Showing papers on "Factor price published in 2006"

Contextual and Temporal Components of Reference Price

Abstract: An emerging consensus in marketing is that consumers respond to price relative to some standard or reference price. Most researchers modeling brand choice have reasoned that this standard is based on past prices of the brand. The authors argue that consumers do use reference prices, but one that is also based on context- other prices in the store-rather than on past prices alone. An analysis of households' brand choices in two subcategories and over three cities support this premise. Within context, the lowest price seems to be an important cue for reference price, whereas within time, a brand's own past prices seem to be the most important cue. Households' use of a contextual reference price also varies predictably across some consumer characteristics. Though their model can be applied to other categories, the findings have important managerial implications: Managerial focus on temporal reference prices could lead to an everyday high price, whereas focus on contextual reference prices could lead to an everyday low price. Only the inclusion of both contextual and temporal reference prices justifies variable pricing.

...plus shipping and handling: Revenue (non) equivalence in field experiments on ebay

Abstract: Many firms divide the price a consumer pays for a good into two pieces---the price for the item itself and the price for shipping and handling. With fully rational customers, the exact division between the two prices is irrelevant---only the total price matters. We test this hypothesis by selling matched pairs of CDs and Xbox games in a series of field experiments on eBay. In theory, the ending auction price should vary inversely with the shipping charge to leave the total price paid constant. Contrary to the theory, we find that charging a high shipping cost and starting the auction at a low opening price leads to higher numbers of bidders and higher revenues when the shipping charge is not excessive. We show that these results can be accounted for by boundedly rational bidding behavior such as loss-aversion with separate mental accounts for different attributes of the price or disregard for shipping costs.

...Plus Shipping and Handling: Revenue (Non) Equivalence in Field Experiments on eBay

Abstract: Many firms divide the price a consumer pays for a good into two pieces---the price for the item itself and the price for shipping and handling. With fully rational customers, the exact division between the two prices is irrelevant---only the total price matters. We test this hypothesis by selling matched pairs of CDs and Xbox games in a series of field experiments on eBay. In theory, the ending auction price should vary inversely with the shipping charge to leave the total price paid constant. Contrary to the theory, we find that charging a high shipping cost and starting the auction at a low opening price leads to higher numbers of bidders and higher revenues when the shipping charge is not excessive. We show that these results can be accounted for by boundedly rational bidding behavior such as loss-aversion with separate mental accounts for different attributes of the price or disregard for shipping costs.

A Simple Model of Inefficient Institutions

Abstract: This paper develops a simple model of economic and political institutions that lead to poor aggregate economic performance. In the model economy, groups with political power, the elite, choose policies to increase their income and to directly or indirectly transfer resources from the rest of society to themselves. The resulting equilibrium is generally inefficient because of three distinct mechanisms: (1) revenue extraction, (2) factor price manipulation and (3) political consolidation. In particular, the elite may pursue inefficient policies to extract revenue from other groups. They may do so to reduce the demand for factors coming from other groups in the economy, thus indirectly benefiting from changes in factor prices. Finally, they may try to impoverish other groups competing for political power. The elite’s preferences over inefficient policies translate into inefficient economic institutions. The notable exception to this general picture emerges when long-term investments are important, thus creating a commitment (holdup) problem, whereby equilibrium taxes and regulations are worse than the elite would like them to be from an ex ante point of view. In this case, economic institutions that provide additional security of property rights to other groups can be useful.

Regional Wage and Employment Responses to Market Potential in the EU

Abstract: In new economic geography models, the spatial distribution of demand is a key determinant of economic outcomes. In one strand, it is argued that higher demand gives rise to a more than proportionate increase in production, a result known as the home market effect. Another strand emphasizes the effects of market sizes on factor prices. We highlight the theoretical connection between these two strands. Using data on 57 European regions, we show how wages and employment respond to differentials in what we call real market potential, a discounted sum of demands derived from the theory.

Price Fairness: Good and Service Differences and the Role of Vendor Costs

Abstract: Prior research suggests that consumers are forgiving of a price increase that is commensurate with increased vendor costs. We argue that the perceived fairness of the price increase will also depend on the alignability of the cost and price increases, such that alignable increases will be perceived as more acceptable than nonalignable increases. Moreover, we predict that when a cost increase is nonalignable, consumers will be more receptive to a service price increase than a goods price increase. Evidence from a series of experiments supports both predictions.

Consumer price adjustment under the microscope: Germany in a period of low inflation

Abstract: We analyse the adjustment of retail and services prices in a period of low inflation, using a set of individual price data from the German Consumer Price Index that covers the years 1998 to 2003 We strong find evidence of time- and state-dependent price adjustment Most importantly, the differences in "unconditional" sectoral price flexibility are found to be linked to input price volatility

Quality and Location Choices under Price Regulation

Abstract: In a model of spatial competition, we analyze the equilibrium outcomes in markets where the product price is exogenous. Using an extended version of the Hotelling model, we assume that firms choose their locations and the quality of the product they supply. We derive the optimal price set by a welfarist regulator. If the regulator can commit to a price prior to the choice of locations, the optimal (second-best) price causes overinvestment in quality and an insufficient degree of horizontal differentiation (compared with the first-best solution) if the transportation cost of consumers is sufficiently high. Under partial commitment, where the regulator is not able to commit prior to location choices, the optimal price induces first-best quality, but horizontal differentiation is inefficiently high.

The Share Price Puzzle

Abstract: We document substantial variation in the prices of common stocks in U.S. markets due to firms selecting particular price ranges for their shares. Cross‐sectional evidence indicates that variables consistent with Merton’s model of capital market equilibrium explain roughly two‐thirds of this variation in share prices. In addition, measures of trading range and share price appreciation predict stock splits, and the “investor base” of firms that split their stock increases compared to other firms. We conclude that firms manage share price levels to increase the value of the firm.

The Price-Setting Behavior of Austrian Firms: Some Survey Evidence

Abstract: This paper explores the price-setting behavior of Austrian firms based on survey evidence. Our main result is that customer relationships are a major source of price stickiness in the Austrian economy. We also find that the majority of firms in our sample follows a time-dependent pricing strategy. However, a substantial fraction of firms deviates from time-dependent pricing in the case of large shocks and switches to a state-dependent pricing strategy. In addition, we present evidence suggesting that the price response to various shocks is subject to asymmetries.

The Effect of Financial Repression & Enforcement on Entrepreneurship and Economic Development

Abstract: This paper studies the effect of financial repression and contract enforcement on entrepreneurship and economic development. We construct and solve a general equilibrium model with heterogeneous agents, occupational choice and two financial frictions: intermediation costs and financial contract enforcement. Occupational choice and firm size are determined endogenously, and depend on agent type (wealth and ability) and the credit market frictions. The model shows that differences across countries in intermediation costs and enforcement generate differences in occupational choice, firm size, credit, output and inequality. Counterfactual experiments are performed for Latin American, European, transition and high growth Asian countries. We use empirical estimates of each country's financial frictions, and United States values for all other parameters. The results allow us to isolate the quantitative effect of these financial frictions in explaining the performance gap between each country and the United States. The results depend critically on whether a general equilibrium factor price effect is operative, which in turn depends on whether financial markets are open or closed. This yields a positive policy prescription: If the goal is to maximize steady-state efficiency, financial reforms should be accompanied by measures to increase financial capital mobility.

Competition and Price Adjustment in the Euro Area

Abstract: This paper explores the role of a number of factors in explaining the heterogeneity in the degree of price stickiness across industries, on the basis of the information provided by surveys on pricing behavior conducted in nine euro area countries. The main focus is placed on the influence of competition on the degree of price flexibility. Our results suggest that the price setting strategies of the most competitive firms give them a greater capacity to react to shocks and make, in practice, for greater flexibility in their prices. The direct influence of market competition on price flexibility is corroborated by a cross-country cross-industry econometric analysis based on the information provided by surveys. This analysis also shows that the cost structure and demand conditions help to explain the degree of price flexibility. Finally, it suggests that countries in which product market regulation is more relevant are characterized by less price flexibility.

Trading Tasks: A Simple Theory of Offshoring

Abstract: For centuries, most international trade involved an exchange of complete goods. But, with recent improvements in transportation and communications technology, it increasingly entails different countries adding value to global supply chains, or what might be called "trade in tasks." We propose a new conceptualization of the global production process that focuses on tradable tasks and use it to study how falling costs of offshoring affect factor prices in the source country. We identify a productivity effect of task trade that benefits the factor whose tasks are more easily moved offshore. In the light of this effect, reductions in the cost of trading tasks can generate shared gains for all domestic factors, in contrast to the distributional conflict that typically results from reductions in the cost of trading goods.

New Survey Evidence on the Pricing Behaviour of Luxembourg Firms

Abstract: This paper analyses the pricing behaviour of Luxembourg firms based on survey evidence. Luxembourg firms typically have low market share, many competitors and longstanding customer relationships. Price discrimination is frequently applied. A majority of firms use price review rules that include elements of state dependency. The median firm reviews and changes prices twice a year. The results suggest an almost equal share of firms applying forward-looking, backward-looking and rules of thumb behaviour. The adjustment speed is faster when cost goes up and demand goes down than in the opposite cases. The most relevant theories explaining price rigidity are implicit contracts, cost-based pricing and explicit contracts. Increases in labour and other costs are the most important factors leading to price increases; for price reductions it is price reductions by competitors followed by declining labour costs.

Trade, Growth, and Convergence in a Dynamic Heckscher-Ohlin Model

Abstract: This paper studies the properties of a dynamic Heckscher-Ohlin model - a combination of a static two-good, two-factor Heckscher-Ohlin trade model and a two-sector growth model - with infinitely lived consumers where international borrowing and lending are not permitted. We obtain two main results: First, even if factor prices are equalized, countries that differ only in their initial endowments of capital per worker may converge or diverge in income levels over time, depending on the elasticity of substitution between traded goods. Divergence can occur for parameter values that would imply convergence in a world of closed economies and vice versa. Second, factor price equalization in a given period does not imply factor price equalization in future periods.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

A Hierarchical Bayes Error Correction Model to Explain Dynamic Effects of Price Changes

Abstract: The authors put forth a sales response model to explain the differences in immediate and dynamic effects of promotional prices and regular prices on sales. The model consists of a vector autoregression that is rewritten in error correction format, which allows the authors to disentangle the immediate effects from the dynamic effects. In a second level of the model, the immediate price elasticities, the cumulative promotional price elasticity, and the long-term regular price elasticity are correlated with various brand-specific and category-specific characteristics. The model is applied to seven years of data on weekly sales of 100 different brands in 25 product categories. The authors find many significant moderating effects on the elasticity of price promotions. Brands in categories that are characterized by high price differentiation and that constitute a lower share of budget are less sensitive to price discounts. Deep price discounts increase the immediate price sensitivity of customers. The ...

The Effect of FDI on Job Separation

Abstract: A novel linked employer-employee data set documents that expanding multinational enterprises retain more domestic jobs than competitors without foreign expansions. In contrast to prior research, a propensity score estimator allows enterprise performance to vary with foreign direct investment (FDI) and shows that the foreign expansion itself is the dominant explanatory factor for reduced worker separation rates. Bounding, concomitant variable tests, and robustness checks rule out competing hypotheses. The finding is consistent with the idea that, given global factor price differences, a prevention of enterprises from outward FDI would lead to more domestic worker separations. FDI raises domestic-worker retention more pronouncedly among highly educated workers and for expansions into distant locations.

A Fractiles Perspective to the Joint Price/Quantity Newsvendor Model

Abstract: Pricing and quantity decisions are critical to many firms across different industries. We study the joint price/quantity newsvendor model where only a single quantity and price decision is made, such as a fashion or holiday product that cannot be replenished and where the price is advertised nationally and cannot be changed. Demand is uncertain and sensitive to price. We develop a method for easily finding the optimal price and quantity that applies to more general cases than the usual one in which uncertainty is either additive, multiplicative, or a combination of the two. We represent a quantity by its fractile of the probability distribution of demand for a given price. We use a standard approach to approximating a given distribution with a finite number of representative fractiles and assume that these fractile functions are piecewise linear functions of the price. We identify effects that are not usually seen in a joint price/quantity newsvendor model. For example, although the optimal quantity is a decreasing function of the unit cost, the optimal price can be nonmonotone in the unit cost and we shed insight into why. We illustrate that using a simplified structure of demand uncertainty can result in substantially lower profits.

Housing Supply and Price Adjustment

Abstract: We analyse two inter-related features of regional housing markets: determinants of new housing supply, and the impact of supply responsiveness on price dynamics. We demonstrate that a suitably specified q-theory model (including residential land values as well as construction costs) explains intended housing starts. Few prior studies have found significant land price effects, due either to their omission or (possibly) to incorrect data definition (use of agricultural rather than residential land values). We examine the interaction of supply responsiveness and price adjustment following demand shocks, using a new panel dataset covering 53 quarters across 73 regions of New Zealand. Regions with high supply responsiveness have relatively small price spikes following demand shocks, consistent with a rational response that limits house price jumps in regions with strong supply responses.

The effect of FDI on job separation

Abstract: A novel linked employer-employee data set documents that expanding multinational enterprises retain more domestic jobs than competitors without foreign expansions. In contrast to prior research, a propensity score estimator allows enterprise performance to vary with foreign direct investment (FDI) and shows that the foreign expansion itself is the dominant explanatory factor for reduced worker separation rates. Bounding, concomitant variable tests, and robustness checks rule out competing hypotheses. The finding is consistent with the idea that, given global factor price differences, a prevention of enterprises from outward FDI would lead to more domestic worker separations. FDI raises domestic-worker retention more pronouncedly among highly educated workers and for expansions into distant locations.

The Sources of On-Line Price Dispersion Across Product Types: An Integrative View of On-Line Search Costs and Price Premiums

Abstract: This article analyzes the price dispersion for products observed on the Internet and reaffirms the existence of substantial price dispersion across e-tailers. Comparison of advertised vs. unadvertised products reveals that predictions of search theory on advertising effect are generally not confirmed in the Internet market. Comparison of multi-channel vs. pure-play e-tailers reveals that multi-channel retailers with established brands in physical stores command price premiums in most on-line markets but not in very competitive markets like books, CDs, and flight tickets. A model is developed that uses cross-site and in-site search as search cost variables, and range of product options, product description, and product demonstration as Web site service feature variables. It is used to test when search cost variables are more salient than service feature variables, and vice versa. The results show that whether a variable accounts for variance in prices differs from product to product. Some service features enable e-retailers to charge higher prices without losing competitiveness; others do not offer price advantage because they represent lower cost structures that allow e-tailers to charge lower prices to become more competitive.

Imperfect information: The persistence of price dispersion on the web

Abstract: In this article, the authors empirically test the notion that as the mean price of durables increases, the degree of dispersion also increases. This effect holds even when they specifically consider variables such as the number of competitors and store quality. The authors suggest that an individual-level perceptual mechanism, the psychophysics of price, at the aggregate level helps explain continued price dispersion on the Web. These results are contrary to predictions from standard economic theory, which suggest that readily available price information will result in increased price competition and lower price dispersion. Two studies consistently demonstrate that as the mean price of an item increases, price dispersion also increases. These results provide evidence that, contrary to general economic expectations, the Internet has not commoditized products. Retailers and managers need to pay attention to Internet information but not be fearful of its impact on their pricing strategies.

Increasing Returns, Imperfect Competition, and Factor Prices

Abstract: We show how, in general equilibrium models featuring increasing returns, imperfect competition and endogenous markups, changes in the scale of economic activity affect income distribution across factors. Whenever final goods are gross-substitutes (gross- complements), a scale expansion raises (lowers) the relative reward of the scarce factor or the factor used intensively in the sector characterized by a higher degree of product differentiation and higher fixed costs. Under very reasonable hypothesis, our theory suggests that scale is skill-biased. This result provides a microfoundation for the secular increase in the relative demand for skilled labor. Moreover, it constitutes an important link among major explanations for the rise in wage inequality: skill-biased technical change, capital-skill complementarities and international trade. We provide new evidence on the mechanism underlying the skill bias of scale.