Showing papers on "Factor price published in 1994"

Bubbles in Metropolitan Housing Markets

Abstract: A commonsense and empirically supported approach to explaining metropolitan real house price changes is for the theory to describe an equilibrium price level to which the market is constantly adjusting. The determinants of real house price appreciation, then, can be divided into two groups, one that explains changes in the equilibrium price and the other that accounts for the adjustment dynamics or changing deviations from the equilibrium price. The former group includes the growth in real income and real construction costs and changes in the real after-tax interest rate. The latter group consists of lagged real appreciation and the difference between the actual and equilibrium real house price levels. Either group of variables can explain a little over two-fifths of the variation in real house price movements in 30 cities over the 1977-92 period; together, they explain three-fifths.

Market Price Variation, Perceived Price Variation, and Consumers' Price Search Decisions for Durable Goods

Abstract: Previous studies have consistently found that most consumers undertake relatively little prepurchase search for durable goods and do even less price-comparison shopping despite the reported importance of price to consumers' purchase decisions. This article proposes and tests two possible explanations for why consumers' willingness to engage in price search does not increase concomitantly with the price variation of durable goods. The first potential explanation, that consumers simply underestimate the market price variation, was not supported. The second possible explanation, which builds upon Weber's law of psychophysics and Thaler's transaction utility theory, was supported. The data indicate that the psychological utility that a consumer derives from saving a fixed amount of money is inversely related to the price of the item. In this case, even if consumers believe that the price variation of more expensive items tends to be greater, their motivation to spend time in price-comparison shopping for these items may not increase as much as expected.

Late Nineteenth-Century Anglo-American Factor-Price Convergence: Were Heckscher and Ohlin Right?

Abstract: Due primarily to transport improvements, commodity prices in Britain and the United States tended to converge between 1870 and 1913. Heckscher and Ohlin, writing in 1919 and 1924, thought that these events should have contributed to factor-price convergence. It turns out that Heckscher and Ohlin were right: a significant share of the Anglo-American real-wage convergence was due to commodity-price convergence. It appears that this late nineteenth-century episode was the dramatic start of world-commodity and factor-market integration that continues today.

Staggering and Synchronization in Price-Setting: Evidence from Multipro-duct Firms

Abstract: Most of the theoretical literature on price-setting behavior deals with the special case in which only a single price is changed. At the retail-store level, at least, where dozens of products are sold by a single price-setter, price-setting policies are not formulated for individual products. This feature of economic behavior raises a host of questions whose answers carry interesting implications. Are price setters staggered in the timing of price changes? Are price changes of different products synchronized within the store? If so, is this a result of aggregate shocks or of the presence of a store- specific component in the cost of adjusting prices? Can observed small changes in prices be rationalized by a menu cost model? We exploit the multiproduct dimension of the dataset on prices used in Lach and Tsiddon (1992a) to explore several of these and other issues. To the best of our knowledge this is the first empirical work on this subject.

Understanding the price puzzle

Abstract: Recent developments in measuring the stance of monetary policy have highlighted an interesting puzzle--namely, that an unexpected tightening in monetary policy leads to an increase rather than a decrease in the price level. In this article, Nathan Balke and Kenneth Emery present evidence on the price puzzle and discuss possible explanations for it. ; Balke and Emery find that the most plausible explanation is that, during the 1960s and '70s, monetary policy was not implemented in a way that fully offset inflationary supply shocks. During this period, monetary policy would tighten in response to a supply shock but not by enough to prevent inflation from rising. In the data, therefore, contractionary policy is positively correlated with inflation. Since the early 1980s, however, the price puzzle has disappeared for either one, or both, of two reasons: the Federal Reserve has placed greater emphasis on achieving price stability, or there have been fewer inflationary supply shocks to the economy.

The Consequences of Price Instability on Search Markets: Toward Understanding the Effects of Inflation

Abstract: Real price variability depreciates the information about future prices contained in current ones. Repeat-purchase customers have, then, less incentive to acquire price information. The fact that consumers are less well informed allows firms to increase their markups and permits inefficient producers to increase their sales. Production gets reallocated toward higher-cost firms. Given the well-documented correlation between inflation and relative price variability, these results help explain some of the costs of inflation. Copyright 1994 by American Economic Association.

Price Rigidity: Causes and Macroeconomic Implications

Abstract: The price adjustment process is crucial to almost any macroeconomic issue. Current macroeconomic literature freatures widely different models ranking from instantaneous price adjustment to completely rigid prices. Professor Andersen provides a comprehensive analysis of reasons why prices may fail to adjust instantaneously to changes in market conditions. This unified treatment will allow the reader to understand the mechanisms at work without becoming lost in technical details. This volume covers both real and nominal price rigidities and integrates existing results from the literature with new results on causes for failures of price adjustment. The analysis of real price rigidities includes inventories, customer markets, search and collusive behaviour. Due to the focus on macroeconmic implications, the analysis of nominal price rigidities is extensive and includes menu costs, informational problems, asynchronized price setting as well as the interaction between price and wage setting. Andersen's own theoretical work on imperfect information, a prime source of price and wage rigidity, is given prominence in the book. The volume is thus a combinatin of a valuable survey of the literature, and an original expression of future possible research avenues.

Economic Integration and Industrial Agglomeration

Abstract: This paper reviews recent research on industrial location, focusing on the way in which reducing barriers to trade may induce relocation of industry. Integration may cause industries to agglomerate in a few locations, this causing divergence of the structure of integrating economies, and possibly also divergence of income levels. Smaller locations will have lower real wages than large ones, although in the limit — as trade costs go to zero — factor price equalisation occurs.

A Semi-Classical Model of Price Level Adjustment

Abstract: This paper investigates the theoretical and empirical properties of a model of aggregate supply behavior that was introduced in the 1970s but has received inadequate attention. The model postulates that price changes occur so as to gradually eliminate discrepancies between actual and market-clearing values and to reflect expected changes in market-clearing values. Its implications are more 'classical' than most alternative formulations that reflect gradual price adjustment. Empirical results, which utilize a proxy for market-clearing output that is a function of fixed capital and the real price of oil, are moderately encouraging but not entirely supportive.

A Proposal to End Inflation

Abstract: This paper suggests how the price level could be stabilized by the Bank of England adopting a rule to peg the price of a new financial instrument. This new instrument would be similar but not identical to a price-index futures contract. The paper explains how the scheme would work, assesses potential objections, and discusses how the Bank of England could enhance the credibility of its commitment to the rule. It also compares the scheme with the alternatives of targeting the monetary growth rate or targeting the price level. Copyright 1994 by Royal Economic Society.

Market Structure and Pricing Behaviour in Austrian Manufacturing

Abstract: The paper provides a formal model of price rigidities which is consistent with the observed difference in pricing across industries. The empirical test for a sample of Austrian manufacturing industries confirms the derived propositions. Concentration, inventoriability, export orientation, and disparities in firm size do not influence the price level directly but are shown to have an impact on the sensitivity of prices to demand and cost changes. Cost (demand) changes are less (more) fully transmitted into prices in concentrated industries.

Exploring the limits of comparative advantage

Abstract: Exploring the Limits of Comparative Advantage. - The paper examines extensions of the Law of Comparative Advantage to several situations that have not been adequately covered before. The basic result is the positive one that a country’s pattern of trade will be negatively correlated with its relative autarky prices. The first extension is to situations of unbalanced trade. The second extension is to an economy with domestic distortions. Finally, the third extension is to a lumpy country model, in which regions of a country may differ in various ways, including differences in factor prices.

Price Elasticities in International Tourism

Abstract: Economic theory holds a central place for price as a determinant of demand. In international tourism, a large number of empirical studies have attempted to estimate the role of price in the form of...

Measuring and Assessing Vertical Ties in the Agro‐food System

Abstract: This paper examines the extent to which the concept of vertical coordination in the agro-food sector lends itself to specification or measurement in a manner that is analytically useful. Based on a combination of theory and empirical evidence, it is suggested that vertical organization can be specified as a parameter, variable in degree of control by principal over agent. Such a specification has potential application in analytical models concerned with what gives rise to vertical ties and/or their economic consequences. Drawing principally on the concepts of transactions costs, factor price distortion, and vertical restraint, analytical attention is directed to the economic incentives for, and performance implications of the use of linkages other than spot market transactions for coordinating vertically interdependent stages in the food chain. Research challenges are identified.

Price-band stabilization programs and risk: an application to the U.S. corn market

Abstract: The impacts of introducing a partial price stabilization scheme in the U.S. corn market are investigated by using a modified version of the bounded price variation model. Specifically, a model is developed and estimated that includes rational expectations of the first three central moments of the (truncated) equilibrium price distribution. The estimated model is used to simulate market equilibrium effects of introducing upper and lower price limits through a taxsubsidy scheme. The results show that corn producers are downside risk averse, and that market feedback effects of price stabilization can, at times, be more important than direct effects.

Capacity-constrained price competition when unit costs differ

Abstract: This paper characterizes the set of NASH equilibria in a price setting duopoly in which firms have limited capacity, and in which unit costs of production up to capacity may differ. Assuming concave revenue and efficient rationing, we show that the case of different unit costs involves a tractable generalization of the methods used to analyze the case of identical costs. However, the supports of the two firms' equilibrium price distributions need no longer be connected and need not coincide. In addition, the supports of the equilibrium price distributions need no longer be continuous in the underlying parameters of the model. Two applications of our characterization are pursued. In the Kreps-Scheinkman model of capacity choice followed by Bertrand-Edgeworth price competition we show that, unlike in the case of identical costs, Cournot equilibrium capacity levels need not arise as subgame-perfect equilibria. The low-cost firm has greater incentive to price its rival out of the market than exists under Cournot behavior. Our second application is to the analysis of the effects of tariffs and quotas in a model in which a domestic market is supplied by a price setting duopoly consisting of a domestic and a foreign firm. We obtain a strong nonequivalence result.

The impact of price support on set-aside responses to an increase in price uncertainty

Abstract: This paper examines the impact of increased price uncertainty on the decision to set aside croppable land. It is shown that the standard response of increased set-aside may not occur if the commodity in question is also subject to a price-support policy. In this situation, conflicting effects on the set-aside decision arise because an increase in underlying price uncertainty may increase not just the variability but also the expected level of producer prices. Copyright 1994 by Oxford University Press.

Factor prices, employment and investment in u.k. and west german manufacturing*

Abstract: This paper investigates the empirical performance of a system of investment and employment equations for the U.K. and West German manufacturing sectors. The distinguishing feature of the model is the assumption that firms face adjustment costs in changing the stock of capital and labor and that these costs are interrelated. That makes the employment and investment decisions of the firm interdependent, with employment being determined by investment and vice versa. The empirical implementation of the model for both countries is satisfactory and outperforms a rival model in which employment and investment decisions are made separately. Copyright 1994 by Blackwell Publishers Ltd and The Victoria University of Manchester

Asymmetric Price Competition with Price Inertia

Abstract: In this article, I analyze price competition under price inertia. After setting prices, sellers are unable to change them for a period of predetermined length, but may delay price commitments indefinitely. Although most consumers consider the firms' products to be perfect substitutes, an arbitrarily small number of "captive" consumers display brand loyalty to a particular firm, even when the competing brand is cheaper. In this article, I show that a firm with even slightly fewer captive consumers than its competitor achieves monopoly power over all remaining consumers.

Price inertia and production lags

Abstract: The paper shows how prolonged price inertia can arise in a macroeconomic system in which there are temporary price rigidities as well as production lags in the use of intermediate goods. In this context, changes in product demand - generated, say, by changes in the money supply - have long-lasting price and quantity effects. Specifically, a temporary demand shift generates "persistence" in price-quantity decision, in the sense that the price-quantity effects of this shift persist for long after the shift has dosappeared. A permanent demand shift generates "sluggishness" in price-quantity decisions, in the sense that the full price effects of the shift take a long time to appear and that meanwhile quantity effects are present.

Contigent Price Contracts and the Efficiency of Housing Markets

Abstract: Frequently, the response of housing markets to a large negative demand shock is a period during which the liquidity of housing declines, but the price at which transactions take place changes little. In this paper we show that a decline in liquidity can result from the inabilities of sellers and buyers to insure against post-shock price uncertainty. We conclude, that the introduction of a risk-sharing contingent price contract may increase the post-shock liquidity of housing by providing insurance against post-shock price uncertainty. Finally, we show that a mutually agreeable contingent price contract will always exist, even when sellers are excessively optimistic.

The demand for economic journals

Abstract: we examine economists' price sensitivity in their purchases of an important good – economic jouarnals. Our paper takes a cross-section of economis journal prices, criculation figures, and some ‘supply instruments’ to focus on the sign of the price coefficient in the demand equation. We assume that demand (circulation) depends on price, frequency of publication, number of articles, and journal quality. To idenatify demand despite joint determination of price and circulation, we use instruments which shift the marginal cost of journal cost of journal production without affecting demand. We find that demands for economic journals, while price-inelastic, are negatively related to price.

On the infrequent adjustment of price by firms

Abstract: I. INTRODUCTION Recent research by Blinder [1991] indicates that as many as 75 percent of all firms change price no more than twice a year. According to the Wall Street Journal these findings seem to have caused considerable surprise.(1) There is, however, nothing unusual about these results. Infrequent price adjustment by firms can be readily explained by the existence of very small price adjustment (or menu) costs, and the fact that deviations from optimal price adjustment policies often result in negligible reductions in a firm's average rate of profit. This paper brings together in a dynamic setting, two ingredients in the literature that have previously been linked only in a static framework; the small-menu-cost argument of Mankiw [1985], and the near-rational argument of Akerlof and Yellen [1985]. Numerical examples are used to answer the familiar objection that price adjustment costs are too small to be important. The main conclusions of the paper remain valid for a wide variety of plausible parameter values, and do not depend on extreme assumptions concerning the flatness of the firm's profit function. The basic insight that under imperfect competition first-order deviations from optimal behavior imply second-order losses was first made by Bowley [1924, 25]. This idea was further developed by Akerlof and Yellen [1985]. Since the firm's profit function is flat at its maximum point, failure to adjust price in response to small exogenous shocks implies very small losses, even if price adjustment is costless. If there are some costs associated with changing price, a policy of rigid prices in the face of small nominal shocks may be optimal. This would seem to provide a micro explanation for sticky prices. These ideas are usually expounded in the framework of a static, two-period model.(2) Further, the conclusions reached are only valid for small deviations from optimal behavior. The present paper extends the argument to a dynamic framework of continual inflation, and its conclusions are shown to remain valid for large deviations from optimal pricing policies.(3) The paper makes two main points. First, very small price adjustment costs often lead to surprising long intervals between price changes, even when the length of this interval is chosen optimally. Second, the loss of profits suffered by the firm, when the interval between price changes is much greater than the optimal value, is often negligible. Large deviations from optimal policies typically imply very small losses. This is a much stronger claim than the familiar argument that small deviations from optimality imply second-order losses, and it does not follow from the envelope theorem. If a firm adopts a simple rule of, say, changing price twice a year, regardless of the inflation rate, it may earn a level of profit practically indistinguishable from that it would earn if it behaved optimally, at least for inflation rates experienced in the western democracies since World War II. The standard objection to the menu cost explanation of infrequent price adjustment is that these costs are much too small to explain observed pricing behavior. The examples presented below show that this objection can be discounted. Seemingly trivial price adjustment costs (as small as one millionth of the firm's annual revenue) can explain price adjustment frequencies as low as once or twice a year at inflation rates of 20 percent per annum and above. Part of the explanation concerns the flatness of the firm's profit function. Over a wide range of plausible values of demand and cost parameters, profit functions are sufficiently flat to explain observed frequencies of price adjustment, even when the interval between price changes is optimal. But there is more too it than this. Large deviations from optimal price adjustment policies imply surprisingly small losses even for profit functions that would never be described as flat. In particular, the loss in profit caused by large deviations in the interval between price changes from its optimal value are normally very small. …