logistics Service Supply Chain in the O2O Model

As an effective way to realize energy savings and environmental protection, cost sharing is gradually becoming an important measure to reduce emissions in the logistics service supply chain under O2O mode in recent years. How to conduct contract selection and design optimization under the cost-sharing situation, and then improve the operational efficiency of the logistics service supply chain is an important issue that needs to be addressed. Firstly, based on the initial market demand for logistics, this paper involves the influence of both online logistics service integrators and onsite functional logistics service providers on logistics market demand in terms of emission reduction and platform brand image and develops a model based on the logistics service demand function in the O2O mode. Secondly, for the role of online and onsite emission reduction services in multi-cycle continuous cooperation to enhance the platform integrator’s brand image, a cost-sharing differential game model between online and onsite services is developed to facilitate providers’ adoption of high-quality emission reduction services. Finally, the HJB equation is used to compare the non-cooperative Nash game, the cost-sharing Stackelberg game, and the cooperative game to make the optimal abatement decision, the optimal benefit, and the cost-sharing ratio of the abatement service supply chain in the non-cooperative Nash game, the cost-sharing Stackelberg game, and the cooperative game. By comparing the results of the three games, we find that the optimal onsite and online abatement service decision is related to the cost, marginal revenue, and the impact of the service on demand; the abatement cost-sharing contract and cooperation are both better than the non-cooperative independent decision state, which can effectively guide the provision of high-quality onsite abatement service and improve the revenue of both parties involved in the logistics service supply chain and the total system’s revenue in the O2O mode. Compared with the cooperative game model, the cost-sharing contract can more effectively facilitate close cooperation between the actors, and the relationship between onsite and online marginal revenue affects the improvement of both parties’ revenue. The findings of the study can provide useful managerial insights for the selection and design optimization of abatement contracts for logistics service supply chains considering cost-sharing via the O2O model.

Economic Assessment of Food Legumes Breeding in China: Evidence Using a Provincial Level Dataset

Advances in crop breeding techniques and economic evaluation are critical to ensuring and improving crop yields and sustainable development. Based on the provincial data on food legumes breeding (FLB) in China from 2001 to 2020, the research and development (R&D) expenditure distribution, FLB contribution rate, and R&D expenditure on FLB were estimated. The economic benefits of output per unit area and R&D expenses were evaluated, and relevant policy suggestions were put forward. The study found that: (i) the R&D expenditure on FLB’s showed a significant upward trend, and the development can be divided into a starting, stable, and rapid growth period. There were significant differences in R&D expenditures across eight provinces of China with relatively high R&D expenditures for FLB; (ii) the R&D expenditure on FLB had a significant lag in the improvement of per mu yield (1 mu = 0.067 hectares). For every 10,000 yuan increase in R&D funding for FLB, the yield per mu will increase by 0.145 kg/mu in the next five years, and the regional spillover effect of breeding costs is significant; and (iii) the marginal revenue of R&D expenditures FLB from 2008 to 2020 is 34.91 yuan, that is, every 1 yuan invested in breeding R&D can bring a short-term marginal revenue of 34.91 yuan and a long-term marginal revenue of 337.23 yuan. Based on the above analysis, some recommendations were proposed and discussed, including further increasing the R&D investment of FLB, strengthening industry–university–research cooperation in breeding, improving the breeding research system, and promoting the multi-dimensional development of FLB industry–university–research services.

Understanding the paradox between tragedies of the commons and the anticommons: From a cognitive psychology perspective.

The tragedy of the commons refers to the overuse of resources which are rival in consumption but lack excludability and it also refers to rent dissipation. While the tragedy of the anticommons is a tragedy closely connected with underuse of resources that are rival in consumption and with too strong excludability. The prior studies proved that the tragedy of the commons and the tragedy of the anticommons are symmetric from the perspective of pure mathematics, especially the game theory, which was later refuted by behavioral economics experiments. According to them, the tragedy of the anticommons is severer than the tragedy of the commons. The asymmetry of the tragedy of the commons and the tragedy of the anticommons is a paradox by these different research methods. This paradox shows that there are imperfections in the completely rational economic man hypothesis set up by neoclassical economics. As a fundamental theory, the tragedy of the commons is quite influential in many disciplines, such as microeconomics, public sector economics, ecological economics, environmental economics, management, sociology, property law, and political science. And the tragedy of the anticommons theory has also opened its door of both theoretical research and practical implications since its acceptance by Nobel laureate Buchanan, the main founder of public choice school. Only when theoretical issues are thoroughly discussed and made clear enough, can people avoid misunderstanding or misusing the commons theory. Thus, it is necessary to elucidate the paradox between them. Based on Simon’s bounded rationality, Kahneman and Tversky’s prospect theory, value function, Thaler’s mental accounting, endowment effect, and other cognitive psychological tools, this study clearly shows that agents’ decision-making process is not just based on the long-believed marginal benefit and marginal cost analysis advocated by traditional neoclassical economists. Agents’ decision-making is a process in which agents selectively absorb, code the objective marginal revenue and marginal cost, and feed relevant information to their brain. Therefore, what plays a directly decisive role is not the objective marginal revenue and marginal cost per se, but the mentally perceived subjective utility of marginal revenue and marginal cost by the human brain. Followed by this research clue, the paradox between the tragedy of the commons and the tragedy of the anticommons is elucidated from the perspective of cognitive psychology.

Sport tickets pricing strategy with home team's crowd effect

AbstractThis paper investigates the impact of the crowd effect and financing constraints on pricing strategy by constructing an intertemporal model and introducing the crowd effect into a monopolistic home team's decision‐making framework. The results demonstrate that a stronger crowd effect and a larger depreciation rate are always beneficial to the expected profits of the home team and the home team may price along the inelastic portion of the static demand curve in periods 1–3, as long as the expected deferred marginal revenue and the additive price from the performance of the preceding match are sufficiently large.

'Guidance' or 'Misleading'? The government subsidy and the choice of enterprise innovation strategy.

Government subsidies have a direct impact on firms' innovation strategies. The game relationship between the government, the subsidized firm and its competitors under different subsidy strategies affects firms' innovation behavior and thus innovation performance. This paper uses a dynamic evolutionary game theory approach based on cost-benefit differences to analyse the mechanisms by which government subsidy strategies affect firms' innovation strategies. It is found that the marginal benefits of a firm's innovation strategy will directly affect the game outcome, indicating that the choice of innovation strategy depends on the maximization of individual firm's interests. At the same time, a firm's innovation strategy is influenced by the firm's own innovation ability and competitors' innovation strategy, and there are two game equilibria. Government subsidies have a positive contribution to the innovation strategy choice of subsidized firms, but have a crowding-out effect on non-subsidized competing firms. The strength of the penalty (the efficiency of the implementation of government subsidies), the marginal revenue of the subsidized firms' rational use of government subsidies and the competitors' strategic choices will directly affect the game outcome.

Nonlinear dynamics and adjunct profits in two boundedly rational models of monopoly

This paper studies the dynamic characteristics of a nonlinear monopoly model involving two boundedly rational monopolists with different information and knowledge on the market demand. The ℓ-monopolist knows only the actual values of output and the profit in the immediate past two periods, whereas the k-monopolist knows the marginal revenue but lacks computational ability to solve the profit maximization conditions. The price and cost functions are assumed to be cubic. These monopolists adopt a gradient-based method to determine their productions. For the dynamics of the ℓ -monopolist, the stability conditions and the explicit forms of the period-4 periodic points are obtained. The k-monopolist loses stability through a supercritical Neimark–Sacker bifurcation and a period-doubling bifurcation when the expected demand is formed with the past data. For comparison of the economic gains of the monopolists, the average profit associated with the nonlinear dynamics are calculated. It is numerically demonstrated that more information does not necessarily mean more profit.

Grid integration of electric vehicles for optimal marginal revenue of distribution system operator in spot market

Electric vehicles (EVs) combined with low-carbon generator sets can significantly reduce CO2 emissions in the transportation sector. EVs can provide flexible auxiliary services for the grid through proper power dispatching, which benefits both EVs and the grid. This paper discusses the optimal charging and discharging plan for EVs for the purpose of a distribution system operator (DSO) while obtaining the optimal day-ahead bidding strategy for DSO in the spot market. Considering the different charging demands of EV users, two contract models of vehicle-to-grid (V2G) and smart charging services are introduced. Then, K-means clustering is adopted to manage the spatiotemporal uncertainties of EVs, in order to maximize the expected marginal revenue of DSO. Then the optimization model is proposed by considering the real conditions campus grid in Shenzhen and the electricity market in Guangdong province. The result shows that the DSO could obtain the marginal revenue not only by the optimal day-ahead bidding strategy but also by scheduling EVs’ charging and discharging. In addition, EV users could reduce the charging cost by charging their EVs during low electricity price periods and get extra revenue by exporting power to the utility grid during high price periods.

A systematic analysis of the costs and environmental impacts of critical materials recovery from hybrid electric vehicle batteries in the U.S.

SummaryCritical materials such as rare earth underpin technologies needed for a decarbonized global economy. Recycling can mitigate the supply risks created by the increasing demand and net import dependence, and enable a circular economy for critical materials. In this study, we analyze the feasibility and life-cycle impacts of recovering critical materials from spent nickel metal hydride batteries from hybrid electric vehicles in the U.S., accounting for stocks, battery scrappage, and end-of-life reverse logistics, given uncertain future availability scenarios. Our results show that the total collection and recycling costs depend strongly on future battery availability, with marginal costs exceeding marginal revenues when the availability of spent batteries declines. We quantify the potential of recycling to reduce primary imports, as well as the accompanying climate change and resource impacts. We explore the underlying reverse logistics infrastructure required for battery recycling and evaluate strategies for reducing associated capital investment risk.

Consequence analysis for integrating remanufactured products for social donation (RSD) under mandatory take-back regulation

To achieve better environmental performance and lessen waste, governments are setting mandatory take-back legislation that requires manufacturers to recycle and remanufacture waste products (i.e., remanufactured products) as much as possible. In this background, enterprises with long-term vision proactively introduce charitable donations into remanufactured products to realize both environmental and social responsibility. However, the impacts of remanufactured products on social donation (RSD) are unclear under the government’s mandatory environmental responsibility goal and worthy of further study. In this paper, we adopt a standardized model where an original equipment manufacturer(OEM) forgoes developing RSD as a benchmark. Some significant ramifications including the economic, environmental, and social consequences after OEM engaging in RSD are examined under mandatory take-back target. It is found that, under the mandatory take-back regulation (i.e., environmental responsibility), the profit of OEM increases, the numbers of new and remanufactured products increase after engaging RSD. About social welfare, the consumer surplus from purchasing new and remanufactured products increases after engaging RSD. On the environmental side, however, the environmental impact under mandatory environmental responsibility becomes worse after performing RSD. A striking result shows that under compulsory take-back regulation, the greater the marginal revenue of remanufactured products for sale, the more willing OEM is to conduct RSD, which stands in stark contrast to conventional wisdom.

A closer look at two conjectures about irregular marginal revenue

A common assumption in models where buyers have private information is for the buyers to draw their private values from distribution F with density f. Optimal mechanisms differ depending on whether the marginal revenue (buyer’s virtual valuation) is increasing (in which case F is said to be regular) or not increasing (in which case F is said to be irregular). This note examines two conjectures about sufficient conditions for irregularity made in the literature—made but not proven. We develop counterexamples to show that these conjectures are false, thereby reducing the set of distributions previously thought to be irregular.

Economic growth target management and the quality of economic development: evidences from China

ABSTRACT By analyzing the data of Chinese industrial firms, we explore the association between governments’ economic growth target management behaviour and the quality of local economic development. We find that the rise of economic growth pressure can decrease the total factor productivity (TFP) of local enterprises and has a negative impact on the quality of local economic development. Besides, the effect of economic growth pressure on local firms’ productivity is more pronounced when firm is stated owned, when firm is located in cities with newly appointed officials, during the period of Communist Party of China National Congress (CPCNC), but would be attenuated if municipal party secretary has achieved a Ph.D. degree. Further mechanism analysis verifies that higher economic growth pressure could demolish the TFP of enterprises by distorting marginal revenue productivity of capital ().

Monopsony in the US Labor Market

This paper quantifies employer market power in US manufacturing and how it has changed over time. Using administrative data, we estimate plant-level markdowns—the ratio between a plant’s marginal revenue product of labor and its wage. We find most manufacturing plants operate in a monopsonistic environment, with an average markdown of 1.53, implying a worker earning only 65 cents on the marginal dollar generated. To investigate long-term trends for the entire sector, we propose a novel, theoretically grounded measure for the aggregate markdown. We find that it decreased between the late 1970s and the early 2000s, but has been sharply increasing since. (JEL J24, J31, J38, J42, L13, L60)

Global Value Chain and Misallocation: Evidence from South Korea

Purpose - This paper empirically investigates the effect of a rise in the global value chain (GVC) on the industry-level efficiency of resource allocation (based on plant-level inefficiency measures) in Korea, with a focus on various channels through which a rise in the GVC can increase competition among firms and thus induce resources to be allocated more efficiently across firms.
 Design/methodology - We empirically investigate the relationship between the industry-specific importance of GVC and the industry-level allocative inefficiency that is measured as the dispersion of the plant-level marginal revenue of capital (MRK) as in Hsieh and Klenow’s (2009) influential model. We compute MRK dispersion for industries sorted by various characteristics that are closely related to firm/industry sensitivity to the GVC. In other words, we compute the average industry-level MRK dispersion for industries sorted by industry-specific importance of GVC and compute the difference between the two groups of industries (higher vs. lower than the median GVC); we also calculate the difference between industries sorted by industry-specific export (import) intensity. This is our difference-in-difference estimate of the MRK dispersion associated with the GVC for the export (import)-intensive industry versus the non-export (non-import)-intensive industry. This differencein- difference estimate of the MRK dispersion conditional vs. unconditional on firm-level productivity is then calculated further (triple-difference estimate).
 Findings - A rise in GVC is associated with a decrease in the MRK dispersion in the export-intensive industry compared to the non-export-intensive industry. The same is true for industries that rely heavily on imports versus those that do not (i.e., import intensive vs. non-intensive). Furthermore, the reduction in the MRK dispersion in the export-intensive industry associated with an increase in the GVC is disproportionately greater for high-productivity firms. In contrast, the negative relationship between GVC and MRK dispersion in the import-intensive industry is disproportionately smaller for high-productivity firms.
 Originality/value - Existing studies focus on the relationship between GVC and aggregate output, exports, and imports at the country level. We investigate detailed firm/industry-level mechanisms that determine the relationship between GVC, trade, and productivity. Using the plant-level data in South Korea, we investigate how GVC is related to the cross-firm MRK dispersion, an important measure of allocative inefficiency, based on Hsieh and Klenow’s (2009) influential economic theory. This is the first study to provide plant-level evidence of how GVC affects MRK dispersion. Furthermore, we examine how the relationship between GVC and MRK-dispersion varies across export intensity, import intensity, and firm-level productivity, providing insight into how GVC can affect firms’ exposure to competition in the global market differently depending on market conditions and thus generate trade-related productivity gains.

Shortage of Skilled Labor, Unions and the Wage Premium: A Regression Analysis with Establishment Panel Data for Germany

The author investigates the different influences of labor shortage on wages in firms with or without collective bargaining agreements. In addition to training, technological solutions, and organizational flexibility, employers can also offer higher wages at a constant employment level to fill vacancies if the current payments are lower than the marginal revenue of the workers. Firms with collective bargaining agreements probably already pay wages according to marginal revenue or, in the case of rent sharing, above it, and the remuneration is probably also not adjusted. Using wage regressions with panel data for German establishments, this paper shows that collective bargaining and a lack of skilled workers can lead to higher wages. However, the latter only applies to firms that are not bound by collective agreements. Hence, wage differentials between these firms decrease, providing further explanation for a countercyclical development of the wage premium from the collective bargaining agreement.

Safety stock placement with market selection under load-dependent lead times

We study the problem of safety stock placement in a supply chain with market selection decisions. A manufacturer with deterministic, load-dependent lead time supplies multiple warehouses, each serving multiple retailers. Each retailer has access to a set of potential markets with different characteristics. Serving more markets increases revenues, but also increases the manufacturer’s lead time, resulting in higher inventory costs. Adopting the Guaranteed Service Approach, we present a nonlinear mixed-integer programming model and reformulate it to eliminate integer variables related to service times at warehouses. We then propose a successive piecewise linearization algorithm and a mixed-integer conic quadratic formulation to solve the resulting nonlinear binary formulation. Computational experiments show that the successive piecewise linearization algorithm outperforms two state-of-the-art solvers, BARON and CPLEX, which are used to solve instances of the original formulation and the mixed-integer conic quadratic reformulation, respectively. The value of incorporating load-dependent lead times is greatest when capacity is limited relative to available demand. The benefit of integrating market selection and safety stock decisions is greatest when capacity is limited and marginal revenue is relatively low.

What does an audit really cost? An exploratory study of auditor pricing of initial engagements in a fixed cost model

Despite decades of research on audit fees, we know very little about the cost to produce an audit. In this paper, we discuss the nature of fixed and variable costs in the audit process. We then use this cost perspective to examine the debate about the pricing of initial audit engagements, an event where marginal costs and marginal revenues are likely to diverge. This is often referred to as ‘lowballing’ which, technically, means delivering a service below cost. However, a fee discount does not necessarily indicate that revenue is below cost for an engagement. Using a sample of engagements from regional audit firms, we analyse audit fees, actual costs, and contribution margins. We find that actual contribution margins are generally positive in new engagements, suggesting that fee discounts do not result in lowballing. We attribute this to a firm pricing audits conditional on an understanding of their fixed cost structure.

The chaotic monopolist revisited with bounded rationality and delay dynamics

Two types of boundedly rational monopolists are studied when the marginal revenue is not necessarily negative sloping. A limited monopolist (ℓ-monopolist) knows only the price and output values in two previous periods. A knowledgeable monopolist (k-monopolist) knows the analytic expression of the marginal profit function and forms sales expectations based on past market information. The k-monopolist adjusts its output levels according to the usual gradient process, while the ℓ-monopolist approximates the marginal profit with a two-point finite difference formula. Stability conditions and complex dynamics are studied in discrete and continuous time scales. In the discrete model, the two monopolists exhibit different dynamics after the stability loss. The ℓ-monopolist has a cascade of a Neimark-Sacker bifurcation. In contrast, the k-monopolist has two different routes, a period-doubling and a Neimark-Sacker bifurcation, depending on how to form sales expectations. In the continuous case, the discrete models are transformed into continuous models via Euler transformation. The stability switching curves are analytically constructed and the directions of stability switching are characterized by computing the stability index for each point of the curves. It is numerically demonstrated that two monopolists exhibit similar dynamics and the k-monopolist approximates the ℓ-monopolist under a special circumstance.

Exploring the operational characteristics of ride-sourcing in an urban area

The emergence of ride-sourcing services has radically changed travel behavior and has important implications for future urban mobility. However, despite the growing market for mobility-on-demand (MOD), empirical studies on the operational characteristics of ride-sourcing systems are sparse. This paper provides an exploratory analysis of the operations of ride-sourcing using large-scale dis-aggregate mobility service data and documents the findings. From a case study in Singapore, we found that the demand follows reproducible patterns, which allows for realistic estimates of fleet operations over time and space. High travel demand during peak periods is observed along with a surge in prices (by 1.6 times on average). Shift behavior such as number of shifts, shift duration, and choices of shift start and end time affect fleet operations and fleet utilization rate. From the user metrics, we found that passengers may experience higher waiting and travel time due to the longer distance required to pickup in residential areas, the network congestion in commercial and business districts, and the detouring effects for sharing. Finally, the driver's total and marginal revenue were analyzed, which indicated a lower average revenue per unit time, distance, and service item in a shared ride compared to a single ride. These empirical observations can help understand the spatio-temporal characteristics of ride-sourcing operations in an urban area and provide insights for transportation planning and operations.

Research on low-carbon supply chain decision-making under carbon cap-and-trade and subsidy policy

Abstract Under the background of carbon cap and carbon subsidy policies implemented by the government, considering a low-carbon supply chain led by a manufacturer and followed by a retailer, the market demand is influenced by the level of emission reduction and promotion of low-carbon products. Stackelberg game theory is used to construct four models, one with no carbon cap and three with a carbon cap respectively. And we get the equilibrium solutions of the degree of emission reduction, degree of promotion, sharing ratio, market demand, manufacturer and retailer profit of low-carbon products. Through comparative analysis, it is found that the MKM model is the optimal one in which the government implements carbon cap and carbon subsidy policies and the manufacturer shares the cost of low-carbon promotion. In this model, the degree of manufacturer’s emission reduction is positively correlated with the influence coefficient of low-carbon emission reduction, manufacturer’s marginal revenue, government unit subsidy for low-carbon emission reduction and the initial price of carbon trading. Meanwhile, it is negatively correlated with the government’s carbon emission quota, elastic coefficient of carbon emission quota and the cost coefficient of low-carbon emission reduction. The results are closely related to the government unit subsidies for low-carbon emission reduction and the government carbon allowances. The manufacturer is more willing to accept the MKM model only when they exceed a certain threshold. Finally, the validity of the models would be verified by a numerical example.