Showing papers on "Factor price published in 1999"

A Range Theory Account of Price Perception

Abstract: It is well accepted in the behavioral pricing literature that a consumer's perception of the attractiveness of a market price depends on a comparison of the market price to an internal reference price The rationale underlying this dynamic has its roots in Adaptation-Level Theory However, consistent with Range Theory, we postulate that a consumer's assessment of the attractiveness of a market price may also depend on a comparison of the market price to the endpoints of the evoked price range Four experiments provide evidence that variance in the width of the evoked price range affects price-attractiveness judgments in the absence of any variance in the internal reference price Of theoretical importance, findings from the present article suggest that pricing theory is in need of augmentation in order to account for this effect Of managerial relevance, these findings suggest that changes in context can bring about changes in the evoked price range and perceptions of the attractiveness of a market price

Demand aggregation through online buying groups

Abstract: An online buying group (referred to herein as a “co-op”) is formed for the specific purpose of purchasing a particular product at ( 102 ) by defining a start time, end time, critical mass, any minimum number of units offered, any maximum number of units offered, starting price and product cost curve. As data is gathered from buyers, by means of their making binding purchase offers, the co-op is modified at ( 108 ) using a pricing tool, so as to take into account for this market data in the definition of the price curve. A buyer chooses a product co-op of interest at ( 114 ). The buyer is presented with the following essential co-op information: current price, closing time, next price level (as defined by a price curve visibility window and the price curve) sufficient to entice the buyer to make an offer. Once a buyer has made up his mind, the decision must be made at ( 116 ) to offer a purchase price which includes the current price, guaranteeing availability if critical mass has been achieved, or to make an offer at a lower price range that can be accepted only if the co-op price drops to that level, which may not occur. Given a decision to make an offer at such lower price, the buyer enters such maximum price at which he is willing to purchase the product at ( 118 ). Should the current price drop to the level at which the offer was made, the price contingency is removed from such offer and assuming critical mass is achieved, the offer is accepted at at the close of the co-op at ( 122 ), and processed accordingly. Inventory is allocated to fulfill the accepted offer at ( 126 ) following the closing of the co-op at ( 124 ).

Asymmetric and Neighborhood Cross-Price Effects: Some Empirical Generalizations

Abstract: This paper provides some empirical generalizations regarding how the relative prices of competing brands affect the cross-price effects among them. Particular focus is on the asymmetric price effect and the neighborhood price effect. The asymmetric price effect states that a price promotion by a higher-priced brand affects the market share of a lower-priced brand more so than the reverse. The neighborhood price effect states that brands that are closer to each other in price have larger cross-price effects than brands that are priced farther apart. The main objective of this paper is to test if these two effects are generalizable across product categories, and to assess which of these two effects is stronger. While the neighborhood price effect has not been rigorously tested in past research, the asymmetric price effect has been validated by several researchers. However, these tests of asymmetric price effect have predominantly used elasticity as the measure of cross-price effect. The cross-price elasticity measures the percentage change in market share or sales of a brand for 1% change in price of a competing brand. We show that asymmetries in cross-price elasticities tend to favor the higher-priced brand simply because of scaling effects due to considering percentage changes. Furthermore, several researchers have used logit models to infer asymmetric patterns. We also show that inferring asymmetries from conventional logit models is incorrect. To account for potential scaling effects, we consider the absolute cross-price effect defined as the change in market share percentage points of a target brand when a competing brand's price changes by one percent of the product category price. The advantage of this measure is that it is dimensionless hence comparable across categories and it avoids scaling effects. We show that in the logit model with arbitrary heterogeneity in brand preferences and price sensitivities, the absolute cross-price effect is symmetric. We develop an econometric model for simultaneously estimating the asymmetric and neighborhood price effects and assess their relative strengths. We also estimate two alternate models that address the following questions: i If I were managing the ith highest priced brand, which brand do I impact the most by discounting and which brand hurts me the most through price discounts? ii Who hurts whom in National Brand vs. Store Brand competition? Based on a meta-analysis of 1,060 cross-price effects on 280 brands from 19 different grocery product categories, we provide the following empirical generalizations: 1. The asymmetric price effect holds with cross-price elasticities, but tends to disappear with absolute cross-price effects. 2. The neighborhood price effect holds with both cross-price elasticities and absolute cross-price effects, and is significantly stronger than the asymmetric price effect on both measures of cross-price effects. 3. A brand is affected the most by discounts of its immediately higher-priced brand, followed closely by discounts of its immediately lower-priced brand. 4. National brands impact store brands more so than the reverse when the cross-effect is measured in elasticities, but the asymmetric effect does not hold with absolute effects. Store brands hurt and are, in turn, hurt the most by the lower-priced national brands that are adjacent in price to the store brands. 5. Cross-price effects are greater when there are fewer competing brands in the product category, and among brands in nonfood household products than among brands in food products. The implications of these findings are discussed.

Geographical Disadvantage: A Heckscher-Ohlin-Von Thunen Model of International Specialization

Abstract: What effect does distance have on costs for economies at different locations? Exports and imports of final and intermediate goods bear transport costs that increase with distance. Production and trade depend on factor endowments and factor intensities as well as on distance and the transport intensities of different goods. The combination of distance, poor infrastructure, and being landlocked by neighbors with poor infrastructure can make transport costs many times higher for some developing countries than for most others. Drawing on two traditions of economic modeling - Heckscher-Ohlin trade theory and von Thunen's work on the isolated state - Venables and Limao analyze the trade and production patterns of countries located at varying distances from an economic center. Predicting a country's production and trade pattern requires knowledge of the country's location, its factor endowment, and the factor intensities and transport intensities of goods. Venables and Limao define transport intensity and show how location and transport intensity should be combined with factor abundance and factor intensity in determining trade flows. A theory based on only one set of those variables, such as factor abundance, will systematically make incorrect predictions. They report that geography and endowments interact in such a way that the world divides up into economic zones with different trade patterns. Countries close to the economic center may specialize in transport-intensive activities; countries further out become diversified, producing and sometimes trading more goods; countries still further out may become import-substituting (replacing some of their imports from the center with local production); in the extreme, regions become autarkic. More remote locations have lower real incomes. Globalization changes the terms of trade, improving the welfare of regions further out from economic centers, though reducing the welfare of closer regions. Where will a new activity, such as assembly of a new product, locate? Remote locations are disadvantaged if the product has high transport intensity (perhaps because of heavy requirements for intermediate inputs). But the costs of remoteness are already incorporated into the factor prices of those regions, which makes them more attractive. Which location is chosen depends, therefore, on how existing activities compare with the new activity in transport intensity and factor intensity. This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to study the location of economic activity. The authors may be contacted at avenables@worldbank.org or ngl4@columbia.edu

The Fallacy of the Fiscal Theory of the Price Level

Abstract: It is not common for an entire scholarly literature to be based on a fallacy, that is, ''on faulty reasoning; misleading or unsound argument''. The ''fiscal theory of the price level'', recently re-developed by Woodford, Cochrane, Sims and others, is an example of a fatally flawed research programme. The source of the fallacy is an economic misspecification. The proponents of the fiscal theory of the price level do not accept the fundamental proposition that the government''s intertemporal budget constraint is a constraint on the government''s instruments that must be satisfied for all admissible values of the economy-wide endogenous variables. Instead they require it to be satisfied only in equilibrium. This economic misspecification has implications for the mathematical or logical properties of the equilibria supported by models purporting to demonstrate the properties of the fiscal approach. These include: overdetermined (internally inconsistent) equilibria; anomalies like the apparent ability to price things that do not exist; the need for arbitrary restrictions on the exogenous and predetermined variables in the government''s budget constraint; and anomalous behaviour of the ''equilibrium'' price sequences, including behaviour that will ultimately violate physical resource constraints. The issue is of more than academic interest. Policy conclusions could be drawn from the fiscal theory of the price level that would be harmful if they influenced the actual behaviour of the fiscal and monetary authorities. The fiscal theory of the price level implies that a government could exogenously fix its real spending, revenue and seigniorage plans, and that the general price level would adjust the real value of its contractual nominal debt obligations so as to ensure government solvency. When reality dawns, the result could be painful fiscal tightening, government default or unplanned recourse to the inflation tax.

Toward a General Theory of Wage and Price Rigidities and Economic Fluctuations

Abstract: This paper begins with the hypothesis that large economic fluctuations, the marked changes in the unemployment that characterize market economies, are a consequence of problems of adjustment to disturbances, especially adjustments of wages and prices. Two strands of work have addressed these problems of adjustment. One focuses on rigidities: downward rigidities in wages are at the center of traditional Keynesian models. The other focuses on the consequences of rapid changes, particularly in asset prices, in the context of markets with incomplete contracting (imperfect indexing) and imperfect capital markets. While the second tradition traces its origins at least back to Irving Fisher’s debt-deflation theories, it has been revived in the newKeynesian work of Bruce Greenwald and Stiglitz (1988, 1989, 1990b, 1993, 1995) and others. The fact that wages and prices did fall dramatically in the Great Depression (by more than a third in the United States) provided some of the impetus to the latter theory. The major economic downturn this year in East Asia, with unemployment in Indonesia soaring from 4.7 percent to 14.3 percent and output falling by at least 16 percent, was accompanied by huge changes in prices: over the first year of the crisis, the current best estimate is that Indonesian real wages fell by 40–60 percent (World Bank, 1998 p. 105). This result, I would argue, is better interpreted through the second strand of thought.

Resetting Price Controls for Privatized Utilities: A Manual for Regulators

Abstract: This manual describes the task that an economic regulator should undertake when revising the price control for a regulated company. The aim of regulation is to protect consumers, while ensuring that the company remains viable and has an incentive to operate efficiently. After an introduction in section 1, section 2 discusses the basic principle of price control regulation. Most systems of regulation include an appeal mechanism to protect the company against an excessively zealous regulator, which means that the regulator will have to make his proposals in time to allow an appeal, should the company wish to make one. Section 3 discusses the procedures the regulator should follow. Section 4 discusses the form of price control the regulator must select to implement. Section 5 offers examples of revenue requirements. The regulator should ask the company for information on its present and projected operating costs, its assets, its investment plans, and its demand forecasts. These are discussed in sections 6-8. The rate of return is critical in determining the amount of revenue needed, and ways to determine an appropriate rate of return are discussed in section 9.

Oligopoly price discrimination and resale price maintenance

Abstract: Oligopoly price discrimination in the retail market prevents a manufacturer from inducing optimal retail margins through any wholesale price. This motivates the manufacturer to impose resale price maintenance. In a model of third-degree price discrimination by rival retailers, a retail price ceiling (or floor) enables the manufacturer to restore the first best. Imposing a fixed retail price is generally not optimal because the manufacturer wants to eliminate price discrimination based on consumers’ abilities to switch retailers, not based on consumers’ valuations. Under resale price maintenance, welfare may either increase or decrease, and it may increase even when total output is reduced.

The computational effect of price endings in multi‐dimensional price advertising

Abstract: Research in marketing indicates that consumers may be sensitive to the final digits of prices. For example, despite being substantively equivalent, a price such as $199 may create more favorable price perceptions than $200. However, existing research has primarily focused on the effects of price endings in the context of uni‐dimensional prices – prices consisting of a single number. Advertised prices in the marketplace are often multi‐dimensional, consisting of numerous price dimensions. In such pricing contexts, price endings may influence consumers’ ability to conduct the arithmetic required to compute the total advertised price. Examines the effect of various price ending strategies on consumers’ computational efforts. The findings indicate that the more commonly exercised price ending strategies tend to result in prices that are the most difficult for consumers to evaluate.

U.S. Wages in General Equilibrium: The Effects of Prices, Technology, and Factor Supplies, 1963-1991

Abstract: Wage inequality in the United States has increased in the past two decades, and most researchers suspect that the main causes are changes in technology, international competition, and factor supplies. The relative importance of these causes in explaining wage inequality is important for policy making and is controversial, partly because there has been no research which has directly estimated the joint impact of these different causes. In this paper, we view wages as arising out of a competitive general equilibrium where goods prices, technology and factor supplies jointly determine outputs and factor prices. We specify an empirical model which allows us to estimate the general equilibrium relationship between wages and technology, prices, and factor supplies. The model is based on the neoclassical theory of production and is implemented by assuming that GDP is a function of prices, technology levels, and supplies of capital and different types of labor. We treat final goods prices as being partially determined in international markets, and we use data on trends in the international economy as instruments for U.S. prices. We find that relative factor supply and relative price changes are both important in explaining the growing return to skill. In particular, we find that capital accumulation and the fall in the price of traded goods served to increase the return to education.

Trade reform and household welfare : the case of Mexico

Abstract: The authors use a two-step, computationally simple procedure to analyze the effects of Mexico's potentially unilateral tariff liberalization. First, they use a computable general equilibrium model provided by the Global Trade Analysis Project (GTAP) as the new price generator. Second, they apply the price changes to Mexican household data to assess the effects of the simulated policy on poverty and income distribution. By choosing GTAP as the price generator, the authors are able to model Mexico's differential tariff structure appropriately: almost zero for North American Free Trade Agreement (NAFTA) members and higher tariffs for nonmembers. Even starting with low tariff protection, simulation results show that tariff reform will have a positive effect on welfare for all expenditure deciles. Under an assumption of nonhomothetic individual preferences, trade liberalization benefits people in the poorer deciles more than those in the richer ones.

Productivity Trends in India's Energy Intensive Industries

Abstract: This paper reports on an analysis of productivity growth and input trends in six energy intensive sectors of the Indian economy, using growth accounting and econometric methods. The econometric work estimates rates and factor price biases of technological change using a translog production model with an explicit relationship defined for technological change. Estimates of own-price responses indicate that raising energy prices would be an effective carbon abatement policy for India. At the same time, the authors results suggest that, as with previous findings on the US economy, such policies in India could have negative long run effects on productivity in these sectors. Inter-input substitution possibilities are relatively weak, so that such policies might have negative short and medium term effects on sectoral growth. The authors study provides information relevant for the analysis of costs and benefits of carbon abatement policies applied to India and thus contributes to the emerging body of modeling and analysis of global climate policy.

Biased Technical Change and the Aggregate Production Function

Abstract: This paper offers a classical model of biased technical change in the MarxRicardo tradition as a framework for theoretical and applied studies of growth. The observable data it generates would appear to an unsuspecting economist to be well-described by a neoclassical model with a static Cobb-Douglas production function, when in fact this production function describes only the technological history of the economy. The CobbDouglas form results from the capital-using, labour-saving bias of technical change. The model's trajectory in wage-profit space will lie along the displaced image of the neoclassical factor price frontier, in contradiction to marginal productivity theory. The Solow residual can be reinterpreted by the classical theory as a measure of the size of this displacement.

Optimal Price Regulation for Natural and Legal Monopolies

Abstract: Optimal price regulation for natural and legal monopolies is an impossible task. The still difficult .task of good price regulation can be systematized by considering separately price level and price structure of the regulated firm. Various methods of price level and price structure regulation are evaluated and then considered for the regulation of electricity transmission, both in the context of an independent transmission company and of vertical integration between transmission and most of the generation capacity. The regulatory approach suggested uses price caps defined on two-part tariffs. This way, flexibility for short-term capacity utilization can be combined with incentives for investments in new transmission capacity.

Geographical Disadvantage: A Heckscher-Ohlin-Von Thunen model of International Specialization

Abstract: We analyze the trade and production patterns of countries located at varying distances from an economic centre. Exports and imports of final and intermediate goods bear transport costs that increase with distance. We show how production and trade depend both on factor endowments and factor intensities, and on distance and the transport intensities of different goods. Countries divide into zones with different trade patterns, some export oriented and others import substituting. We study the implications of distance for factor prices and real incomes, the effects of changes in transport costs, and the locational choice of new activities.

The Heckscher-Ohlin Model Between 1400 and 2000: When It Explained Factor Price Convergence, When It Did Not, and Why

Abstract: This is a paper about intercontinental trade, since factor proportions differ far more between continents than within. Long distance intercontinental trade was also the economic event which motivated the theoretical work of Bertil Ohlin.

Expectation and Housing Price Dynamics Following Deregulation in Korea

Abstract: This paper offers an explanation for the existence of price control on new houses in Korea, which is deemed both inefficient and inequitable This phenomenon cannot be explained by the conventional model of rent-seeking or the capture theory of regulation Instead, it is attributable to the popular belief that the removal of the price regulation will lead to the increase in the overall housing price by increasing the demand for existing houses that are a perfect substitute for new houses However, the paper, using a stock-adjustment model of the housing market, demonstrates that the claimed outcome cannot materialize under perfect foresight or adaptive expectation The outcome is possible in the short run under a peculiar expectation scheme of a self-fulfilling nature But even in this case, the price increase will be a one-time event and in the long-run overall housing prices will fall below the level that would prevail if the price regulations were maintained

The Demand for Labour and the Lucas Critique. Evidence from Norwegian Manufacturing

Abstract: This paper uses neoclassical theory as a foundation for modelling labour demand in Norwegian manufacturing. Applying the Johansen (1988,1991) methodology, we obtain a single cointegrating vector between employment, production, relative factor prices, total factor productivity and the stock of real capital. Normalised on employment, the estimated long run elasticities are 1.37 (production), -0.32 (relative factor prices), -0.57 (total factor productivity) and -1.00 (the stock of real capital). Next, we develop a conditional labour demand model that exhibits parameter constancy. In addition to equilibrium correction effects, we find contemporaneous effects of production and relative factor prices. We cannot reject super exogeneity to be present in our labour demand equation. Hence, the evidence on labour demand in Norwegian manufacturing does not lend support to the Lucas critique.

The influence of foreign factor prices and international taxation on fixed investment in the UK

Abstract: This paper examines the influence of foreign factor prices and international corporate taxation on fixed investment in the U.K. manufacturing sector. The evidence suggests that factor prices affect fixed investment in the United Kingdom through their influence on international competitiveness rather than the factor mix decision. There also appears to be a significant effect of tax competitiveness on the rate of investment. Empirical evidence suggests that policy to increase investment be aimed at reducing the average rate rather than the marginal rate of corporation tax. Copyright 1999 by Royal Economic Society.

Product substitutability and competition in long-distance telecommunications

Abstract: I. INTRODUCTION The growing availability of detailed firm-level data and advances in econometric techniques have led to the estimation of industry structural parameters in order to evaluate proposed policy changes (Hausman, Leonard, and Zona [1994]). In particular, estimates of own and cross-elasticities of demand are used to draw inferences about competition under various assumptions about producer behavior (e.g., Hausman [1994] and Stern [1994]). Generating estimates of structural parameters requires not only price and demand data but often requires firm-level factor price data to be used as instrumental variables. Even when firm-level factor price data are available, they may not fulfill the independence requirements of residual demand estimators because the competitors purchase from the same input market. Because the data requirements for the estimation of Marshallian demand elasticities are less severe, they may yield unbiased estimates. Residual demand elasticities can then be constructed under various assumptions about the extent of pricing coordination among producers. This article carries out this process for the U.S. long-distance telecommunications industry. A unique and detailed data set that includes firm-level output, price, and factor price information is employed. The analysis focuses on the so-called Basket 1 services, which are ordinary interstate and international message toll service, operator assistance, and calling-card service. These services are generally regarded as the ones in which AT&T is likely to possess the most market power. Despite the detailed nature of the available data, some of the factor prices are shown to lead to biased estimates when used as instrumental variables. Results from specifications that omit these instruments indicate that AT&T faces a Marshallian demand elasticity of about -10. Residual demand elasticities are estimated for various assumptions regarding the degree of pricing coordination in the industry. For plausible assumptions regarding the degree of price coordination among firms, AT&T's residual demand elasticity is likely below-5, implying an industry dead-weight loss of less than 1.5% revenues. Since the courts and the Federal Communications Commission (FCC) opened U.S. long-distance telecommunications to competitive entry, the number and size of entrants has grown to the point that AT&T, once the legal monopolist, now supplies less than half of the total market. The FCC's incremental approach to deregulating AT&T decreased regulatory oversight in specific product markets as competition became more vigorous and culminated in its 1995 decision to declare AT&T "nondominant," essentially deregulating AT&T. The results of this analysis tend to support this decision. Nevertheless, debate over the extent of competition continues, primarily to evaluate the claim that allowing the Bell Operating Companies (BOCs) into these markets will yield consumer benefits from still more vigorous competition. This analysis suggests that these benefits are likely to be small. Hence, as Brennan [1987] points out, the case for permitting BOC entry into long-distance should focus on whether they are likely to provide the service at lower cost or whether they have scope for discriminatory actions, rather than on whether they will make the long-distance market substantially more competitive. II. PREVIOUS STUDIES The extent of competition in the U.S. long-distance industry and the effects of price regulation have been the subject of policy interest and the focus of a few empirical studies. MacAvoy's [1995] analyses lead him to conclude that the industry is increasingly collusive. His event study finds that a portfolio of MCI and Sprint stock realizes positive abnormal returns when an AT&T price increase is reported. While this indicates that the industry is imperfectly competitive, it could result from either unilateral or coordinated pricing behavior. …

International Trade and the Skill Structure of Wages and Employment in West Germany / Außenhandel und die Qualifikationsstruktur von Löhnen und Beschäftigung in Westdeutschland

Abstract: Building on a Heckscher-Ohlin-Samuelson framework with factor price rigidities, this paper provides an empirical analysis of the relationship between trade, technical progress, and the labor market in West Germany for the period from 1970 until 1990. The analysis builds on relative product prices as the major transmission channel of trade effects on the labor market and allows for three skill types of labor. The major findings are that, relative to skilled labor, wages were increasing disproportionately both for low- and high-skilled labor whereas employment trends were favoring higher skill levels monotonically. Import competition as well as total factor productivity were increasing disproportionately in those industries using low- or high-skilled labor intensively. These results are consistent with trade effects dominating for low-skilled labor and technology effects for high-skilled labor while wage bargaining institutions were holding up relative wages of low-skilled labor. The combined effect accounts for the disproportionate increase of unemployment for low-skilled workers.

The Impact of Import Competition on Employment and Wages in Swiss Manufacturing

Abstract: This paper explores the impact of import competition on wage and employment at the industry level in Switzerland. We estimated reduced-form wage and employment equations for a panel of seven Swiss manufacturing sectors. Our analysis relies on a basic partial equilibrium relationship that relates changes in import price to domestic factor price and factor demand changes. Results are consistent with those found for other countries. A majority of the coefficients are significantly positive, reflecting a negative impact of import competition on both employment and wages, but our main result is that all the elasticities have a relatively small magnitude. As in several other studies, our results suggest that import price variations have had very little incidence on domestic labour market.

Price Limits, Information Acquisition, and Bid–ask Spreads: Theory and Evidence

Abstract: A number of futures markets use price limits which, in effect, preclude trade from occurring at prices outside certain exogenous bounds. Noting that such markets are characterized by heterogeneously informed traders, whereas previous work on price limits assumes symmetrically informed traders, we examine the effects of price limits in a setting where market participants are asymmetrically informed. We find that imposing price limits generally lowers the quality of information acquired in equilibrium, but lowers bid–ask spreads as well. Thus, depending on the relative weights placed by society on liquidity versus price efficiency, there may exist a set of price limits that are most efficient in achieving a trade-off between liquidity and informational efficiency. We perform empirical tests of some implications of the model using cross-sectional data on price limits. We find that price limits are strongly negatively related to both price volatility and trading volume. Though other explanations for our empirical findings cannot be ruled out, these results are not inconsistent with the model's implication that price limits should be tighter for contracts which offer greater profit potential for informed traders.

Decline in the US profit rate: a sectoral analysis

Abstract: The profit rate is a key element in the cyclical growth of economies because of its effect on investment and saving behaviour and, therefore, on capacity, productivity and competitiveness. The US industry profit rates have declined dramatically since the 1950s. This decline is analysed and the factors that explain it are determined. It is found that sectoral factor productivities and real factor prices account for most of this decline. The real wage has a stronger effect on manufacturing profit rates, while the real capital price explains better profitability in nonmanufacturing industries. A rise in both factor prices reduces the profit rates during the 1960s and the 1970s. After 1980, a fall in the real price of capital with a sustained improvement in technology account for the stabilization of the declining trends in sectoral profit rates. Breaking with the trends in other industries, technology accounts for most of the decline in the finance, insurance and real estate sector throughout the sample.