Showing papers on "Factor price published in 1979"

Price as an Indicator of Quality: Report on an Enquiry

Abstract: I. Introduction It is generally accepted that price may enter into the determination of consumers' choice in two ways: as an indicator of cost and as an indicator of quality. Contemporary demand theory rests heavily on the first of these two functions while the second tends to be treated as if it were an exceptional and anomalous phenomenon, to be mentioned only in order to be dismissed as unimportant. Indeed, it is of considerable analytical convenience to ignore price as a quality indicator, because if this is not done, the utility function of the individual must be formulated so as to incorporate an additional set of independent variables, namely the prices of all the commodities in the market. The problem is not intrinsically insoluble but it leads to difficulties which can be avoided simply by denying the relevance of this aspect of price.

Price adjustment and market structure

Abstract: The present thesis is concerned with the relationship between price adjustments in response to changes in economic conditions and industrial market structure. Its point of departure consists of abandoning the time-honoured assumption that firms in industrial markets act as if they were price takers. Instead, attention is focused on the determinants of price adjustment in a more realistic industrial setting. Following the introductory analysis, a synthesis is proposed between the long-standing "administered prices" hypothesis, and the recent theories associated with the "new view" of Keynes. It is suggested that both approaches have common theoretical underpinnings which are themselves closely related to this thesis. The main body of analysis consists of a theoretical and an empirical investigation. In the theoretical section, two distinct aspects of the price adjustment decision are examined. The first concerns the comparative statics of adjustment and involves an analysis of the factors which determine the magnitude of price adjustments following changes in cost and demand. Moreover, the influence of market structure on the adjustment process is examined through its impact on the costs of search which are associated with the pricing decision. The second, and no less important aspect of the theoretical investigation concerns the dynamics of price adjustment. The object of this analysis is to assess the impact of market structure on the rate of price adjustment over time. The two hypotheses developed in the theoretical section are put to extensive empirical testing. The quantitative analysis involves mainly time-series and cross-section regressions, but other statistical techniques such as rank correlation and covariance tests are also employed. The first of these hypotheses is that price adjustments in response to short-run changes in demand could be attenuated relative to those occasioned by changes in marginal costs. The rationale for this asymmetry is based on the unequal impact of search costs. The empirical findings, whilst by no means conclusive, do not contradict this view. The second hypothesis suggests that a high degree of industrial concentration will be associated with high rates of price adjustment. This is because concentration facilitates the process of dynamic co-ordination amongst firms by reducing the costs of search. The empirical results come out strongly in favour of this hypothesis. The consequential implications regarding "administered prices" and the management of inflation are explored in the concluding chapter of this thesis.

Factor-price uncertainty with variable proportions: a note

Abstract: Marion Stewart recently examined the theory of the neoclassical firm under factorprice uncertainty in the same spirit as the well-known Leland-Sandmo theory of the firm under demand uncertainty. The main finding of his study is that, in most cases, risk-averse managers when faced with inputprice uncertainty would substitute fixed (riskless) factors of production for the risky factors. The principal methodology used consisted of a direct comparison of the input choices of the firm's manager under both risk neutrality and risk aversion. Stewart's results are important and have many obvious empirical implications, but they contain two serious deficiencies that may lead to errors and confusions. First, the formulation and solution of the multiple input case in the Appendix, as well as the uncertain price case in Section IV are flawed, insofar as the decision rules followed by the firm are suboptimal. Second, the first paragraph of Stewart's study implies that a riskindifferent manager operating in an uncertain environment is not going to be affected by the uncertainty with respect to his output and factor-proportions decisions. This implication is misleading. It is shown in this paper that input price uncertainty combined with risk indifference has a very definite effect upon the input choices of the firm as compared to the certainty case. This effect of uncertainty combined with risk neutrality must be distinguished from that of risk aversion proper because it has direct implications for empirical work. In empirical work at the firm or industry level, input prices are estimated by dividing the observed ex post cost of each input by the observed input use during the reference period. The result is an observed "average" price that, under certain assumptions, corresponds to an unbiased estimate of the expected ex ante input price. If (as it often happens) this observed price is used in the empirical work as if it were known ex ante with certainty, then in general a bias will be introduced even when the manager is risk indifferent. It is shown in this paper that in cases of practical interest this bias may or may not have the same sign as the effect of risk aversion, which means that the total effect of uncertainty upon input choices is very often unpredictable when compared to the predictions of the theory of the firm under certainty if the input and output prices are assumed equal to their mathematical expectations. This weakens somewhat the impact of Stewart's results. The other point made in this note is that in cases of more than one "risky" input, the method followed by Stewart (in his Appendix A) is incorrect, insofar as it leads to suboptimal decisions. Under variable proportions production the firm does not need to choose simultaneously the levels of all inputs. Hence, the risky inputs can be purchased after uncertainty has already been resolved, given the level of the riskless input. The selection of the latter must therefore incorporate the fact that risky inputs have been selected ex post under conditions of certainty. Similar remarks are also true when there is combined uncertainty in input and output prices. I shall consider a hypothetical firm that uses three' inputs, x1, x2, and X3, to produce the final product q, and let rl, r2, r3, and p denote their respective unit prices. Input X3 (plant and equipment) must be chosen prior to the other two, so that at the time X3 iS

Price/performance patterns of U. S. computer systems

Abstract: Econometric models of the U.S. computer market have been developed to study the relationships between system price and hardware performance. Single measures of price/performance such as “Grosch's Law” are shown to be so oversimplified as to be meaningless. Multiple-regression models predicting system cost as a function of several hardware characteristics do, however, reveal a market dichotomy. On one hand there exists a stable, price predictable market for larger, general purpose computer systems. The other market is the developing one for small business computer systems, a market which is relatively unstable with low price predictability.

Factor Price Equalization with More Industries Than Factors

Abstract: Publisher Summary This chapter discusses factor price equalization with more industries than factors. The local version of factor price equalization is that small changes in factor endowments leave factor prices unchanged, given that goods prices are fixed. Factor prices are locally constant as functions of factor endowments. A global version is that two countries whose factor prices are locally constant and that face the same international prices and have the same technology also have exactly the same factor prices. Factor price equalization, both local and global, depends critically on the comparison of the number of industries and the number of factors. For example, on the negative side, if the number of factors exceeds the number of goods, small changes in factor endowments will change factor prices, and local factor price equalization does not hold (Samuelson, Diewert and Woodland, and Jones and Scheinkman). On the positive side, both local and global factor price equalization results have been shown for the cases where there are exactly as many factors as industries. A big difference between the cases of equal and unequal numbers of industries and factors is that in the former case, the cone of factor price equalization is unique, whereas it need not be in the latter, more realistic, case.

On the Concepts of Factor Intensities and the Relation between Commodity Prices and Factor Rewards

Abstract: Publisher Summary This chapter provides an overview of the concepts of factor intensities and the relation between commodity prices and factor rewards. If a competitive economy of the two-commodity and two-factor model is considered, according to the Stolper−Samuelson theorem, a rise in the price of a commodity will bring about a more than proportionate increase in the price of the corresponding intensive factor, while the other (less intensive) factor price must fall. Recently, many economists have tried to generalize the Stolper−Samuelson theorem from the 2 × 2 case to the many-commodity and many-factor case. In the n × n case, Chipman defined the Stolper×Samuelson criteria as follows: (1) the weak Stolper−Samuelson criterion states that there exists an association of goods and factors such that a rise in the price of a good will bring about a more than proportionate increase in the price of the corresponding intensive factor and (2) the strong Stolper−Samuelson criterion states that there exists an association of goods and factors such that a rise in the price of a good will bring about a more than proportionate increase in the price of the corresponding intensive factor and no increase in any of the remaining factor prices.

The Distributional Consequences of Recent Inflation

Abstract: Income redistribution is an inevitable byproduct of inflation, simply because all prices do not move upward at the same rate. The most recent period of accelerated inflation in the United States, that is the period beginning in 1972 and continuing up to the present time, has been characterized by extremely diverse changes in income within agriculture because the prices for different commodities have peaked at different times and have risen by widely varying amounts. Income redistribution also has occurred because factor price ratios have changed. Appreciation in land values has redistributed income from new en-

The treatment of “home ownership” in the cpi*

Abstract: This paper explores the imputed service price approach to the pricing of the services of consumer-owned-and-used durables in the construction of the consumer price index, using the services of owner-occupied housing as an illustration. A theoretical framework for analyzing this question is first developed. Certain practical problems are then discussed. The conceptual difficulty of constructing an appropriate rate of return on the basis of available data on interest rates and house prices, in the context of inflation, is explored. Two arguments are advanced that statistical agencies ought not to follow the imputed service price approach in pricing the services of owner-occupied dwellings and other consumer durables. On the one hand, nominal interest rates will, in any short period, reflect monetary policy and not any change in the money “rental” of owner-occupied houses. Second, movements in nominal interest rates will also reflect changes in the money price of pure consumption goods, as well as changes in the money price of houses. The argument is extended to other consumer durables and, in the limiting case, to monetary balances, and it is concluded that in all but trivial cases the application of the service price approach leads to price movements of little or no meaning.

A Systematic Approach to Effective Pricing

Abstract: Introduction Price is only one of the many elements in the marketing mix which determine the extent of the success or failure of a product, and since in any actual marketing situation price exerts its influence in combination with all the other factors, it would seem justified to ask whether it is at all reasonable to lift price out of the complex and discuss it by itself.

Market Interdependence and Third-Degree Price Discrimination: Comment

Abstract: The purpose of this theoretical note is to develop a model of third-degree price discrimination in which the quantities sold in each market are interdependent. We demonstrate in our mathematical model that in this situation the price differential may be explained not only in terms of price elasticity differentials, as is typically shown to be the case, but also in terms of the market interdependency, which is generally overlooked.

Production as behavior toward risk

Abstract: This article presents a mean-variance model of the risk-averse firm under price uncertainty and examines the impact of uncertainty on the firm's production decision.It then develops a geometric method for comparative-statics analysis.

Price Distributions, Price Comparison Surveys, and Price Competition: A Comment on a Paper by Schmidbauer

Abstract: Klaus Schmidbauer presented a paper entitled “On the Price Structure in Consumer Markets: Results of a Secondary Analysis of Price Comparisons of Consumer Durables”. The paper analysed price data on consumer durables collected by the German Institut fur angewandte Verbraucherforschung in order to throw some light on two important issues in consumer policy. First, Schmidbauer considered the shape and form of the distributions of prices of given makes and models of consumer durables found in local markets. Inspection of these empirical distributions permitted the author to reach some conclusions about the usefulness of providing price comparison information on a public good basis. Secondly, the variety of different prices on offer in a local market (as measured by the coefficient of variation) was suggested as a measure of local price competition. Simple correlations were found between the number of prices quoted for a model and the range of those prices (positive); the average variability of prices between sellers and the price level in a given local market (negative); and the size of the local market and the price level (negative). Overall these results were taken as confirming the notion that increased price competition is reflected in an increased variation in price.

Technical analysis of the futures market and its relation to hedging

Abstract: The cattle market is known for its extreme price fluctuations that can make a pauper out of a prince. The boom or bust nature of the industry is nothing new, as the change in prices can be fairly dramatic. Since the price that a cattle feeder receives for his cattle has a large impact on his profits, the severe price changes have had a major impact on the variation in net profits for cattle feeders. If a cattle feeder is going to reduce his price risk by using selective hedging, he has to either (a) be a good price forecaster or (b) have some strategy that is less subjective than price forecasting. If his judgement is incorrect, he could be hedged when the price is increasing and unhedged when the price is decreasing, increasing the volatility of his income and decreasing the average income. Therefore, if the entrepreneur is going to be able to use the futures market to protect himself from price declines, he will need to be able to determine when the futures price is going to fall.

Relative Prices and ‘Factor Price’ Equalisation in a Heterogeneous Capital Goods Model

Abstract: In recent years there has been some debate on the consequences for some well-known international trade theorems of the inclusion of heterogeneous capital goods in the process of production.1 In one contribution Steedman and Metcalfe [12] have shown by means of a simple numerical example that the equalisation by trade of so-called ‘factor prices’, the wage and rate of profits, may not occur in these circumstances. Such a result requires a non-monotonic relationship between relative commodity prices and ‘factor prices’. The purpose of this paper is to examine this relationship in the context of a multi-commodity, multi-technique circulating capital model of the type familiarised by Sraffa [11]. We shall attempt to show that circumstances exist in which ‘factor price’ equalisation (f.p.e. for short) may not be realised, and that such circumstances are not dependent on there being complete international specialisation, nor on reversals of ‘factor’ intensity.

Factor Prices and Methods of Cultivation

Abstract: A basic feature of the agricultural sector of almost all underdeveloped countries is that access to factors of production is much easier for some groups than others. That is, factor markets are highly ‘imperfect’, and in consequence market prices diverge considerably from social opportunity costs. In many instances, in fact, there is a multiplicity of markets within a locality for a single factor of production, e.g. credit. In these instances there may be no such thing as ‘the’ price of an input; different groups may pay different prices for the same input. In other cases there may be no market for certain inputs. For example, in many regions of the world land is seldom bought or sold; transfer is usually through gift or inheritance. Moreoever, in some regions there may be no rental price of land, although producers will, of course, operate in terms of implicit or subjective prices. Thus the rural areas of underdeveloped countries are characterized both by a scarcity of factor markets and by an abundance of small, fragmented markets. This market structure affects the allocation of resources within agriculture, the methods of production adopted by the farmer, the readiness to innovate and the distribution of income.

Taxes on Factors of Production: Their Effects on Factor Proportions and Inflation.

Abstract: : In the last 25 to 30 years, payroll taxes and subsidies for investment have substantially altered relative factor prices facing firms. This paper presents theoretical and empirical findings on how these taxes and subsidies have affected long-run factor substitution in U.S. manufacturing industries and the short-run effects of payroll taxes on inflation in the economy as a whole. Neoclassical theory suggests that payroll taxes and investment subsidies will lead to substitution of capital for labor in production. In the analysis of factor substitution, quarterly time series data were used to estimate factor demand equations. The empirical results were mixed. The effects of input prices on the demand for factors were strong and in the expected direction. The tax variables were not found to have uniformly strong effects, although some results do support the neoclassical theory of factor demand. The analysis of labor supply focuses on participation, the dimension of supply displaying the most noncyclical variation. For males, participation was closely related to the likelihood of finding a job, as measured by the ratio of employment to labor force; but effects were not found for other variables, including the real wage rate. For females, the real wage rate was a determinant of participation as well as the probability of finding employment was a determinant of participation. For neither sex was a robust relationship found between the Social Security tax variables and labor supply....Costs, Econometrics, Economic models, Industrial production, Inflation(Economics), Investments, Labor supply, Manufacturing, Taxes.