This is a picture of ESMT books and working papers


ESMT Berlin publishes in international academic journals, which are first-class in their respective fields. Research also provides cutting-edge and profound insights for the business community as well as the classroom through managerial publications and case studies. This rare integration of research and practice makes ESMT Berlin an outstanding location for generating relevant and ground-breaking knowledge.

ESMT Working Paper

Consumer choice under limited attention when alternatives have different information costs

ESMT Working Paper No. 16-04 (R3)
Frank Huettner, Tamer Boyaci, Yalçın Akçay (2018)
Subject(s): Product and operations management
Keyword(s): Discrete choice, rational inattention, information acquisition, non-uniform information costs, market inference
JEL Code(s): D40, D80

Consumers often do not have complete information about the choices they face and therefore have to spend time and effort in acquiring information. Since information acquisition is costly, consumers trade-off the value of better information against its cost, and make their final product choices based on imperfect information. We model this decision using the rational inattention approach and describe the rationally inattentive consumer’s choice behavior when she faces alternatives with different information costs. To this end, we introduce an information cost function that distinguishes between direct and implied information. We then analytically characterize the optimal choice probabilities. We find that non-uniform information costs can have a strong impact on product choice, which gets particularly conspicuous when the product alternatives are otherwise very similar. There are significant implications on how a seller should provide information about its products and how changes to the product set impacts consumer choice. For example, non-uniform information costs can lead to situations where it is disadvantageous for the seller to provide easier access to information for a particular product, and to situations where the addition of an inferior (never chosen) product increases the market share of another existing product (i.e., failure of regularity). We also provide an algorithm to compute the optimal choice probabilities and discuss how our framework can be empirically estimated from suitable choice data.

Pages 52
Publication Nr. 16-04 (R3)
ISSN 1866–3494 (Print)

ESMT Working Paper

Opaque queues: Service systems with rationally inattentive customers

ESMT Working Paper No. 18-04
Subject(s): Management sciences, decision sciences and quantitative methods
Keyword(s): Service operations, rational inattention, strategic customers, rational queueing, information costs, system throughput, social welfare

Classical models of service systems with rational and strategic customers assume queues to be either fully visible or invisible. In practice, however, most queues are only “partially visible” or “opaque”, in the sense that customers are not able to discern precise queue length upon arrival. This is because assessing queue length and associated delays require time, attention, and cognitive capacity which are all limited. Service firms may influence this information acquisition process through their choices of physical infrastructure and technology.
In this paper, we study rational queueing behavior when customers have limited time and attention. Following the theory of rational inattention, customers optimally select the type and amount of information to acquire and ignore any information that is not worth obtaining, trading off the benefits of information against its costs before deciding to join. We establish the existence and uniqueness of a customer equilibrium and delineate the impact of information costs. We show that although limited attention is advantageous for a firm in a congested system that customers value highly, it can be detrimental for less popular services that customers deem unrewarding. These insights remain valid when the firm optimally selects the price. We also discuss social welfare implications and provide prescriptive insights regarding information provision. Our framework naturally bridges visible and invisible queues, and can be extended to analyze richer customer behavior and complex queue structures, rendering it a valuable tool for service design.

Pages 42
Publication Nr. 18-04
ISSN 1866–3494 (Print)

ESMT Working Paper

The Coleman-Shapley-index: Being decisive within the coalition of the interested

ESMT Working Paper No. 18-03
André Casajus, Frank Huettner (2018)
Subject(s): Economics, politics and business environment, Management sciences, decision sciences and quantitative methods
Keyword(s): Decomposition, Shapley value, Shapley-Shubik index, power index, Coleman Power of the Collectivity to Act, Penrose-Banzhaf index, EU Council, UN Security Council
JEL Code(s): C71, D60

The Coleman Power of the Collectivity to Act (CPCA) is a popular statistic that reflects the ability of a committee to pass a proposal. Applying the Shapley value to this measure, we derive a new power index that indicates each voter's contribution to the CPCA. This index is characterized by four axioms: anonymity, the null voter property, transfer property, and a property that stipulates that sum of the voters' power equals the CPCA. Similar to the Shapley-Shubik index (SSI) and the Penrose-Banzhaf index (PBI), our new index emerges as the expectation of being a pivotal voter. Here, the coalitional formation model underlying the CPCA and the PBI is combined with the ordering approach underlying the SSI. In contrast to the SSI, the voters are not ordered according to their agreement with a potential bill but according to their vested interest in it. Among the most interested voters, the power is then measured in a similar way as with the PBI. Although we advocate the CSI against the PBI to capture a voter's influence on whether a proposal passes, the CSI gives new meaning to the PBI. The CSI is the decomposer of the PBI, splitting it into a voter's power as such and as her impact on the power of the other voters by threatening to block any proposal. We apply the index to the EU Council and the UN Security Council.

Pages 22
Publication Nr. 18-03
ISSN 1866–3494 (Print)

ESMT Working Paper

Reverse privatization as a reaction to the competitive environment: Evidence from solid waste collection in Germany

ESMT Working Paper No. 18-02
Juri Demuth, Hans W. Friederiszick, Steffen Reinhold (2018)
Subject(s): Economics, politics and business environment
Keyword(s): Local privatization, state-owned enterprises, competition law enforcement, mergers, logit regression
JEL Code(s): L33, L44, L88, H44, K21

After earlier waves of privatization, local governments have increasingly taken back control of local service provisions in some sectors and countries and, instead, started providing those services themselves (reverse privatization). Using a unique panel data set on the mode of service provision for solid waste collection for German municipalities covering the years 2003, 2009, and 2015, we investigate motives for reverse privatization. Our results show that, in deciding whether to insource or not, municipalities react to the cost advantages of private suppliers as well as to the competitive environment, with more switching to insourcing in concentrated markets. Furthermore, we find local contagion effects, that is, insourcing is more likely if municipalities close by also provide services themselves, whether in horizontally or vertically-related markets. Implications for competition law enforcement are discussed.

Pages 39
Publication Nr. 18-02
ISSN 1866–3494 (Print)

ESMT Working Paper

Knowing me, knowing you: Inventor mobility and the formation of technology-oriented alliances

ESMT Working Paper No. 18-01
Stefan Wagner, Martin C. Goossen (2018)
Subject(s): Strategy and general management, Technology, R&D management
Keyword(s): Inventor mobility, alliance formation, interfirm collaboration, technological capabilities, pharmaceuticals

We link the hiring of R&D scientists from industry competitors to the subsequent formation of collaborative agreements, namely technology-oriented alliances. By transferring technological knowledge as well as cognitive elements to the hiring firm, mobile inventors foster the alignment of decision frames applied by potential alliance partners in the process of alliance formation thereby making collaboration more likely. Using data on inventor mobility and alliance formation amongst 42 global pharmaceutical firms over 16 years, we show that inventor mobility is positively associated with the likelihood of alliance formation in periods following inventor movements. This relationship becomes more pronounced if these employees bring additional knowledge about their prior firm’s technological capabilities and for alliances aimed at technology development rather than for agreements related to technology transfer. It is weakened, however, if the focal firm is already familiar with the competitor’s technological capabilities. By revealing these relationships, our study contributes to research on alliance formation, employee mobility, and organizational frames.

Pages 54
Publication Nr. 18-01
ISSN 1866–3494 (Print)

ESMT Working Paper

Static or dynamic efficiency: Horizontal merger effects in the wireless telecommunications industry

ESMT Working Paper No. 17-04
Michał Grajek, Klaus Gugler, Tobias Kretschmer, Ion Mişcişin (2017)
Subject(s): Economics, politics and business environment, Information technology and systems, Technology, R&D management
Keyword(s): Telecom mergers, static and dynamic efficiency, difference-in-difference
JEL Code(s): L22, O33, G34, L96

This paper studies five mergers in the European wireless telecommunication industry and analyzes their impact on prices and capital expenditures of both merging carriers and their rivals. We find substantial heterogeneity in the relationship between increases in concentration and carriers’ prices. The specifics of each merger case clearly matter. Moreover, we find a positive correlation between the price and the investment effects; when the prices after merger increase (decrease), the investments increase (decrease) too. Thus, we document a trade-off between static and dynamic efficiencies of mergers.

Pages 40
Publication Nr. 17-04
ISSN 1866–3494 (Print)

Working Paper

Consumer demand for credit card services

CEPR Discussion Paper No. DP12506
Alexei Alexandrov, Özlem Bedre-Defolie, Daniel Grodzicki (2017)
Subject(s): Economics, politics and business environment, Finance, accounting and corporate governance
JEL Code(s): D12, G41

We estimate how demand for credit card transacting, borrowing, and late payment responds to the interest rate and late payment fee. We find that lower rates increase borrowing and lower fees increase late payments. Prime cardholders demand for all services is decreasing in any price. In contrast, subprime cardholders borrow less when fees drop, a response consistent with models of limited attention. We calculate that a 2 percentage point rise in the Federal Funds rate decreases borrowing by 16 percent, or $130 billion, that this effect is greater in higher income communities, and that it exhibits geographic agglomeration.

Pages 48
Publication Nr. DP12506

ESMT Working Paper

Brand positioning and consumer taste information

ESMT Working Paper No. 17-01 (R1)
Arcan Nalca, Tamer Boyaci, Saibal Ray (2017)
Subject(s): Product and operations management
Keyword(s): Supply chain management, uncertain consumer taste, product introduction, product positioning, store brands, national brands, information acquisition, information sharing, vertical differentiation, horizontal differentiation

In this paper, we study how a retailer can benefit from acquiring consumer taste information in the presence of competition between the retailers store brand (SB) and a manufacturers national brand (NB). In our model, there is ex-ante uncertainty about consumer preferences for distinct product features, and the retailer has an advantage in resolving this uncertainty because of his close proximity to consumers. Our focus is on the impact of the retailers information acquisition and disclosure strategy on the positioning of the brands. Our analysis reveals that acquiring taste information allows the retailer to make better SB positioning decisions. Information disclosure, however, enables the manufacturer to make better NB positioning decisions – which in return may benefit or hurt the retailer. For instance, if a particular product feature is quite popular, then it is beneficial for the retailer to incorporate that feature into the SB, and inform the manufacturer so that the NB also includes this feature. Information sharing, in these circumstances, benefits both the retailer and the manufacturer, even though it increases the intensity of competition between the brands. But, there are situations in which the retailer refrains from information sharing so that a potentially poor positioning decision by the NB makes the SB the only provider of the popular feature. The retailer always benefits from acquiring information. However, it is beneficial to the manufacturer only if the retailer does not introduce an SB due to the associated high fixed cost.

Pages 33
Publication Nr. 17-01 (R1)
ISSN 1866–3494 (Print)

Working Paper

The Matthew effect as an unjust competitive advantage: Implications for competition near status boundaries

INSEAD Working Paper No. 2017/68/EFE
Forthcoming in Journal of Management Inquiry
Henning Piezunka, Wonjae Lee, Richard Haynes, Matthew S. Bothner (2017)
Keyword(s): Competition, status, tournament, Matthew effect

Merton often envisioned status growth as a process of stepping across a boundary between one status grade and another, more elite status grade. Such boundaries include the border between graduate school and a top academic department that young researchers try to traverse, or the frontier between scientists outside the French Academy and scientists inside the French Academy. Since it is now common to measure status continuously using network data, the behavioral ramifications of status boundaries have been understudied in recent research. In this essay, we focus on competitive behaviors that emerge near a status boundary because of the desirability - as well as the “double injustice” - of the Matthew effect. Offering insights for future research, we discuss how these competitive behaviors are likely to delay, or even derail, status growth for those who are near a status boundary.

The text of the working paper is available at SSRN.

Publication Nr. 2017/68/EFE

ESMT Working Paper

Can capital constraints restrain creativity? The spillover effect of budget constraints on employee creativity

ESMT Working Paper No. 17-03
Francis de Véricourt, Jeffrey Hales, Gilles Hilary, Jordan Samet (2017)
Subject(s): Finance, accounting and corporate governance
Keyword(s): Budgetary controls, budgets, creativity, capital constraints, originality

When setting budgets, managers may place constraints on how resources can be used in an effort to mitigate opportunistic behavior by subordinates. These restrictions can affect the ability of the subordinate to succeed in the budgeted task, but may also have an unintended spillover effect on the ability to innovate. Using an experiment, we find that individuals working under higher budgetary constraints are more efficient in their use of budgeted resources, but are less successful in the budgeted tasks, than their counterparts working under lower budgetary constraints. Importantly, we find that imposing budgetary constraints also causes employees to subsequently generate fewer highly original and creative ideas in an unrelated activity. These findings suggest that budget structures can have unintended consequences on the innovative capabilities of organizations. This paper contributes to the expansive budgeting literature by showing budgetary control design has organizational performance implications beyond the specified budgeted activity.

Pages 29
Publication Nr. 17-03
ISSN 1866–3494 (Print)

ESMT Working Paper

Speeding up the Internet: Regulation and investment in European fiber optic infrastructure

ESMT Working Paper No. 17-02
Wolfgang Briglauer, Carlo Cambini, Michał Grajek (2017)
Subject(s): Economics, politics and business environment, Information technology and systems, Technology, R&D management
Keyword(s): Internet access market, access regulation, investment, infrastructure, Next Generation Networks, broadband, telecoms, cable operators and Europe
JEL Code(s): L96, L51

In this paper we study how the coexistence of access regulations for legacy (copper) and fiber networks shapes the incentives to invest in network infrastructure. To this end, we develop a theoretical model explaining investment incentives by incumbent telecom operators and heterogeneous entrants and test its main predictions using panel data from 27 EU member states over the last decade. Our theoretical model extends the existing literature by, among other things, allowing for heterogeneous entrants in internet access markets, as we consider both other telecom and cable TV operators as entrants. In the empirical part, we use a novel data set including information on physical fiber network investments, legacy network access regulation and recently imposed fiber access regulations. Our main finding is that more stringent access regulations for both the legacy and the fiber networks harm investments by incumbent telecom operators, but, in line with our theoretical model, do not affect cable TV operators.

Pages 45
Publication Nr. 17-02
ISSN 1866–3494 (Print)

Working Paper

Will German banks earn their cost of capital?

Deutsche Bundesbank Discussion Paper No. 01/2017
Andreas Dombret, Yalin Gündüz, Jörg Rocholl (2017)
Subject(s): Economics, politics and business environment, Finance, accounting and corporate governance
Keyword(s): German banking sector, low interest period, profitability, hidden and open reserves
JEL Code(s): G21, G28

Research Question: This paper analyses the effect of a sustained period of low interest rates on the outlook for the German banking sector. Low interest rates provide a particular challenge for German banks, which are highly dependent on interest income and exhibit relatively high cost-income ratios. It is thus an open question whether German banks will manage to earn their cost of capital in this environment.
Contribution: We analyse the interest earnings from loans and the interest expenses for deposits, i.e. the core business interest margin of a bank. We consider different future interest rate scenarios and analyse the extent to which they cause a further narrowing of the core business interest margin. Finally, we test whether a special feature of German accounting standards could serve as a buffer in sustaining profitability for some time.
Results: Our results indicate that a sustained period of low interest rates will increase the pressure on the core business interest margin earned by German banks. Even if interest rates stayed constant at current levels, the core business interest margin of German banks would be reduced by 16% over the next four years. Moreover, this projected decline in the core business interest margin will result in only 20% of German banks earning a cost of capital of 8% by the end of this decade. However, by applying a special feature of German accounting standards and using hidden and open reserves, German banks may alleviate this decline to a certain extent.

Pages 27
Publication Nr. 01/2017

ESMT Working Paper

Pricing when customers have limited attention

ESMT Working Paper No. 16-01 (R2)
Tamer Boyaci, Yalçın Akçay (2017)
Subject(s): Product and operations management
Keyword(s): Pricing, choice behavior, rational inattention, information acquisition, signaling game

We study the optimal pricing problem of a monopolistic firm facing customers with limited attention and capability to process information about the value (quality) of a single offered product. We model customer choice based on the theory of rational inattention in the economics literature, which enables us to capture not only the impact of true quality and price, but also the intricate effects of customer’s prior beliefs and cost of information acquisition and processing. We formulate the firm’s price optimization problem assuming that the firm can also use the price to signal the quality of the product to customers. To delineate the economic incentives of the firm, we first characterize the pricing and revenue implications of customer’s limited attention without signalling, and then use these results to explore Perfect Bayesian Equilbiria (PBE) of the strategic pricing signalling game. As an extension, we consider heterogeneous customers with different information costs as well as prior beliefs. We discuss the managerial implications of our key findings and prescribe insights regarding information provision and product positioning.

Pages 41
Publication Nr. 16-01 (R2)
ISSN 1866–3494 (Print)

ESMT Working Paper

Freemium pricing: Evidence from a large-scale field experiment

ESMT Working Paper No. 16-06
Julian Runge, Stefan Wagner, Jörg Claussen, Daniel Klapper (2016)
Subject(s): Marketing, Product and operations management
Keyword(s): Freemium, pricing, digitization, field experimentation
JEL Code(s): M30, M20

Firms commonly run field experiments to improve their freemium pricing schemes. However, they often lack a framework for analysis that goes beyond directly measurable outcomes and focuses on longer term profit. We aim to fill this gap by structuring existing knowledge on freemium pricing into a stylized framework. We apply the proposed framework in the analysis of a field experiment that contrasts three variations of a freemium pricing scheme and comprises about 300,000 users of a software application. Our findings indicate that a reduction of free product features increases conversion as well as viral activity, but reduces usage – which is in line with the framework’s predictions. Additional back-of-the-envelope profit estimations suggest that managers were overly optimistic about positive externalities from usage and viral activity in their choice of pricing scheme, leading them to give too much of their product away for free. Our framework and its exemplary application can be a remedy.

Pages 43
Publication Nr. 16-06
ISSN 1866–3494 (Print)

ESMT Working Paper

Contracts as a barrier to entry in markets with non-pivotal buyers

ESMT Working Paper No. 15-02 (R1)
Published in American Economic Review, 107 (7): 2041–71.
Özlem Bedre-Defolie, Gary Biglaiser (2016)
Subject(s): Economics, politics and business environment

Considering markets with non-pivotal buyers we analyze the anti-competitive effects of breakup fees used by an incumbent facing a more efficient entrant in the future. Buyers differ in their intrinsic switching costs. Breakup fees are profitably used to foreclose entry, regardless of the entrant’s efficiency advantage or level of switching costs. Banning breakup fees is beneficial to consumers and enhances the total welfare unless the entrant’s efficiency is close to the incumbent’s. Inefficient foreclosure arises not because of rent shifting from the entrant, but because the incumbent uses the long-term contract to manipulate consumers’ expected surplus from not signing it.

Pages 38
Publication Nr. 15-02 (R1)
ISSN 1866–3494 (Print)