Showing papers on "Factor price published in 1995"

Price Level Determinacy Without Control of a Monetary Aggregate

Abstract: It is shown that the price level remains determinate even in the case of two kinds of radical money supply endogeneity -- an interest rate peg by the central bank, and a 'free banking' regime -- that are commonly supposed to imply loss of control of the price level. Price level determination under such regimes can be understood in terms of a 'fiscal theory of the price level,' according to which the equilibrium price level is that level that makes the real value of nominally denominated government liabilities equal to the present value of expected future government budget surpluses. The application of the fiscal theory of the price level to exogenous-money regimes is sketched as well.

Technology, Trade, and Factor Prices

Abstract: A number of recent studies appear to show that international trade is a secondary factor in the growing inequality of wages, with technology probably the main culprit. These studies have, however, been subjected to severe and in some cases harshly worded criticism by trade theorists, who argue that the authors of these studies have misspecified the impacts of both technology and trade on factor prices. This paper shows that it is the critics who are confused. In particular, much recent discussion about technology, trade, and wages is marked by a failure to distinguish between the models we all use and the particular thought experiments we typically use to teach these models -- which happen not to be the appropriate thought experiments we need to analyze the real-world issues.

The Strategic Role of Listing Price in Marketing Real Estate: Theory and Evidence

Abstract: The seller of a real estate property and his broker have two primary goals: to sell the properly for as high a price as possible and as quickly as possible. While these are separate objectives, they are closely related through the listing price of the seller. The listing price affects how long it takes to find a buyer (i.e., Time On the Market = TOM), and TOM influences the price that results from the bargaining between the seller and the buyer. This leaves the seller and his agent with an important question: What is the optimal price to be asked for the property? The objective of this research is to provide a theoretical and empirical analysis of the impact of listing price on TOM and the transaction price.

Empirical Generalizations About the Impact of Advertising on Price Sensitivity and Price

Abstract: Consumers' sensitivities to price changes are an important input to strategic and tactical decisions. It has been argued that price sensitivities depend on factors such as advertising. Prior studies on the effect of advertising on consumer price sensitivity have found seemingly conflicting results. We analyze the characteristics of previous studies in marketing and generate a set of three empirical generalizations. These are (1) an increase in price advertising leads to higher price sensitivity among consumers, (2) the use of price advertising leads to lower prices, and (3) an increase in nonprice advertising leads to lower price sensitivity among consumers. These generalizations have important implications for managers and researchers. Managers need to coordinate their advertising and pricing decisions to attain maximum profits. For researchers, our summary and discussion of empirical results provide directions for future.

A meta-analysis of national brand and store brand cross-promotional price elasticities

Abstract: This paper investigates whether price discounts by national brands influence private-label sales and vice versa through meta-analysis of 261 cross-price elasticity estimates from sixteen product-chains. On average, price reductions by national brands and private labels have more or less equal influence on each others' sales. However, there is greater variation in the effect of private-label price cuts across national brands. National brands with large market shares decrease private-label sales through price cuts but are seldom affected by private-label discounts. National brands with lower relative price have greater influence on private-label sales and are also affected more by private-label price cuts.

Percentage discounts, initial price, and bargain hunting: A heuristic-systematic approach to price search behavior.

Abstract: Consumer decisions concerning price search were investigated using the heuristic-systematic model of social judgment (S. Chaiken, A. Liberman, & A. H. Eagly, 1989 ). Consumers used the size of the percentage discount as a heuristic cue to help decide whether a better price was likely to be available elsewhere. However, as predicted, participants relied on this cue only when the initial base price of the item was low. In contrast, search was continued despite the offer ofa large percentage discount when consumers were shopping for items that were relatively expensive. This finding was attributed to the higher potential costs associated with missing a better price when consumers were shopping for more expensive items. In general, the heuristic-systematic model proved to be a useful way to characterize price search decisions. It was also suggested that these findings might be useful in explaining some conflicting results in the price search literature. Implications for behavioral price theories are also discussed.

How Low Is a Guaranteed-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.

Production Uncertainty and Factor Price Disparity in the Slaughter Cattle Market: Theory and Evidence

Abstract: A model of a competitive firm facing uncertainty with respect to input quality is applied to the issue of price differentials existing between slaughter cattle marketing alternatives. The marketing alternatives are live weight, dressed weight, and dressed weight and grade. The model demonstrates that price differentials between marketing alternatives are the result of buyer uncertainty over cattle quality. If buyers are assumed risk averse, then the price differential between alternatives increases. These results lead to the proposition of a theory of factor price disparity, and empirical evidence is presented in support of this theory.

Input choices under price uncertainty

Abstract: Theory shows that, depending on risk preferences and technological parameters, price uncertainty may alter firms' choice of capital intensity. This paper presents an empirical analysis of the effect of price uncertainty on firms' choices of capital and labor stocks. Empirical results from a cross-section of manufacturing industries, as well as within-industries over time, show that greater price uncertainty increases an industry's capital-labor ratio. It appears that risk aversion does not dominate firms' decision making. These empirical findings have implications for the analysis of factor demand and productivity, and capacity utilization rates.

The Antebellum Transportation Revolution and Factor-Price Convergence

Abstract: In antebellum America an extensive network of canals and railroads was constructed which slashed transportation costs across regions. This 'transportation revolution' presents an interesting case study of the factor-price convergence (FPC) theorem. In this paper I look for integration of regional labor markets driven by FPC by studying the extent to which commodity prices and factor prices converged across regions between 1820 and 1860. My primary result is that I find very little evidence of antebellum FPC across regions. I do find that commodity prices equalized quite markedly. But I also find that nominal labor prices equalized very little, if at all. Given this result, I go on to discuss two aspects of the antebellum economy which very likely helped prevent FPC: differences across regions in endowments and technology. This finding underscores that the FPC theorem does not have unambiguous empirical predictions. How commodity prices feed into factor prices depends crucially on parameters such as endowments and technology.

Testing the induced innovation hypothesis using cointegration analysis

Abstract: This paper deals with some of the problems involved in testing the hypothesis that factor price movements tend to influence the type of technological innovations which are developed and adopted, known as the Induced Innovation Hypothesis. Previous methods to perform this test are briefly reviewed and their limitations are discussed. A testing procedure which is based on the use of cointegration analysis is proposed and its advantages outlined. Finally, one application of the method is made, providing little support for the Induced Innovation Hypothesis in the case of US Agriculture (1948–83).

On the Simultaneous Determination of Current Expenditure, Real Capital, Fee Income, and Public Debt in Norwegian Local Government

Abstract: An extended community preference model including real and financial investments is estimated on accounting time-series data for the local public sector in Norway. The estimation results indicate considerable sluggishness in local public spending, both in current expenditure and investment spending. A positive shift in grants or taxes will in the short run lead to reductions in the net debt, due to the sluggish spending adjustment. But as spending adjustments take place, the effect on the net debt is reversed, so the long run effect is positive. The long run elasticities of factor demand and net debt with respect to exogeneous income constraints do not differ significantly from unity. The estimated price elasticities suggest that factor demand is close to neutral-elastic in the long run. Higher factor prices involve higher production costs, and local authorities are thus induced to increase user charges.

Factor Intensity Versus Factor Substitution in a Specified General Equilibrium Model

Abstract: This paper examines the sensitivity of the comparative static elasticities of a general equilibrium model of production to factor intensity and factor substitution. A model of the US economy is specified with three factors and two goods. Changing factor endowments have consistently inelastic effects on factor prices. Prices of goods, however, have elastic effects on factor prices, and factor endowments have elastic effects on outputs. Factor intensity influences the comparative statics more than factor substitution. Under a move toward free trade characterized by a falling price of manufactures relative to services, the wage of unskilled labor falls while the wage of skilled labor and the price of capital rise.

Scale Economies, Returns to Variety, and the Productivity of Public Infrastructure

Abstract: We examine the productivity of public infrastructure in a general equilibrium context. In our model, infrastructure lowers costs in a manufacturing sector characterized by both firm-level returns to scale and industry-level external returns to variety. Infrastructure alters factor prices, intermediate prices and the allocation of factors across sectors. The effect on manufacturing or aggregate output, however, is indeterminate. In particular, our theory suggests that the degree of monopoly power influences public capital's productivity effect. We test the model using state-level panel data. We confirm the absence of direct effects on output, but find suggestive evidence of a positive impact of public capital on manufacturing variety as measured by the number of manufacturing establishments. These results indicate the need for future research on potentially important indirect channels by which public capital affects manufacturing productivity.

Target Pricing—A Challenge for Purchasing

Abstract: INTRODUCTION - A NEW APPROACH TO PRICING Long known for their uncomplicated approaches to business situations, the Japanese have developed a strategy for price determination that could have significant ramifications in the area of pricing. Artistic in its simplicity and uncomplicated in structure, it provides the buyer with a challenge in obtaining a price reduction, and at the same time tying that reduction into the overall pricing strategy of his or her firm. In turn, the supplier is placed in a position of justifying the price in a way that maintains product integrity while reducing waste in the product and the processes that produced it. The method, known as target pricing, illustrates the concept that price reduction is an integrated effort. It is not only a design engineering effort or a manufacturing effort, but also a purchasing effort. Coordinated activities, all focused on the same target, bring about the desired price reduction. Target pricing itself is simple. In determining the target price, marketing computes the price it believes is necessary to achieve the desired share of market. That price becomes the target. Once the target price is set, the normal operating profit for the item is subtracted from the target price. This remainder becomes the target cost. The organization now focuses on reaching that target cost. Each functional area is responsible for a proportional segment of the cost reduction. This means company-wide cost reduction in all areas of the buyer's firm. It translates to: 1. Design to cost, on the part of design engineering 2. Manufacture to cost, on the part of production 3. Purchase to cost, on the part of purchasing The targets given each of these areas are relative to the price reduction that marketing wishes to achieve for the product. If the purchased material cost component is 40 percent of the price of the current model and a 10 percent price reduction is ordered, then purchasing has the target of reducing the purchased material cost component to 36 percent. Any reduction in excess of the four percentage points simply adds to profit. The greater the spread between cost and price, the greater is the opportunity to use price as a competitive weapon. There are sizable ancillary benefits that flow from adopting this approach. They include: * Clear targets for the size of price reductions needed from a supplier * The ability to assess the reduction's contribution to the overall pricing goal of the company * The ability to compute and document purchasing's contribution on a product by product basis Target pricing also creates a unique operating environment for both the buyer and the supplier. It provides an ideal opportunity to quantify cost savings by the application of such programs as early supplier involvement (ESI), quality function deployment (QFD), and value analysis (VA). Instead of being conceptual and abstract, interaction with suppliers and key company personnel takes on concrete meaning when there is an actual target price to achieve. This is not theory, but the practical application of a simple concept with far-reaching strategic ramifications for both the buyer and the supplier.[1] TARGET PRICING'S OPERATING ENVIRONMENT IN JAPAN Target pricing was developed in Japan, where securing market share has been a higher order priority than short-term product profits.[2] In the long term, enhanced market share will lead to long-term profits. After reaching the goal of market share, and perhaps leadership in the market, the price may be increased to raise the return on investment to the desired level. Constant improvement (Kaizen) activities will also result in cost reduction. Those suppliers who are contributors via cost reduction, and partners in the growth of the customer company, can look forward to increased growth as the market share target is reached. This may not evolve into a single sourcing situation, however, because many Japanese firms also "hedge their bets" with dual sourcing and information sharing between the suppliers. …

Why Growth Rates Differ: The Political Economy of Social Capability in 21 Developing Countries

Abstract: Social capability as a determinant of the differing growth performance of development countries over the last three decades is meant to cover all those causes of growth which go beyond the proximate ones — the level of investment and its efficiency — in explaining differences in growth rates. These include: entrepreneurship, learning by doing, organizational and institutional aspects related to transactions and information costs, as well as the general economic and political framework which determine the relative costs of doing business in different countries, as well as their efficiency of investment, and levels of thrift.

The Antebellum Transportation Revolution and Factor-Price Convergence

Abstract: In antebellum America an extensive network of canals and railroads was constructed which slashed transportation costs across regions. This 'transportation revolution' presents an interesting case study of the factor-price convergence (FPC) theorem. In this paper I look for integration of regional labor markets driven by FPC by studying the extent to which commodity prices and factor prices converged across regions between 1820 and 1860. My primary result is that I find very little evidence of antebellum FPC across regions. I do find that commodity prices equalized quite markedly. But I also find that nominal labor prices equalized very little, if at all. Given this result, I go on to discuss two aspects of the antebellum economy which very likely helped prevent FPC: differences across regions in endowments and technology. This finding underscores that the FPC theorem does not have unambiguous empirical predictions. How commodity prices feed into factor prices depends crucially on parameters such as endowments and technology.

Factor Price Distortions and Public Subsidies in East Germany

Abstract: Economic development in East Germany is not uniform. The building and construction industry is booming but manufacturing industry is stagnating. The paper argues that severe distortions in relative factor prices are the cause of the dichotomous development. These distortions result from excessive wage increases and investment support large enough to make the cost of capital negative for East German industry. The negative cost of capital implies that this factor in fact mutates into an economic good whose ‘production’ the firm tries to increase by using more of other factors. It is suggested that the support for investment be abandoned and that a political compromise be sought, whose aim is to reduce the planned wage rises. The compromise could include an investment wage agreement for insider workers and a distribution of the stock of public housing to prevent workers from suffering wealth losses. It would be a Pareto improvement avoiding the large welfare loss incurred by the policies currently pursued. ; East Germany; Factor Prices; Subsidies; Transformation

Pricing: A Normative Strategy in the Delivery of Human Services

Abstract: The price of a service is an integral part of that service. Price can be viewed as a statement of value, a reflection of costs, or a marketing strategy. In human services, particularly in the not-for-profit sector, price can be used as an effective means of achieving program goals. That is, price can be used to reinforce specific patterns of service utilization, to prioritize resource deployment, and to pursue other goals relevant to the mission of the agency. For service providers in the not-for-profit sector, the revenue production aspect of price may often be secondary to other organizational goals. Traditional approaches to pricing have been either cost or market oriented. The former is supply focused in that price is viewed as a reflection of the cost of the input used to create the goods or services, whereas the latter is demand focused in that price is a tool for eliciting a certain response from a potential consumer. Economic Views on Pricing Economic theory relates price to cost, competition, and the elasticity of demand. In competitive markets the combined forces of competition and the desire of sellers to maximize profits will lead sellers to produce to the point at which price, marginal cost, and average cost are equal (McCain, 1981). The price of health and human services paid by consumers is influenced by third-party payers and voluntary and public subsidies. Insurance policies use deductibles, copayments, and limits to make consumers cost conscious and to limit their financial liability (Feldstein, 1983). Paringer (1983) noted that the presence of insurance leads to "the large divergence between consumer out-of-pocket price and marginal cost" (p. 121), which means that the price paid by the consumer, who is insured against a particular loss, may be far less than the cost of producing the service. Enthoven (1980) argued that the price of insurance itself is, in effect, subsidized because it is purchased with pretax dollars. Therefore, consumers will tend to buy more insurance than they would if they were purchasing insurance with after-tax dollars. In short, an economic approach to the pricing of services is made more complex by the presence of factors external to the market, as well as by social norms and values (MacRae & Wilde, 1979). The extent to which demand for a product changes when the price of the product changes is referred to as price elasticity. Price elasticity is said to be high when demand changes dramatically in response to a given price change and low when such a change has a minimal impact on price. When the demand is relatively elastic, profits will increase when costs are adjusted downward, within certain price points, because consumers will demand a much greater volume of goods or services at the lower price. When demand is inelastic, the amount consumers demand is relatively constant when changes are made between price points. Profits are therefore increased when prices are increased to the maximum the market can bear. Gabor (1988) observed that the amount a consumer may demand may actually increase when prices are raised. Consider, for example, the fictitious planet Zed. On planet Zed there are the very rich, the middle class, and the poor. Furthermore, there are only two kinds of food, rice and caviar. The poor population eats only rice, which is much cheaper than caviar; the rich population eats only caviar; and the middle class eats rice two meals a day and caviar one meal a day. If the price of rice rises, the poor population will eat the same amount of rice but forgo what few luxury items they once could afford. If the poor population suffers extreme poverty, they may eat less rice and go hungry, but no one is that poor on Zed. The rich population, on the other hand, does not eat rice, and therefore the increase in price does not affect them. The middle class, however, provides a more interesting example. Because rice is their primary food, an increase in the cost of rice will dramatically affect their food budgets. …

Factor Price Distortions, Resource Allocation, and Growth: A Computable General Equilibrium Analysis

Abstract: The present paper estimates the welfare cost of both labor and capital market distortions in South Korea using a computable general equilibrium model and expands on earlier studies by distinguishing autonomous differentials from distortions in accounting for differences in sectoral wages and returns to capital. The results of this paper cast doubt on the generality of the proposition on the sensitivity of economic efficiency to market distortions. Our results show that removing labor market distortions would increase output by less than 1% of the base year GDP. Even when capital market distortions are also removed, the GDP increases only by 3.2%, and welfare by 5.6%. The study also examines a consequence of capital market distortions which suggests that distortions may lead to more rapid capital formation and higher concentration of capital stock. Given the industrial policy configuration in Korea, we find that financial incentives had more distorting effects than fiscal incentives. Copyright 1995 by MIT Press.

Economic integration and convergence : an historical perspective

Abstract: Theory is ambiguous as to how globalization influences the relative performances of rich and poor countries. This paper surveys some recent literature on the historical links between international commodity and factor market integration and convergence. Focussing on the late 19th century, a period both of globalization and convergence, it shows that trade had and important impact on factor prices in some countries, just as Heckscher and Ohlin would have predicted. Migration was however a more important force for convergence during this period, while international capital flows led to both convergence and divergence. The analysis suggests that more attention should be paid to open economy forces when discussing convergence.(This abstract was borrowed from another version of this item.)

Testing the Induced Innovation Hypothesis in South African Agriculture (an Error Correction Approach)

Abstract: Apparently factor prices do matter in agricultural production and in the selection of production technology. And in South Africa, more attention should be focused on the technological needs of small-scale farmers. Current policies sustain the bias toward labor-saving technical change, hardly appropriate for a labor-surplus economy in which small farmers in the former homelands face a chronic scarcity of land. Thirtle, Townsend, and van Zyl investigate whether factor prices matter in agricultural production and in the selection of production technology. Each stage of the analysis corroborates the inducement hypothesis, which implies that factor prices do matter in agricultural production and in the selection of production technology. The empirical results also suggest that observed rates and biases of technological change are influenced by average farm size, by spending on research and extension, and by favorable tax and interest-rate policies. In South Africa, the authors contend, more attention should be focused on the technological needs of small-scale farmers. The lobbying power of the large commercial farmers, combined with policies followed under apartheid, must have influenced the allocation of research and development funds between labor- and land-saving technical change. This will have distorted the technological bias toward labor-saving technical change, which is hardly appropriate for a labor-surplus economy in which small farmers in the former homelands face a chronic scarcity of land. These results show that factor prices do matter in agricultural production and the selection of production technology. And there seems to be merit to the World Bank's usual policy prescription - structural adjustment and market liberalization - for economies in which prices are controlled and distorted. They investigate the role of factor prices by applying cointegration techniques to a model of induced innovation based on the two-stage constant elasticity of substitution production function. This approach results in direct tests of the inducement hypothesis, which are applied to data for South African agriculture for the period 1947-92. They check the time series properties of the variables, establish cointegration, and construct an error correction model (ECM) that allows factor substitution to be separated from technological change. Finally, they subject the ECM formulation to tests of causality, which show that the factor price ratios induce the factor-saving biases of technological change. This paper - a product of the Office of the Director, Agriculture and Natural Resources Department - is part of a larger effort in the department to design appropriate agricultural policies.