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Advances in both cost-function analysis and in econometric theory now allow the estimation of cost functions that explicitly include adjustment costs for quasi-fixed factors. Pindyck and Rotemberg (1983) estimate a dynamic cost function for the U.S. manufacturing sector that includes adjustment costs for both capital and labor. Their results indicate that capital is costly to adjust, as expected, but that the cost of adjusting labor is insignificant. In this paper we use their model (hereafter the PR model) to estimate a dynamic cost function for a single industry so that we may examine adjustment costs for labor and capital at a lower level of aggregation.
We are particularly interested in the adjustment cost of labor. Finding that capital is costly to adjust, but that labor is not, is intuitively appealing for situations where firms are building new plants and increasing employment over time. But it seems likely that these results will be different if large, permanent reductions in employment are occurring: the cost of adjusting the labor stock will increase if job security provisions are included in worker contracts and if more white collar workers, who may be more expensive to lay off , l are included among the terminations. Indeed, our results indicate that for at least one declining industry, the cost of adjusting labor may be more important than the aggregate estimates suggest.
Bundling has been a widespread business phenomenon. From computers to stereo systems to vacation packages offered by travel agencies, one can see bundling everywhere in our daily life. Firms use bundling strategy for a variety of reasons. Supply-side and demand-side factors play an important role in bundling decisions. It might be cheaper for a firm to offer two products as a bundle rather than sell them separately. Car manufacturers can assembly components of a car much more efficiently than a customer. Alternatively, consumers might value the bundle more than they value individual products. For example, software packages are meaningless without hardware on which to be installed. However, in some markets it is not so clear whether bundling involves either supply-side or demand-side benefits.
In this paper, I focus on those markets where firms use bundling discounts, which represent one particular type of bundling in order to encourage customer loyalty. In the markets I consider, firms offer multi-products that are not substitutable. As an early example, credit card companies such as Visa take advantage of this strategy by offering free miles, hotel rate discounts etc. Retailers, which are my motivating example in this research, have also successfully experimented with bundling discount strategy.
