The purpose of this article is to explain the spread between spot rates on corporate and government bonds. We find that the spread can be explained in terms of three elements: (1) compensation for expected default of corporate bonds (2) compensation for state taxes since holders of corporate bonds pay state taxes while holders of government bonds do not, and (3) compensation for the additional systematic risk in corporate bond returns relative to government bond returns. The systematic nature of corporate bond return is shown by relating that part of the spread which is not due to expected default or taxes to a set of variables which have been shown to effect risk premiums in stock markets Empirical estimates of the size of each of these three components are provided in the paper. We stress the tax effects because it has been ignored in all previous studies of corporate bonds.

In this paper we examine the issue of balancing media advertising (pull strategy) and trade promotions (push strategy) for manufacturers of consumer packaged goods utilizing a three-stage game theoretic analysis and test model's implications with scanner panel data. We develop a model of two competing manufacturers who distribute their brand to consumers through a common retailer. In the model the manufacturers directly advertise their brand to consumers and also provide trade deals to the retailer. Each manufacturer's brand has a loyal segment of consumers who buy their favorite brand unless the competing brand is offered at a much lower price by the retailer. The number of loyal consumers is different for the two brands and so is the strength of their loyalty to their favorite brand. The loyal consumers of the brand with stronger loyalty require a larger price differential in favor of the rival brand before they will switch away from their favorite brand. The manufacturers first decide advertising spending level, and then the wholesale price of their respective brands. The two manufacturers do not observe each other's decisions while making these decisions, however they do take into account how the other firm is likely to react as a function of their own decisions. Advertising directly affects the strength of loyalty a consumer has for the favorite brand. If the favorite brand advertises, the loyalty strength increases but if the rival brand advertises, it decreases. The marginal effect of own versus competing brand advertising is different in magnitude. The two manufacturers provide trade deals to the retailer by discounting the brand from a regular wholesale price. The trade discounts are partially passed on to the consumers by the retailer who sets the retail prices of the two brands after observing the wholesale prices. The retail shelf price discounts make the promoted brand more attractive to the consumers due to the reduced price differential between their favorite brand and the promoted brand, thus affecting their switching behavior. The model and its analysis shed light on the role of brand loyalty in the optimal advertising and trade promotion policies for the two manufacturers. The analysis indicates that, if one brand is sufficiently stronger than the other and if advertising is cost effective, then the stronger brand loyalty requires less advertising than weaker brand loyalty, but a larger loyal segment requires more advertising than a smaller loyal segment. Moreover, stronger brand loyalty requires more trade promotion spending under these conditions. The analysis also indicates that the retailer promotes the stronger loyalty brand more often but provides a smaller price discount for it compared to the weaker loyalty brand. These analytical results can be understood better if we view advertising as a “defensive” strategy used to build brand loyalty which helps in retaining the loyal consumers, and price promotions as an “offensive” strategy used to attract the loyal consumers away from the rival b...

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The authors use primary data to empirically test several hypotheses about business format franchising on the basis of the theoretical model presented in Lal (1990). They find support for the hypothesis that royalty rate balances the incentives to the franchisor to invest in brand name with those to the franchisees to invest in retail service. Also consistent with the mixed strategy equilibrium, the authors find that royalty rate positively affects monitoring frequency, and that monitoring costs negatively affect service level. However, contrary to the theory, the authors find that monitoring costs inversely affect monitoring frequency among franchisors. They analytically extend Lal's model to incorporate heterogeneity in monitoring costs among franchisees belonging to the same franchisor and find strong empirical support for the hypothesis that monitoring costs inversely affect monitoring frequency within a franchise system.

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