Showing papers on "Factor price published in 1982"

Price Asynchronization and Price Level Inertia

Abstract: If price decisions are taken neither continuously nor in perfect synchronization, the process of adjustment of all prices to a new nominal level will imply temporary movements in relative prices. It might then well be that, to avoid these movements in relative prices, each price setter will want to move his own price slowly compared to others. The result will be a slow movement of all prices to their new nominal level, and substantial inertia of the price level. This paper formalizes this intuitive argument and reaches four main conclusions: (1) Even small departures from perfect synchronization can generate substantial price level inertia. (2) If price decisions are desynchronized, even anticipated movements in money will usually have an effect on economic activity. It is however possible to find paths of money deceleration which reduce inflation at no cost in output. (3) Price desynchronization has implications for relative price movements as well as for the price level. Goods early in the chain of production have more price and profit variability than goods further down the chain. (4) Price inertia, if it is due to price desynchronization, may be difficult to remove. It may well be that, given the timing decisions of others, no agent has an incentive to change his own timing decision: the time structure of price desynchronization may be stable.

Prices, Technology, and Farm Size

Abstract: In this paper we construct and empirically test a theory of the agricultural firm which explains the long-term growth in farm size in the United States. Typically the U.S. farm unit is a family enterprise. Consequently the ratio of the opportunity cost of farm labor to the price of machinery services determines the size of the farm operation by influencing the machine-labor ratio. Applying the model to U.S. data, we explain virtually all of the growth in the machine-labor ratio and in farm size over the 1930-70 period by changes in relative factor prices without reference to "technological change" or "economies of scale."

Measuring Managerial Efficiency: The Case of Baseball

Abstract: In economic analysis the role of the entrepreneur is paramount to the production process. The entrepreneur is engaged in a Darwinian game of efficiently transforming scarce resource inputs into outputs. In the modern business organization this role is delegated to managers. Despite the conceptual importance of the role of management in the production function, very little is known about the actual effect on output of variations in managerial skill. In part this is due to the lack of proprietory data. In part it is due to difficulties in measuring the outputs and inputs of complex production processes in a meaningful way. A number of investigators have employed the concept of the frontier production function, as developed by Forsund and Hjalmarsson [1] and Timmer [6] and more recently by Schmidt and Lovell [3], to measure the effect on technical and price efficiency of various property rights structures or institutional constraints. To our knowledge estimates of managerial efficiency have not been obtained with firm specific data, except for some regulated industries. In this study we estimate managerial efficiency by manager and by firm, managerial marginal revenue product, the rate of change in managerial efficiency over years of experience and relative factor price efficiency. We use major league baseball teams over the period 1961-1980 as our data source. What is particularly appealing about the choice of major league baseball teams as the industry for analysis is that outputs (win percent) and inputs (player skills) are unambiguously measured, and the production function is simply specified, as shown by Scully, [5]. Our results indicate that managerial skill in baseball contributes very substantially to the production process. The paper will evolve as follows. First, the concept of the frontier production function is briefly outlined. Then, estimates of managerial efficiency by manager and by team are provided and discussed, a managerial efficiency learning curve is estimated, an estimate of managerial marginal revenue product provided, and the managerial efficiency

Monetary and Fiscal Policy with Flexible Exchange Rates

Abstract: If price decisions are taken neither continuously nor in perfect synchronization, the process of adjustment of all prices to a new nominal level will imply temporary movements in relative prices. It might then well be that, to avoid these movements in relative prices, each price setter will want to move his own price slowly compared to others. The result will be a slow movement of all prices to their new nominal level, and substantial inertia of the price level. This paper formalizes this intuitive argument and reaches four main conclusions: (1) Even small departures from perfect synchronization can generate substantial price level inertia. (2) If price decisions are desynchronized, even anticipated movements in money will usually have an effect on economic activity. It is however possible to find paths of money deceleration which reduce inflation at no cost in output. (3) Price desynchronization has implications for relative price movements as well as for the price level. Goods early in the chain of production have more price and profit variability than goods further down the chain. (4) Price inertia, if it is due to price desynchronization, may be difficult to remove. It may well be that, given the timing decisions of others, no agent has an incentive to change his own timing decision: the time structure of price desynchronization may be stable.

Factor Substitutability in Australian Manufacturing with Emphasis on Energy Inputs

Abstract: In this paper a model of the production structure in the aggregate Australian manufacturing sector is estimated, emphasizing the use this sector makes of energy inputs. A translog cost function is estimated with time-series data for four inputs, capital services, labour services, energy and materials and likewise an energy submodel is estimated for solid fuels, oil, electricity and gas. The substitutabilily and the complementarity relationships between the various factor inputs and between the various fuels are examined: an interesting finding is that capital and energy are substitutes and labour and energy are complements. Factor price elasticities are calculated and turn out to be quite significant. The study concludes that rising energy prices will induce significant shifts in both the mix of fuel inputs and the level of aggregate energy utilization.

The Welfare Implications of Externalities and Price Elasticities for Telecommunications Pricing

Abstract: THE efficiency implications of telecommunications service pricing are analogous to a puzzle whose parts are beginning to be assembled. Recently, Mitchell (1978) has examined the efficiency implications of alternative local service pricing approaches. He contrasts the welfare effects of a flat monthly rate with measured service pricing under an optimal two part tariff with an access line charge and a per call charge. Daly and Mayor (1980) have examined the efficiency implications of free directory assistance, contrasting it to marginal cost pricing and found large welfare losses. The efficiency implications of long-distance telecommunications service, which in 1975 accounted for almost one-half of the Bell System revenues,' remains to be placed in the puzzle. The primary purpose of this paper is to examine the efficiency implications of the pricing of local service vis-h-vis conventional long-distance service referred to as Message Telecommunications Service (MTS), which constitutes the bulk of long-distance service. Excluded from this analysis are WATS and private line service. As demonstrated by Rohlfs (1979), substantial cross subsidization occurs between local service, which is priced approximately 50% below marginal cost, and long-distance, which is priced two to three times above marginal cost. Nevertheless, cross subsidization need not imply inefficiency in a second best pricing framework for several reasons (Baumol and Bradford, 1970). First, subsidization of local service can be justified due to access externalities, arising because the value to potential callers is not internalized in the subscriber's price. Second, even in the absence of access externalities, if the price elasticities of both services tend to be very inelastic, cross subsidization may have negligible efficiency effects. The optimal second best pricing approach depends critically on the deviation of price from marginal costs, the extent of the access externality, and the relative price elasticities for local and long-distance service. In this exercise, the welfare effects are particularly sensitive to the price elasticity of MTS service, thereby justifying the empirical focus on the price elasticity of MTS. The MTS demand relationship estimated in this paper contains advances in several respects. First, unlike previous pure time series or cross sectional studies,2 the data set consists of pooled quarterly data (1966 to 1978) for five southwestern states. The analysis of intrastate long distance demand3 offers a much more robust data source than national interstate demand owing to the limited price variation in the latter. The pooled model features polynomial distributed lags and an error structure which corrects for both autocorrelation and heteroskedasticity. Also, the model includes a unique and superior measure of television advertising effects, an index of gross rating points, reflecting the actual frequency with which television advertising is viewed by the public. The use of gross rating points avoids the distortion implicit in the substantial volume discounts reflected in expenditure data.4 The subsequent section outlines the simple theoretical model, which is the basis for econometric estimation and the pooling techniques. Section III reports the empirical results. In section IV, we examine the price elasticity implications for optimal pricing of MTS service. Section V recapitulates the major conclusions and suggests directions for future research. Received for publication September 29, 1980. Revision accepted for publication April 20, 1981. * University of Houston. The author wishes to acknowledge the collaboration of Bruce Egan in the econometric modelling section of this paper. In addition, numerous helpful comments were provided by George Daly, Thomas Mayor, Jeffrey Rohlfs, William Taylor, and an anonymous referee. I See Rohlfs (1978), table III-1. 2 For a review, see Taylor (1980) and Lowry (1976). 3 Taylor notes that from the view of demand, the distinction between interstate and intrastate MTS is purely artificial. See Taylor (1980), p. 97, and table 5.1 4 Comanor and Wilson (1967) note that volume discounts may give rise to increasing marginal returns to advertising expenditures.

Do Multinational Firms Adapt Factor Proportions To Relative Factor Prices

Abstract: It has been alleged that multinational firms fail to adapt their methods of production to take advantage of the abundance and low price of labor in less developed countries and therefore contribute to the unemployment problems of these countries. This paper asks two questions: do multi-national firms adapt to labor cost differences by using more labor-intensive methods of production in LDC's than in developed countries and do multinational firms' affiliates in LDC's use more capital-intensive methods than locally-owned firms? We concluded that both U.S.-based and Swedish-based firms do adapt to differences in labor cost, using the most capital-intensive methods of production at home and the least capital-intensive methods in low-wage countries. Among host countries, the higher the labor cost, the higher the capital intensity of production for manufacturing as a whole, within individual industries, and within individual companies. When we attempted to separate the capital-intensity differences into choice of technology and method of operation within a technology we found that firms appeared to choose capital-intensive technologies in LDC's but then responded to low wage levels there by substituting labor for capital within the technology. Similarly, U.S. affiliates appeared to use technologies similar to those of locally-owned firms but to operate in a more capital-intensive manner mainly because they faced higher labor costs.(This abstract was borrowed from another version of this item.)

Theory of the Firm in "Short-Run" Industry Equilibrium

Abstract: A number of economists have studied the "long-run" input behavior (Eugene Silberberg 1974a; Lowell Bassett and Thomas Borcherding 1 970a, b, c; C. E. Ferguson and Thomas Saving, and Paul Meyer, 1967) of a competitive industry in which entry or exit continues until industry output price moves to the minimum average cost of the marginal firm in the industry. However, this analysis requires very strong assumptions which severely restrict diversity between firms. Silberberg (1974a), for example, assumes all firms' production functions are identical except for a scale factor. Complementary to these long-run investigations, I will present a compact but thorough analysis of the short-run case in which technology and the number of firms are fixed, but industry output-price responds to aggregate supply changes of existing firms resulting from changes in factor prices. In contrast to the long-run analysis, no assumptions limiting interfirm diversity, nor any other restrictions (beyond definition of the usual neoclassical firm) are needed. Furthermore, results are obtained for industry factor demand which do not necessarily hold for individual firms when they respond to factor prices jointly with other firms in the industry. This contradicts the older methodology associated with Paul Samuelson (1947) in which factor-demand responses are derived for firms acting in isolation from each other, and their isolated responses are aggregated to obtain the industry factor response. For example, traditional theory shows input response obeys the law of demand for isolated firms. But this standard result no longer holds when a firm adjusts within a larger industry of firms whose collective output response can affect output price. Thus, the law of demand for industry factor behavior cannot be established by aggregation of isolated firm responses. However, its validity does nevertheless hold in the short run in which the number of firms in the industry is constant. Therefore, the purpose of this paper is to characterize the short-run industry level factor-demand implications, and to show how these implications relate to the traditional theory of isolated firm behavior. In addition, it is briefly shown how these short-run results also imply that the law of demand is likely to hold even in the long run, where entry and exit from the industry can occur (even for an industry of quite dissimilar firms). Given the well-established literature of the standard neoclassical firm, the main body of the paper will confine presentation to required definitions, and the statement plus interpretation of the main results. All proofs and derivations are reserved for the Appendix.

Price dispersion in oligopoly

Abstract: In the world of perfect markets consumers are assumed to respond instantly to every small price change. However, in the real world it is not clear that any small price change will have a great impact on consumers' decisions and that, regardless of their habit, they will shift from one brand to the other. The purpose of this paper is to examine oligopolistic price competition under the assumption that consumers are non-responsive to small price differences. The paper proves the existence of equilibrium in which firms do not necessarily charge the same price; however some of the firms charge their monopolistic price and others charge prices close to that price.

Profitability, Employment and Structural Adjustment in France

Abstract: In this paper, we present a dynamic model which explains output, enployment and energy consumption in the French manufacturing sector in terms of the expectedand actual path of wage rates and energy prices in units of output. The modelhas two distinguishing features: First, the rate of capacity utilization isdetermined explicitly from profit-maximizing behavior and it is viewed as the crucial adjusting variable in the short run. Second, we assume complete lack of substitutability between capital, labor and energy inputs ex post.The model is motivated by a brief discussion of French growth, focusing on the decline of profitability and employment in manufacturing, and simulated using annual data from 1950 to 1979. The wage explosion and the energy shock of the early seventies are interpreted (in a model allowing for overhead labor) in terms of changes in expected real factor prices,and their effects on the utilizationand the profitability of each vintage are quantified. Aggregating over vintages,the model generates the observed decline in profitability and utilization of existing capacity. The results of the simulation are very encouraging, and a simultaneous estimation of the model under static expectations is rejected by the data. There are two limitations of the analysis which will be relaxed in further work. Investment is exogenous and open-economy aspects only appear indirectly, say via constraints on the energy price and the price of output.

The optimal tariff for a small country under international price uncertainty

Abstract: THE optimal tariff argument is widely acknowledged as an exception to the dictum of the classical doctrine of free trade. With a given income distribution and no foreign retaliation, this argument demonstrates that a large trading country can improve its welfare by imposing a tariff to distort domestic prices away from the international terms of trade. The optimal tariff equals 1h/f 1, where qf is the elasticity of the foreign offer curve. For a small country which cannot influence world prices, i.e., qf = 0o, the optimal tariff rate is zero [Kahn (1947), Little (1948), Johnson (1950)]. Because many less developed countries (LDC's) are small trading countries, the prescription of classical economic theory is that the optimal (welfare maximizing) trade policy is free, undistorted trade. However, in recent years due to the uncertainty which characterizes international markets, many developing countries have implemented development programs to promote self-sufficiency and to decrease dependence on external sources of strategic imports. Common policy instruments used to accomplish this are domestic price regulation, import tariffs and/or export taxes to distort internal prices away from the international terms of trade. Traditional trade theory suggests that developing countries impose welfare losses on themselves by so distorting international prices. The theory of the optimal tariff was developed under the assumption of perfect certainty in the international terms of trade. However, due to stochastic elements in the supply as well as demand for certain internationally traded commodities, international trade is not characterized by certainty in trading prices. Future international prices can be known, at best, in a probabilistic sense. This is particularly true in the case of agricultural products, whose supply schedule contains a stochastic weather argument. Recently, several theoretical contributions to the international trade literature have incorporated price uncertainty into formal trade models [e.g., Feder, Just, and Schmitz (1977), Brainard and Cooper (1968), Batra and Russell (1974), Turnovsky (1974), Anderson and Riley (1976)]. However, none of these studies carries the analysis through to draw conclusions for optimal tariff policy of a small trading country which faces uncertainty in international prices. In this paper the formulation of the international price uncertainty problem differs from that in all the above studies except Feder,

Substitution Elasticities in the Large -Scale Manufacturing Industries of Pakistan : A Comment

Abstract: with similar estimates for other developing countries; and that because of the low value of the elasticities, the removal of factor price distortions, while necessary to the attainment of a more labour-intensive pattern of development, needs to be supported by policies aimed at subsidizing the developing of indigenous technologies. While the above summary of the contents of A.R. Kemal's paper may seem innocuous enough, the actual reading of the paper has left me with a profound sense of unease and disagreement. This arises from several considerations : the use of a highly controversial data base without a warning to readers of its serious statistical pitfalls and without acknowledgement of three earlier published articles on the subject in this Review; the uncritical application of a 'production function' approach without setting out in clear, unequivocal terms the various assumptions that are crucial to sustaining it; the . unnecessary preoccupation with the actual task of measurement rather than focusing on the implications of, and the interpretations that might be attached to, the results; the use of a selective, purposive sample of other developing-countries estimates to argue for the 'consistency' of the results; the failure to provide the reader with sufficient evidence on the statistical properties of the data used; and the failure to match the results with such evidence as exists on the movement of relative factor income shares in manufacturing and the 'bias' in technical change. I should, in this comment on Kemal's work, like to elaborate on these, and related, issues.

Profitability, Employment and Structural Adjustment in France

Abstract: In this paper, we present a dynamic model which explains output, enployment and energy consumption in the French manufacturing sector in terms of the expectedand actual path of wage rates and energy prices in units of output. The modelhas two distinguishing features: First, the rate of capacity utilization isdetermined explicitly from profit-maximizing behavior and it is viewed as the crucial adjusting variable in the short run. Second, we assume complete lack of substitutability between capital, labor and energy inputs ex post.The model is motivated by a brief discussion of French growth, focusing on the decline of profitability and employment in manufacturing, and simulated using annual data from 1950 to 1979. The wage explosion and the energy shock of the early seventies are interpreted (in a model allowing for overhead labor) in terms of changes in expected real factor prices,and their effects on the utilizationand the profitability of each vintage are quantified. Aggregating over vintages,the model generates the observed decline in profitability and utilization of existing capacity. The results of the simulation are very encouraging, and a simultaneous estimation of the model under static expectations is rejected by the data. There are two limitations of the analysis which will be relaxed in further work. Investment is exogenous and open-economy aspects only appear indirectly, say via constraints on the energy price and the price of output.

Price effects of wool marketing innovations: some empirical evidence

Abstract: Conflicting claims are often made about the price effects of specific wool marketing innovations. In this paper, a regression model is used to estimate the price effects of two innovations, namely, computerised selling by separation and pre-sale, dense packaging of wool. The results are indicative of aggregate price differentials between wool sold via the 'normal' system and via an innovative system for the particular wool types and sale dates analysed. The extent to which price effects may be offset by differences in selling charges is also considered. In addition, some underlying reasons for price differences, where they exist, are proposed.

Optimal bid-ask price strategies

Abstract: Economic analysis has begun to focus on the implications of transaction costs to trading in capital assets. Specifically, the economics of market making and the price of liquidity has received considerable attention. This paper formulates the market maker's bid-ask price decision as a semi-Markov decision process with the reward being a function of expected return and risk. Risk is intimately related to dealer inventory and hence the solution of the analysis specifies bid-ask price strategies which are inventory dependent. Numerical examples indicate the market maker's optimal bid-ask prices will tilt around the ‘assets’ equilibrium price to control inventory as well as influence expected profit.

Pricing and Selling

Abstract: After purchasing a supply of goods, the retailer assigns prices to the merchandise to sell it at a profit to the consumer This chapter discusses the mechanics and terminology of this operation Price setting is a two-way street One approach is to start from the cost of a product and to add its expenses and the net profit Markup is the amount that is added to the cost of an item to arrive at the sales price or the original retail price For a single item, the price would vary as time passes Any rise in the price after a markdown, up to its original retail price, is termed a markdown cancellation Gross profit is the excess of the sales price over the cost of an item The gross profit can be calculated for a firm's total sales or item by item On a single product sold at its original retail price, gross profit will equal the markup If a product is sold below the cost, it would result in a gross loss Net profit is the excess of gross profit over operating expenses

The Theory of Exhaustible Resources: Was the Price of Oil before the Crisis Close to the Competitive Price?

Abstract: It is shown in this paper that the price of an exhaustible resource in an economy of pure competition is not equal to the marginal cost of production and that, in this respect, the classical theory is the ‘worst possible case’ were the resources considered to be inexhaustible. The price of an almost depleted resource is shown to be equal to the marginal cost of production when the resource is exhausted, and on the other hand, its level depends on three factors: (a) the present cost of a substitute; (b) the life expectancy of the resource remaining; (c) the rates of interest on the international capital market. We have calculated from a coherent data assemblage the ‘right’ price for oil in the context of the theory, as it appeared prior to the 1973 crisis. This may be seen to have approximated the actual price ($2/bbl.). This is the optimal theoretical price produced using the pure competition of world resources. The technical, historical and strategical reasons behind this noteworthy convergence are given, reasons which establish scientifically the crisis as an ‘impasse’ in an outdated strategy which had become unable to adapt to new production characteristics. However, the theory of exhaustible resources shows that, even in an economy of pure competition, there is a natural revenue which cannot be considered systematically to be a revenue of a monopolistic nature, or even be judged in regard to the conclusion of the classical theory of pure and perfect competition.