Journal Article On Experimental Research in Oligopoly Get access J. W. Friedman J. W. Friedman University of Rochester Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 36, Issue 4, October 1969, Pages 399–415, https://doi.org/10.2307/2296467 Published: 01 October 1969 Article history Received: 04 August 1968 Revision received: 25 October 1968 Published: 01 October 1969

SOME of the highest profit rates appear in industries that advertise heavily. These high earnings have been attributed to barriers to entry associated with product differentiation [2, 6]. A possible alternative explanation is that the treatment of long-lived advertising as current expenses leads firms that invest heavily in such intangibles to overstate their rates of return since their equity is understated [1, p. 153; 15, p. 167]. The same practice may result in the understatement of their dollar profits so that they pay less tax than other firms whose investments are all tangible. The purpose of this paper is to work out more precisely the overor under-statement of profit and rate of return involved in the expensing of advertising and to evaluate the mis-statement in practice.' Part I develops conceptually the conditions under which overor under-statements can be expected. Part II recomputes dollar profits and rates of return for a variety of industries, estimates the tax avoidance that results, and examines the relationship between recomputed profit rates and advertising. Part III contains a proposal for policy change.

ONE of basic facts of life confronting econometric researchers is that in order to test any hypothesis it is necessary to assume validity of other assumptions which cannot be tested. An important part of art of practical econometrics is knowing how much to include in maintained hypothesis; if too much is assumed there may be little or nothing left to test, while if too little is assumed it may be impossible to reach any conclusions, or else analysis may become hopelessly complex. In a recent article in this Review 1 Robert Eisner and M. I. Nadiri have examined critically one of essential maintained hypotheses used by Dale W. Jorgenson, James A. Stephenson, Robert E. Hall, and Calvin D. Siebert in a substantial body of empirical research on demand for capital goods.2 This assumption maintains that long-run partial elasticity of flow of capital services, stock of capital, flow of gross investment demand, or flow of net investment, with respect to price of output (p) divided by price of capital services (c) should be unity. By respecifying Jorgenson's model in a logarithmic form, Eisner and Nadiri have produced tests of hypothesis that long-run price elasticity of demand for capital stock is unity. Not only do they find that estimated elasticity with respect to (p/c) is significantly less than one, but all of their preferred point estimates of this parameter are less than 0.16 and in some cases do not differ significantly from zero. The first of seven conclusions summarized by Eisner and Nadiri is that the role of relative prices, critical element in approach, is not confirmed. I In principle, Eisner-Nadiri goal of relaxing and testing crucial maintained hypotheses is a laudable one. Their conclusions, if they can be sustained, have far-reaching implications. If their estimated elasticities are correct, then fiscal and monetary policy-makers have little, if any, direct influence on investment expenditures. A cautious to importance of Eisner-Nadiri conclusions would seem justified, however, in view of fact that others have also undertaken task of critically examining maintained hypotheses in Jorgenson model. While none of other critics of Jorgenson has defended precise manner in which he has specified his model, without exception results have been favorable to essence of neoclassical approach to investment functions assumption that relative prices do matter.4 The next section of this paper is essentially an exercise in detective work aimed at finding out why Eisner and Nadiri obtained results contrary to body of other research. The analytical method used is to carry goal of Eisner and Nadiri relaxing and testing maintained hypothesisone step further. The maintained hypothesis I relax and test involves assumption of serially independent errors.5 * Support for this research was provided under contract DACA31-67-C-0141, U.S. Army Corps of Engineers, for Office of Emergency Planning, and by National Science Foundation and Ford Foundation through grants to Cowles Foundation for Research in Economics. I am very grateful to Professors Robert Eisner, Robert J. Gordon, David Grether, Dale Jorgenson, Franco Modigliani, and Marc Nerlove and to members of Workshop in Econometrics and Mathematical Economics of University of Chicago, for criticisms of earlier versions of this paper, and to Petter Frenger for extremely helpful research assistance. '[7]. Eisner's criticisms have been amplified in [5] and [6]. 2This body of research includes [12] [13] [16] [17] [19] [20] [21] [22]. 3[7], p. 380. 'See [2] [3] [4] [9]. Some of this evidence is discussed briefly in section III below. The evidence on demand for factors other than capital, and on direct estimation of CES production functions, is also relevant, at least indirectly. See [23] for discussion of this evidence. 'As I note below, stochastic assumption I make that errors are a first order autoregressive process -is only one step more general than that used by Eisner and Nadiri. I do not wish to imply that this stochastic assumption is anything more than a minimal improvement; only reasons for not using other types of assumption was my desire to minimize computational problems.

Charles W. Haley, The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets: A Comment, The Review of Economics and Statistics, Vol. 51, No. 2 (May, 1969), pp. 220-221

There occurs on some occasions a difficulty in deciding the direction of causality between two related variables and also whether or not feedback is occurring. Testable definitions of causality and feedback are proposed and illustrated by use of simple two-variable models. The important problem of apparent instantaneous causality is discussed and it is suggested that the problem often arises due to slowness in recording information or because a sufficiently wide class of possible causal variables has not been used. It can be shown that the cross spectrum between two variables can be decomposed into two parts, each relating to a single causal arm of a feedback situation. Measures of causal lag and causal strength can then be constructed. A generalisation of this result with the partial cross spectrum is suggested.

Abstract Acquisitions by corporations of their own outstanding shares are one of those transactions which seem to be peculiarly subject to misunderstanding. From time to time efforts have been made to shed light on the nature of such transactions, but to date the gloom of confused thinking and questionable policy has not been fully dispelled in this special segment of corporate finance. About a half-century ago the author of this article published an article which he naively assumed would settle the basic issue, once and for all, and in other writings since this piece appeared he has tried his hand at the chore of promoting straight thinking on the subject of "treasury" shares. These comments represent a sort of postscript to the earlier attempts, and they are drafted with the thought that a continuing campaign is necessary to keep the leaven of logic alive wherever there is persistent susceptibility to error. The first step in grappling with the subject of "treasury" shares is to recognize that such shares have substantially the same status as stock that has never been issued. This essential point, unfortunately, has usually been overlooked in the textbooks and other writings on accounting and finance.