Showing papers on "Factor price published in 1993"

International Factor Price Differences: Leontief was Right!

Abstract: The factor price equalization hypothesis is widely at odds with the large variation in factor prices across countries. Similarly, the Heckscher-Ohlin-Vanek (HOV) theorem constitutes an incomplete description of trade in factor services: its predictions are always rejected empirically. These two issues are examined using a modification of the HOV model that allows for factor-augmenting international productivity differences. The empirical results are stark: this simple modification of the HOV theorem explains much of the factor content of trade and the cross-country variation in factor prices.

Informative price advertising in a sequential search model

Abstract: The purpose of this paper is to study the role and implications of price advertising when shopping trips are costly to consumers. To do so, we introduce advertising into an optimal sequential search model. Information about prices is both gathered by consumers and disseminated by firms. Consumers search sequentially and stores advertise (with various intensity) when it is in their interest to do so. Our model has a unique equilibrium exhibiting priee dispersion. The model generates predictions about the shape of the price distribution and firms' advertising behavior. We explore the effects of entry, and find that when initial advertising costs (at zero level of effort) are precisely zero, entry drives the equilibrium to the perfectly competitive outcome. However, when initial marginal advertising costs are positive, entry drives prices higher, and while the informed consumers almost surely locate competitive prices, welfare does not necessarily increase. Finally, we compare the effectiveness of the two informational channels. When advertising costs shrink, prices become competitive; however, when search costs shrink, prices remain bounded above marginal production costs.

Oil Prices and Economic Activity: Is the Relationship Symmetric?

Abstract: This paper presents some evidence of an asymmetric effect of oil price spikes upon the U.S. economy. It appears that price increases may be associated with reductions in economic activities, while price decreases do not display a distinct relationship with the economy. Possible explanations for these results are offered. 27 refs., 1 fig., 2 tabs.

The rational effect of price promotions on sales and consumption

Abstract: We explore the rational effect of price variation on sales and consumption in markets where consumers are uncertain about the future price of goods. We first derive an optimal ordering policy which expresses the amount a consumer should purchase and consume in a given period as a function of the observed price of the good, the distribution of future prices, and the nature of his or her inventory. This policy extends previous normative models of inventory control, such as those by Golabi 1985 and Kalymon 1970 to the case where the amount to consume in a given period is an explicit decision variable and prices follow a first-order stochastic process. We then use this model to explore how changes in the long-run frequency and temporal correlations of price promotions should normatively affect the contemporaneous relationship between purchase, consumption and price. Among the predictions which follow from the model are that consumption should rationally increase with the size of existing inventories, the short-term sensitivity of sales to prices should be greater than that of consumption to price, and this discrepancy increases with decreases in the temporal correlation of price deals and the long-term relative frequency of price deals.

Quality competition, welfare, and regulation

Abstract: In this paper, we study the supply of quality in imperfectly competitive markets, and explore the role of regulation in markets where firms may use both quality and price to compete for customers. In a model where firms first choose qualities and then prices, we find that quality decisions have strategic effects: firms react to quality disadvantages by price reductions. Because of this strategic effect, firms do not have the correct incentive to set socially efficient quality levels. Price and quality competition results in a socially suboptimal quality level. Efficiency can be restored by lump-sum transfers and price regulatory policies. Simple price regulation may result in lower price and higher quality.

Price Discrimination, Competition and Regulation

Abstract: This paper analyzes some effects of price discrimination policy in a model where a dominant incumbent firm faces an endogenous degree of competition in one of its two markets. Banning price discrimination tends to encourage more entry, which is desirable if the entrant is as efficient as the incumbent but has ambiguous welfare effects more generally. Prices in both markets might fall. Price discrimination policy under different forms of price regulation is also examined. If the incumbent's average price level is regulated, then allowing price discrimination can lead to pricing below marginal cost, with possible anticompetitive consequences.

Irreversible Price-Induced Efficiency Improvements: Theory and Empirical Application to Road Transportation

Abstract: Energy demand since 1986 seems inconsistent with the notion of constant income and price elasticities reported in the literature. Energy demand growth remained sluggish despite the simultaneous substantial reduction in real fuel costs and increases in real income. This investigation differentiates, as it were, two different price effects that should explain this apparent asymmetry in energy demand. The first effect is embedded in the technical efficiency and therefore largely irreversible. The second effect revolves around consumers` decisions and hence is reversible. This dichotomy of the price effect provides a suitable framework to study energy demand (in this instance, road transport). Moreover, the projections and policy recommendations following from this framework differ from the standard symmetric specification. Moderate price increases will affect consumers` behaviour, while only sufficiently high gasoline prices will trigger further efficiency improvements. The present low growth rates of energy demand mask a much higher growth at the service level, therefore energy demand growth may accelerate as these efficiency gains die out (if price levels or price expectations remain low). 19 refs., 9 figs., 4 tabs.

Price concessions, time on the market, and the actual sale price of homes

Abstract: This article examines the relationships between listing price concessions, time on the market, and the actual sale price of homes. The principal hypothesis that significant listing price concessions, usually the result of overpricing, can lead to real discounts on the final sale price is proven by our empirical results. We also found that the longer the time on the market, the higher the sale price, ceteris paribus. This finding is consistent with the theory that the longer a property remains on the market, the higher the probability is that a relatively superior selling price can be realized.

Price limits and stock market volatility in Taiwan

Abstract: There is no theoretical basis for determining whether the imposition of circuit breakers will have the desired effect of reducing stock market volatility A commonly cited benefit ascribed to price limits is that such measures provide a cooling-off period, allowing investors to re-evaluate market information and to reformulate a new investment strategy Another benefit is that price limits allow order imbalances to be publicized and that therefore they work to attract value traders In both these ways, proponents claim, price limits protect the market from violent movements Opponents of price limits argue that they serve no purpose other than to slow down or delay a price change They argue that even though price limits can stop the price of a share from free falling on the trading day when a shock hits, the price will continue to move toward equilibrium as new limits are established in subsequent trading periods According to this view, price limits only prolong the number of trading days it will take for the market to adapt to a disturbance toward equilibrium Given the above diverse viewpoints, the effects of price limits is an issue to be empirically tested Employing a projected standard deviation series with heteroscedasticity corrected as a measurement for stock volatility, and using both daily and monthly data, we test the hypothesis that a narrower price limit will curtail price fluctuation Our results do not show that price limits have a significant impact on reducing equity price volatility On the contrary, we find that price limits tend to slightly exacerbate price volatility We also find that serial correlations of stock returns are inversely related to the range of price limits, implying a delaying effect of price limits

An econometric analysis of foreign direct investment in the united kingdom

Abstract: This paper constructs a theoretical model of the factors influencing both the location and the method of production chosen by multinational enterprises and examines the extent to which it can be used to explain aggregate foreign direct investment in the United Kingdom over the last two decades. The results suggest that market size, relative factor prices, and the nonproduction costs of trade have an important influence on the location of investment. The evidence presented is also consistent with the hypothesis that investment in the United Kingdom is viewed as offering access to a wider (tariff free) European market. Copyright 1993 by Scottish Economic Society.

A test for price integration in the EC lamb market

Abstract: The purpose of this paper is to test for price integration in the British-French markets for lamb in the period after the introduction of the EC sheepmeat regime in 1980. A Holmes-Hutton rank order procedure is used to determine if price changes in one market cause price changes in the other market and thus define an integrated market. Using weekly price data for the period 1983-86, the results indicate that the British-French lamb markets are integrated in that a price change in one market is fully reflected in price changes in the other. However, there is considerable lag time in response to price changes. This may be attributed to less than perfect substitution between the British and French product, to the ex post nature of the clawback provision that existed in the British price support system during the period of analysis, and to informal trade barriers.

Factor Price Equalization: Theory and Evidence

Abstract: Students of international economics have absorbed the factor price equalization (FPE) theorem over recent decades. It may be time to reconsider that factor prices would likely converge outside the context of the formal Heckscher-Ohlin-Lerner Samuelson model. This paper reviews the theoretical evolution of FPE and the empirical evidence regarding the influence of trade on the international pattern of factor prices.

Necessary and Sufficient Conditions for Factor Price Equalization

Abstract: Although models with factor price equalization are used frequently in both theoretical and applied research in international economics, only sufficient conditions for factor price equalization have been presented in the literature. In this paper, the authors present necessary and sufficient conditions for factor price equalization under quite general assumptions about the technologies of different countries. The necessary and sufficient conditions they derive are consistent with joint production, decreasing returns to scale, and substantive differences in the technologies and endowments of different countries. The authors' results enable them to reconcile the classical approach and the integrated equilibrium approach to factor price equalization.

Price distortion in the transition process: A CGE analysis of China's case

Abstract: The correct evaluation of price distortion is a prerequisite for designing the correct price reform policy which is of tremendous importance in the transitions process from a centrally planned economy to a market economy. The purpose of this paper is to investigate the advantages and shortcomings of various criteria for evaluating price distortion. Based on the characteristics of a two-tiered planned-market system in Chinese economic reform, a computable general equilibrium (CGE) model has been built to evaluate quantitatively the degree of price distortion in the prevailing price system and the effects of price adjustments in order to propose a reasonable price reform policy. The difference between the planned price and the equilibrium price seems to be a better indicator for evaluating the degree of price distortion than others. Furthermore, this difference provides more accurate feedback for price reform policies in order to ensure a stable and controllable price reform process.

Variable price adjustment costs

Abstract: I. INTRODUCTION Costly price adjustment models (often called menu cost models--see Mankiw |1985~), are based on the assumption that nominal price changes in product markets are costly. With aggregate inflation the optimal pricing policies are state-contingent: the firm lets its real price drift until it reaches a threshold; the nominal price is then changed so as to make the new real price equal to a target value. The simplest case is the one-sided (s, S) policy studied by Sheshinski and Weiss |1977~: the real price is increased to S after it has been eroded by inflation to s.(1) Nominal prices are held constant for extended periods of time, as is "...apparent to anyone with eyesight" (Rotemberg |1987~). As the timing of price changes is chosen optimally, the optimal policies dominate time-contingent policies.(2) Not surprisingly the models have been adopted in the New-Keynesian literature as a microfoundation for nominal rigidities. Along with monopolistic competition and coordination failures they have entered the mainstream of that literature.(3) Given their importance for the New-Keynesian approach, costly price adjustment models require closer scrutiny. There are two basic problems: first, it is not clear what the costs of price adjustment are; second, there is empirical evidence inconsistent with the standard, fixed cost model.(4) 1. More complex policies are studied by Barro |1972~, Tsiddon |1988~, Caplin and Leahy |1991~ and Dixit |1991~. 2. See discussions in Blanchard and Fischer |1990~ and Caplin and Leahy |1991~. A notable exception are time-inconsistent problems which may arise in long-term contracts. 3. Rotemberg |1987~, Ball, Mankiw and Romer |1988~, Blanchard |1990~ and Gordon |1990~ review macroeconomic applications. Textbook expositions are in Blanchard and Fischer |1990~, McCafferty |1990~, Abel and Bernanke |1992~ and Mankiw |1992~. 4. Another issue is how a smooth aggregate price level results from lumpy individual adjustments. On this see Caplin and Spulber |1987~ and Caballero and Engel |1991~. The costs of price changes are of two basic types. First are the costs of market response: customers switching, competitors pricing more aggressively, etc. Second are the costs of changing the menu: deciding on the new price, changing labels, informing salesmen and customers, etc. In existing literature the costs are assumed to be fixed, which suggests that they are of the latter type.(5) The main criticism of this approach is that, as menu costs are small, the results are unlikely to be empirically relevant or economically significant. McCallum |1989~ summarizes this argument. In response Akerlof and Yellen |1985~ and Mankiw |1985~ argued that, as the profit function is flat around its maximum, profits are not responsive to changes in the real price. Thus even small costs may result in infrequent price changes. Empirical evidence supports neither the criticism nor the response: the observed frequency of price changes is often too low, and real price variations are too large, to be generated by a small menu cost. For example Cecchetti |1986~ finds that a typical U.S. weekly magazine would change its nominal price once every four to six years, allowing the real price to deteriorate by about 25 percent. Results for monopolistic newspapers in Canada, studied by Fisher and Konieczny |1992~, are similar. The average price increase for the twenty-six products in Israel studied by Lach and Tsiddon |1992~ was 12 percent when the monthly inflation rate was 7.3 percent. Also, in Kashyap |1990~, price changes vary greatly in size across products sold in the same catalog even though, presumably, the menu cost is similar. With respect to the second problem, fixed cost models imply that the size of adjustment rises with inflation (the real price is allowed to be eroded more and is reset to a higher value). Yet in Lach and Tsiddon |1992~ this holds for only sixteen out of twenty-six products; adjustments become smaller for eight and there is no effect in two cases. …

Contracting Costs, Inflation, and Relative Price Variability

Abstract: This paper provides an analysis of the effect of relative price uncertainty and price level uncertainty on contracting costs. The paper shows that, as relative price uncertainty or price level uncertainty increase, contracts where performance is assured through the posting of a bond become more advantageous than contracts that rely on reputation. Increases in relative price and price level uncertainty make contracting more expensive by increasing the payoff from defaulting on long-term contracts when unfavorable realizations occur. As uncertainty increases, long-term contracting becomes less frequent and reputation plays a smaller role in contracting. Copyright 1993 by Ohio State University Press.

Factor Price Equalization: A Cointegration Approach

Abstract: Factor Price Equalization: A Cointegration Approach. — Previous studies of factor price equalization have generated mixed results. It is argued that the limited success often results from the fact that labor cost time series are nonstationary, and hence traditional OLS models are misspecified. In this paper, the cointegration approach is utilized to test for the existence of a long-run relationship between factor prices. It is shown that indices of labor cost per unit of manufacturing output for six major industrialized nations are indeed cointegrated. These results support the hypothesis that factor prices possess a long-run equilibrium relationship.

Compositional change, aggregation, and dynamic factor demand. Estimates on a panel of manufacturing firms

Abstract: Most empirical research on investment and dynamic factor demand has used aggregated data The large number of authors who have cited this as a source of problems strongly suggests possible benefits from analyzing individual firm data This paper presents an analysis of a panel dataset of US manufacturing firms Several models, based on cost minimization and a three-factor Cobb–Douglas technology, are developed The differences concern whether the technology varies across two-digit SIC industries, the presence of fixed adjustment lags, and the determinants of adjustment costs Identification relies on the rational expectations hypothesis, and estimation on non-linear 3SLS The estimates indicate that versions with the adjustment lag perform better than others Conditional elasticities reveal that factor demand responds rapidly to anticipated changes in output and factor prices, a finding consistent with other recent work It appears that the factor demand of large firms is more price sensitive and less sensitive to output than small firms, consistent with recent work on credit market imperfections Comparison of the results based on the pooled and the industry varying technologies indicate that the use of aggregate data is indeed a source of problems

Optimal Trade Policies for a Small Open Economoy

Abstract: This paper investigates optimal trade policies for a small open economy with unemployment. When factor prices are rigid, random foreign prices result in random unemployment of resources. The ranking of second-best policies is investigated. If the marginal propensity to consume the importable is positive and nonincreasing in income, the optimal composite tariff dominates the optimal target price, which in turn dominates the optimal quota. Copyright 1993 by The London School of Economics and Political Science.

The magnification effect with three factors

Abstract: Price changes create a range of factor price adjustments in the three factor, two good general equilibrium model of production. Comparative static adjustments in the model have been described by magnification effects and sign patterns. This note supplements the diagrammatic technique of Jones and East on (1983, Journal of International Economics) and derives eleven magnification effects implied by the sign patterns of Thompson (1985, Canadian Journal of Economics) . At the bottom line, only one type of magnification effect can be ruled out. Stated in terms of the extreme or most intensive factors, the Stolper-Samuelson theorem cannot be reversed. 1. THE MAGNIFICATION EFFECT WITH THREE FACTORS There is ample motivation for wanting to develop general understanding of the structure of production when there are three factors of production . The three factor model with capital, labor, and land is the basis of the "classical" model of trade. Including the third factor also allows the input of energy or skilled labor . The third factor, however, complicates analysis. The important concept of factor intensity has to be reinterpreted. The possibility of technical complementarity arises. Also, factor substitution plays a more critical role in comparative statics than when there are only two primary productive factors. Jones and East on (1993) utilize a diagrammatic approach to derive magnification effects between percentage changes in prices of goods and factor prices in the three factor, two good (3 x 2) general equilibrium model of production . Thompson (1985) derives the comparative static sign patterns of the same model . This note derives all possible magnification effects implied by the comparative static sign patterns. The third factor creates a middle term in the factor intensity ranking across industries. Ruffin (1981) shows that the most intensive or extreme factors in the ranking are migration enemies in that an increase in one factor's endowment lowers the ether's price. Additionally, the middle factor is a friend of both extreme factors. Batra and Casas (1976) argue that the price of an extreme factor is positively related with the price of its good, and negatively related with the price * Thanks are due to Ron Jones, Stephen East on, and Akira Takayama for suggestions on several critical points as this paper developed. An anonymous referee of this journal made important suggestions.

Land, labor and the wage-rental ratio : factor price convergence in the late nineteenth century

Abstract: This paper augments the new historical literature on factor price convergence. The focus is on the late nineteenth century, when economic convergence among the current OECD countries was dramatic; and the focus is on the convergence between Old World and New, by far the biggest participants in the global convergence during the period; and the focus is on land and labor, the two most important factors of production in the nineteenth century. Wage-rental ratios boomed in the Old World and collapsed in the New, moving the resource-rich and labor scarce New World closer to the resource-scarce and labor-abundant Old World. The paper uses both computable general equilibrium models and econometrics to identify the forces causing the convergence. These include: commodity price convergence and the Heckscher-Ohlin Theorem of factor price equalization; migration, capital-deepening and frontier disappearance, factors stressed by Malthus, Ricardo, Wicksell and Viner; and factor-saving biases associated with induced-innovational theory, an endogenous response to relative factor scarcities.

The Competitiveness of Countries and Their Multinational Firms

Abstract: Analyses of international competitiveness and comparative advantage focus on the characteristics and behaviour of countries. They generally assign the responsibility for changes in countries’ competitiveness to macroeconomic developments and for changes in comparative advantage to changes in factor abundance and factor prices, to industry productivity developments, or to economies of scale in production. There is also another strand of literature that attributes changes in competitiveness to more ‘structural’ developments, in the sense that they are more deeply imbedded and long term, and not subject to manipulation by macroeconomic policy. These include changes in the aggregate productivity of the country, its workers, and its firms relative to those of its competitors. Recent discussions of US trade problems have emphasised factors of the second type, in particular worker skills or motivation, or the innovativeness, inventiveness, management abilities, and technological capabilities of US firms, all or some of which have supposedly declined.

Policies for coping with price uncertainty for Mexican maize : policies for maize price variability in Mexico

Abstract: The three goals of recent agricultural pricing policies in Mexico for maize have been to raise farm income and crop profitability by boosting domestic prices through trade restrictions, to provide some price certainty at planting time, and to reduce year-to-year variations in maize prices. The government pursued all goals jointly, using import quotas and a state marketing agency to implement a mandated pan-Mexico price for maize. Farmers benefited primarily from the price support, and very little from the other goals. Maize policies were unsustainable and enormously expensive, so the government has decided to reform the sector. [The reforms will be institutionalized in the North American Free Trade Agreement (NAFTA).] The author shows that the same price enhancement and stabilization could have been achieved at less cost by using variable border tariffs within a price-band mechanism. Moving immediately to such a policy can lower costs yet produce the same effects as current policy. The multiple effects of policy on price can be measured separately, and a variable tariff/price-band scheme can be used to target both price levels and price variability. International markets in commodity futures and options (through millers and banks) could offer farmers an inexpensive way to provide in-season price stability. But the farm sector can take advantage of these instruments only if the domestic distribution system is reformed - by liberalizing interstate trade, harmonizing standards and measures (including sanitation standards), and privatizing storage facilities. No market mechanisms exist to ease the underlying year-to-year price variability for wheat and maize. But the benefits of government intervention to smooth prices are small and, in themselves, do not justify using a price-band mechanism. Still, a price-band system might be considered as a transitional tool. NAFTA calls for slow liberalization of the maize market, but the Mexican government could liberalize its markets more aggressively. Levels of transfer under current policies remain high and the costs of adjustment may depend on the path of international prices during the transition. The advantage of the price-band mechanism is that relief is granted (transparently and automatically) to consumers when prices are abnormally high and to producers when they are abnormally low. This would help forestall political pressures for ad hoc measures.

How Low is a Garanteed-Lowest-Price?

Abstract: A game based on the Bertrand duopoly model is constructed to study the effects of price guarantee policies. Before it chooses a list price, a firm can make a binding commitment to match or beat its competitor's price. The effectiveness of these price guarantee policies in facilitating price collusion depends on the solution concept used. Furthermore, there exists an equilibrium in which neither firm offers any price guarantees and each firm sets price equal to marginal cost. (This abstract was borrowed from another version of this item.)

Land, Labor and the Wage-Rental Ratio: Factor Price Convergence in the Late Nineteenth Century

Abstract: This paper augments the new historical literature on factor price convergence. The focus is on the late nineteenth century, when economic convergence among the current OECD countries was dramatic; and the focus is on the convergence between Old World and New, by far the biggest participants in the global convergence during the period; and the focus is on land and labor, the two most important factors of production in the nineteenth century. Wage-rental ratios boomed in the Old World and collapsed in the New, moving the resource-rich and labor scarce New World closer to the resource-scarce and labor-abundant Old World. The paper uses both computable general equilibrium models and econometrics to identify the forces causing the convergence. These include: commodity price convergence and the Heckscher-Ohlin Theorem of factor price equalization; migration, capital-deepening and frontier disappearance, factors stressed by Malthus, Ricardo, Wicksell and Viner; and factor-saving biases associated with induced-innovational theory, an endogenous response to relative factor scarcities.

Taxes and the price level : a further examination of the PPP hypothesis

Abstract: The effects of taxation on the general price level have traditionally been regarded as reflecting monetary policy, rather than fiscal factors. This view abstracted from the possible endogeneity of monetary expansion with respect to tax hikes, and from the effects which taxation may have on the reserve price of entrepreneurial labor. An analysis of Purchasing Power Parity data for 51 countries from stage IV of the ICP project supports the hypothesis that domestic indirect taxes tend to raise the general price level. In contrast to the accepted view, other prices do not seem to decline to offset the effect of such taxes on the price of tradables. The paper also presents some new evidence on the other factors which cause national price levels to diverge from PPP.