Showing papers on "Factor price published in 2004"

Price dispersion in the small and in the large: evidence from an internet price comparison site

Abstract: This paper examines four million daily price observations for more than 1,000 consumer electronics products on the price comparison site http://Shopper.com. We find little support for the notion that prices on the Internet are converging to the ‘law of one price.’ In addition, observed levels of price dispersion vary systematically with the number of firms listing prices. The difference between the two lowest prices (the ‘gap’) averages 23 per cent when two firms list prices, and falls to 3.5 per cent in markets where 17 firms list prices. These empirical results are an implication of a general ‘clearinghouse’ model of equilibrium price dispersion.

International Evidence on Institutional Trading Behavior and Price Impact

Abstract: This study characterizes institutional trading in international stocks from 37 countries during 1997 to 1998 and 2001. We find that the underlying market condition is a major determinant of the price impact and, more importantly, of the asymmetry between price impacts of institutional buy and sell orders. In bullish markets, institutional purchases have a bigger price impact than sells; however, in the bearish markets, sells have a higher price impact. This differs from previous findings on price impact asymmetry. Our study further suggests that price impact varies depending on order characteristics, firm-specific factors, and cross-country differences.

Price Discrimination in Broadway Theater

Abstract: A common thread in the theory literature on price discrimination has been the ambiguous welfare effects for consumers and the rise in profit for firms, relative to uniform pricing. In this study I resolve the ambiguity for consumers and quantify the benefit for a firm. I describe a model of price discrimination that includes both second-degree and third-degree price discrimination. Using data from a Broadway play, I estimate the structural model and conduct various experiments to investigate the implications of alternative pricing policies. The observed price discrimination may improve the firm's profit by approximately 5%, relative to uniform pricing, while the difference for aggregate consumer welfare is negligible. Also, I show that the gain from changing prices in the face of fluctuating demand is small under the observed price discrimination.

An Assignment Theory of Foreign Direct Investment

Abstract: We develop an assignment theory to analyze the volume and composition of foreign direct investment (FDI). Firms conduct FDI by either engaging in greenfield investment or in cross-border acquisitions. Cross-border acquisitions involve firms trading heterogeneous corporate assets to exploit complementarities, while greenfield FDI involves building a new plant in the foreign market. In equilibrium, greenfield FDI and cross-border acquisitions co-exist, but the composition of FDI between these modes varies with firm and country characteristics. Firms engaging in greenfield investment are systematically more efficient than those engaging in cross-border acquisitions. Furthermore, most FDI takes the form of cross-border acquisitions when factor price differences between countries are small, while greenfield investment plays a more important role for FDI from high-wage into low-wage countries. These results capture important features of the data.

Alternative Forms of Economic Regulation and their Efficiency Implications for Airports

Abstract: This paper investigates the effects of different forms of price regulation on airport efficiency Our investigation takes into account the interaction between concession profits and price regulations Our results show that while ROR regulation may lead to over investment in capacity, price-cap regulation is prone to under-investment The extent of the under-investment is found to be less under the dual-till price cap than under the single-till price cap Our empirical investigation of capital input productivity and total factor productivity confirm the analytical findings In particular, the total factor productivity is greater under the dual-till price cap than under either the single-till price cap or single-till ROR Our analysis appears to support the argument made by several economists that dual till regulation would be better than the single-till regulation in terms of economic efficiency, especially for large and busy airports

International Outsourcing and Factor Prices with Multistage Production

Abstract: We develop a dual representation of the technology of international fragmentation for an industry using 2 factors in a continuum of stages. We then derive a generalised factor price frontier which incorporates an endogenous adjustment of the margin of fragmentation. Using this frontier in a 2 × 2 general equilibrium model, we investigate the role of outsourcing in the adjustment to a decline in the final output price of the multistage industry, and the attendant factor price effects. We also explore the implications of an improved technology of international fragmentation on the margin of fragmentation and on domestic factor prices.

Quantifying the Impact of Services Liberalization in a Developing Country

Abstract: Konan and Maskus consider how service liberalization differs from goods liberalization in terms of welfare, the level and composition of output, and factor prices within a developing economy, in this case Tunisia. Despite recent movements toward liberalization, Tunisian service sectors remain largely closed to foreign participation and are provided at high cost relative to many developing nations. The authors develop a computable general equilibrium (CGE) model of the Tunisian economy with multiple products and services and three trading partners. They model goods liberalization as the unilateral removal of product tariffs. Restraints on services trade involve both restrictions on cross-border supply (mode 1 in the GATS) and on foreign ownership through foreign direct investment (mode 3 in the GATS). The former are modeled as tariff-equivalent price wedges while the latter are comprised of both monopoly-rent distortions (arising from imperfect competition among domestic producers) and inefficiency costs (arising from a failure of domestic service providers to adopt least-cost practices). They find that goods-trade liberalization yields a gain in aggregate welfare and reorients production toward sectors of benchmark comparative advantage. However, a reduction of services barriers in a way that permits greater competition through foreign direct investment generates larger welfare gains. Service liberalization also requires lower adjustment costs, measured in terms of sectoral movement of workers, than does goods-trade liberalization. And it tends to increase economic activity in all sectors and raise the real returns to both capital and labor. The overall welfare gains of comprehensive service liberalization amount to more than 5 percent of initial consumption. The bulk of these gains come from opening markets for finance, business services, and telecommunications. Because these are key inputs into all sectors of the economy, their liberalization cuts costs and drives larger efficiency gains overall. The results point to the potential importance of deregulating services provision for economic development. This paper - product of the Trade, Development Research Group - is part of a larger effort in the department to measure the benefits of services trade.

Price Rigidity. Evidence from the French CPI Micro-data

Abstract: Based upon a large fraction of the price records used for computing the French CPI, we document consumer price rigidity in France. We first provide a methodological discussion of issues involved in estimating average price duration with micro-data. The average duration of prices in the sectors covered by the database (65% of the CPI) is then found to be around 8 months. A strong heterogeneity across sectors both in the average duration of prices and in the pattern of price setting is reported. There is no clear evidence of downward nominal rigidity, since price cuts are almost as frequent as price rises. Moreover, the average size of a change in price is quite large in both cases. Overall, while our results do not entail a clear conclusion about the existence of menu costs, there is evidence of both time-dependent and state-dependent price setting behaviors by retailers.

Buyer Search Costs and Endogenous Product Design

Abstract: Buyer search costs for price are changing in many markets. Through a model of buyer and seller behavior, I consider the effects of changing search costs on prices both when product differentiation is fixed and when it is endogenously determined in equilibrium. If firms cannot change product design, lower buyer search costs for price lead to increased price competition. However, if product design is a decision variable, lower search costs for price may also lead to higher product differentiation, which decreases price competition. In this case, the overall effect of lower buyer search costs for price may even be higher prices, lower social welfare, and higher industry profits. The result is especially interesting because recent technological changes, such as Internet shopping, can affect the market structure through lowering buyer search costs.

Price Setting in France: New Evidence from Survey Data

Abstract: This paper reports the results of a survey conducted by the Banque de France during winter 2003-2004 to investigate the price-setting behavior of French manufacturing companies. Prices are found to adjust infrequently; the median firm modifies its price only once a year. Price reviews are more frequent than price changes; the median firm reviews its price quarterly. Firms are found to follow either time-dependent, state-dependent or both pricing rules. Moreover, the chosen interval of price reviews depends on the probability that changes in the firms' environment occur. Coordination failure and nominal contracts (either written or implicit) are the most important sources of price stickiness, while pricing thresholds and physical menu costs appear to be totally unimportant. Asymmetries in price stickiness are found to be different for cost shocks compared to demand shocks: prices are more rigid downward than upward for cost shocks, while the reverse is true for demand shocks.

Why are prices sticky? the dynamics of wholesale gasoline prices

Abstract: The menu-cost interpretation of sticky prices implies that the probability of a price change should depend on the past history of prices and fundamentals only through the gap between the current price and the frictionless price. We find that this prediction is broadly consistent with the behavior of nine Philadelphia gasoline wholesalers. Nevertheless, we reject the menu-cost model as a literal description of these firms' behavior, arguing instead that price stickiness arises from strategic considerations of how customers and competitors will react to price changes.

The pricing behaviour of italian firms: new survey evidence on price stickiness

Abstract: This study examines price setting behaviour of Italian firms on the basis of survey data. Prices are mostly fixed following mark-up rules, although customer-specific characteristics have a role in some sectors. Rival prices mostly affect price strategies of industrial firms. In reviewing their prices, firms follow either state-dependent rules or a combination of time and state-dependent ones. A considerable degree of price stickiness emerges; in 2002 most firms changed their price only once. Three explanations are ranked highest: explicit contracts, tacit collusive behaviour and the temporary nature of the shock. Prices respond asymmetrically to shocks, depending on the direction of the required adjustment and the source of the shock. Real rigidities play an important role in determining this asymmetry. Cost shocks impact more when prices have to be raised than when they have to be reduced; demand decreases are more likely to induce a price change than demand increases.

Tourism, Trade and Domestic Welfare

Abstract: Tourism has been regarded as a major source of economic growth and a good source of foreign exchange earnings. Tourism has also been considered as an activity that imposes costs on the host country. Such costs include increased pollution, congestion and despoliation of fragile environments and intra-generational inequity aggravation. One aspect that has been ignored is the general equilibrium effects of tourism on the other sectors in the economy. These effects can be quite substantial and should be taken into account when assessing the net benefits of a tourism boom on an economy. This paper presents a model which captures the interdependence between tourism and the rest of the economy, in particular agriculture and manufacturing. We examine the effect of a tourist boom on structural adjustment, commodity and factor prices and more importantly resident welfare. An important result obtained is that the tourist boom may immiserize the residents. This occurs because of two effects. The first, a favourable effect due to an increase in the relative price of the non-traded good which is termed the secondary terms of trade effect. The second, a negative effect due to an efficiency loss that occurs in the presence of increasing returns to scale in manufacturing. If this second effect outweighs the first effect, resident immiserization occurs.

Price setting behaviour in Spain: stylised facts using consumer price micro data

Abstract: This paper identifies the basic features of the price setting mechanism in the Spanish economy, using a large dataset that contains over 1.1 million price records and covers around 70% of the expenditure on the CPI basket. In particular, the paper identifies differences in the frequency and size of price adjustments across types of products and explores how these general features are affected by certain specific factors: seasonality, the level of inflation, changes in indirect taxation and the practice of using psychological and round prices. We find that prices do not change often but do so by a large amount, although there is a marked heterogeneity across products. Moreover, the high frequency of price reductions suggests that there is no strong downward rigidity. Our evidence also supports the use of time and state-dependent pricing strategies. JEL Classification: E31, D40, C25

Imperfect Price Transmission: Is Market Power Really to Blame?

Abstract: Several studies in the literature have argued that price transmission in vertically-related markets is imperfect, i.e. that farm input price changes are not fully passed-through to the final product price. Market power, notably oligopoly, is presumed to be the principal source of imperfect price transmission. To date, the impact of oligopsony (buyer) power on the degree of price transmission has not been evaluated using a formal theoretical model. Moreover, neither has the combination of oligopoly and oligopsony despite the fact that its influence has been formally acknowledged in both the UK and some European food markets. This paper makes a contribution to the literature by developing a model of price transmission where both oligopoly and oligopsony power co-exist and where industry technology is assumed to be characterised by variable input proportions. It shows that taking the degree of price transmission in a perfectly competitive market as a benchmark, oligopoly and oligopsony power do not necessarily lead to imperfect price transmission, although they can. Indeed, they may counteract each other's impact on the degree of price transmission. The key to these outcomes is to be found in the functional forms for retail demand and farm supply.

A tale of two cities: Price uniformity and price volatility in gasoline retailing

Abstract: Retail gasoline markets have been found to exhibit either price volatility and price dispersion or price rigidity and uniformity across large metropolitan areas. The purpose of this paper is to identify a theoretical explanation for these patterns of pricing behavior, and to look for evidence consistent with the theory by examining market structure, conduct, and spatial pricing patterns in different retail gasoline markets in Canada. The study utilizes a novel source of price data: price observations reported to internet data collection sites. The firm and station specific price data are consistent with the presence of tacitly collusive behavior in one retail gasoline market and the presence of maverick retailers that prevent tacit collusion in the other retail market.

Price setting behaviour in Spain: stylised facts using consumer price micro data

Abstract: This paper identifies the basic features of the price setting mechanism in the Spanish economy, using a large dataset that contains over 1.1 million price records and covers around 70% of the expenditure on the CPI basket. In particular, the paper identifies differences in the frequency and size of price adjustments across types of products and explores how these general features are affected by certain specific factors: seasonality, the level of inflation, changes in indirect taxation and the practice of using psychological and round prices. We find that prices do not change often but do so by a large amount, although there is a marked heterogeneity across products. Moreover, the high frequency of price reductions suggests that there is no strong downward rigidity. Our evidence also supports the use of time and state dependent pricing strategies.

Institutional Quality and International Trade

Abstract: Institutions - quality of contract enforcement, property rights, shareholder protection, and the like - have received a great deal of attention in recent years. Yet trade theory has not considered the implications of institutional differences, beyond treating them simply as different technologies or taxes. The purpose of this paper is twofold. First, we propose a simple model of international trade in which institutional differences are modeled within the Grossman-Hart-Moore framework of contract incompleteness. We show that doing so reverses many of the conclusions obtained by equating institutions with productivity. Institutional differences imply, among other things, that the less developed country may not gain from trade, and factor prices may actually diverge as a result of trade. Second, we test empirically whether institutions act as a source of trade, using data on 1998 US imports disaggregated by country and industry. The empirical results provide evidence of institutional content of trade: institutional differences are an important determinant of trade flows.

The Factor Content of Bilateral Trade: An Empirical Test

Abstract: The factor proportions model of international trade is one of the most influential theories in international economics. Its central standing in this field has appropriately prompted, particularly recently, intense empirical scrutiny. A substantial and growing body of empirical work has tested the predictions of the theory on the net factor content of a country’s trade with the rest of the world, usually under the maintained assumptions of factor price equalization and identical homothetic preferences across trading countries (or under quite specific relaxations of these assumptions). In contrast, this paper uses OECD production and trade data to test the restrictions (derived by Helpman) on the factor content of trade flows that hold even under nonequalization of factor prices and in the absence of any assumptions regarding consumer preferences. In a further contrast with most of the existing literature, which has focused on the factor content of a country’s multilateral trade, our tests concern bilateral...

Brand and Price Advertising in Online Markets

Abstract: We model a homogeneous product environment where identical e-retailers endogenously engage in both brand advertising (to create loyal customers) and price advertising (to attract shoppers ). Our analysis allows for cross-channel effects; indeed, we show that price advertising is a substitute for brand advertising. In contrast to models where loyalty is exogenous, these cross-channel effects lead to a continuum of symmetric equilibria; however, the set of equilibria converges to a unique equilibrium as the number of potential e-retailers grows arbitrarily large. Price dispersion is a key feature of all of these equilibria, including the limit equilibrium. While each firm finds it optimal to advertise its brand in an attempt to grow its base of loyal customers, in equilibrium, branding (1) reduces firm profits, (2) increases prices paid by loyals and shoppers, and (3) adversely affects gatekeepers operating price comparison sites. Branding also tightens the range of prices and reduces the value of the price information provided by a comparison site. Using data from a price comparison site, we test several predictions of the model.

Location, concentration, and performance of economic activity in brazil *

Abstract: What are the prospects for economic development in lagging sub-national regions? What are the roles of public infrastructure investments and fiscal incentives in influencing the location and performance of industrial activity? To examine these questions, we estimate a spatial profit function for industrial activity in Brazil that explicitly incorporates infrastructure improvements and fiscal incentives in the cost structure of individual firms. We use firm level data from the 2001 annual industrial survey along with regional data at the microregion level and find that there are considerable cost savings from being located in areas with relatively lower transport costs to reach large markets. In comparison, fiscal incentives have modest effects in terms of influencing firm level costs. Although the results suggest that firms benefit from being in locations with good access to markets, we do not suggest that improving interregional connectivity would necessarily assist lagging regions in the short run. Improving inter-regional connectivity implicitly reduces a natural tariff barrier so firms currently serving large markets and benefiting from economies of scale can more easily expand into new markets in competition with local producers. Therefore, producers in the leading regions can crowd out local producers, which would be detrimental for local production and employment in the lagging region.

"The Real Thing": Nominal Price Rigidity of the Nickel Coke, 1886-1959

Abstract: We report that the price of a 6.5-oz Coca-Cola was 5c from 1886 until 1959. Thus, we are documenting a nominal price rigidity that lasted more than 70 years! The case of Coca-Cola is particularly interesting because during the 70-year period there were substantial changes in the soft drink industry as well as two World Wars, the Great Depression, and numerous regulatory interventions and lawsuits, which led to substantial changes in the Coca- Cola market conditions. The nickel price of Coke, nevertheless, remained unchanged. We find that this unusual rigidity is best explained by (1) a contract between the Company and its parent bottlers that encouraged retail price maintenance, (2) a single-coin vending machine technology, which limited the Company's price adjustment options due to limited availability and unreliability of the existing flexible price adjustment technologies, and (3) a single-coin monetary transaction technology, which limited the Company's price adjustment options due to the customer "inconvenience cost." We show that these price adjustment costs are of a different nature than the standard menu cost, and their estimates exceed the existing estimates by an order of magnitude. A possible broader relevance of the nickel Coke phenomenon is discussed in the context of Nickel and Dime Stores, which were popular in the US in the late 1800s and the early 1900s.

The role of u.s. trading in pricing internationally cross-listed stocks

Abstract: This paper addresses two issues: 1) where does price discovery occur for firms that are traded simultaneously in the U.S. and in their home markets and 2) what explains the differences across firms in the share of price discovery that occurs in the U.S? The answer to the first question is that the home market is typically where the majority of price discovery occurs, but there are significant exceptions to this rule and the nature of price discovery across international markets during the time of trading overlap is richer and more complex than previously realized. For the second question, the results provide strong support that liquidity is an important factor. For a particular firm, the greater the liquidity of U.S. trading relative to the home market, the greater the role for U.S. price discovery.

Ordering and Inventory Policies for Step Changes in the Unit Item Cost: A Discounted Cash Flow Approach

Abstract: This paper considers the problem of determining the optimal ordering quantities of a purchased item where there are step changes in price, either up or down. Other costs incurred include ordering costs associated with each replenishment and holding costs related to capital tied up in inventory and physical stock holding. The net present value (NPV) principle is applied. Explicit expressions for the development of the optimal order quantities over time are presented. It is shown that three cases may be distinguished: (i) when the price change is very small, (ii) when an essential price increase occurs, and (iii) when there is an essential price decrease. Although the optimal last-order quantity before a price increase is similar in magnitude to what has been presented in other articles applying average cost approaches, in certain respects, this paper offers novel results contradictory to those suggested by other authors. Analysis shows that the average-cost model solutions are first-order approximations in the discount rate. Numerical evaluations of a range of price increases and times to the price increase suggest that, with certain important caveats, the average-cost formulae are likely to be acceptable for most practical situations for the infinite horizon situation.