Showing papers on "Factor price published in 2008"
TL;DR: In this paper, the authors modify the Salop model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase.
Abstract: We modify the Salop (1979) model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase. Consumers' sensitivity to losses in money increases the price responsiveness of demand-and hence the intensity of competition-at higher relative to lower market prices, reducing or eliminating price variation both within and between products. When firms face common stochastic costs, in any symmetric equilibrium the markup is strictly decreasing in cost. Even when firms face different cost distributions, we identify conditions under which a focal-price equilibrium (where firms always charge the same "focal" price) exists, and conditions under which any equilibrium is focal.
331 citations
TL;DR: This article surveys the empirical literature on the economic geography of trade flows, factor prices, and the location of production, concluding that imperfectly competitive industries are drawn more than proportionately to locations with good market access.
Abstract: This paper surveys the empirical literature on the economic geography of trade flows, factor prices, and the location of production. The discussion is structured around the empirical predictions of a canonical theoretical model. We review empirical evidence on the determinants of trade costs and the effects of these costs on trade flows. Geography is a major determinant of factor prices, and access to foreign markets alone is shown to explain some 35% of the cross-country variation in per capita income. The paper documents empirical findings of home market (or magnification) effects, suggesting that imperfectly competitive industries are drawn more than proportionately to locations with good market access. Sub-national evidence establishes the presence of industrial clustering, and we examine the roles played by product market linkages to customer and supplier firms, knowledge spillovers, and labour market externalities.
304 citations
TL;DR: This article examined the transmission of international coffee prices through the domestic value chain in Uganda and found that producer price fluctuations are inconsistent with constant transaction costs, and investigated three possible explanations for this finding: storage and contango, marketing costs that increase with price, and trader entry that raises search time.
Abstract: Using detailed data from three simultaneous surveys of producers, traders, and exporters, this paper examines the transmission of international coffee prices through the domestic value chain in Uganda. We find that producer price fluctuations are inconsistent with constant transaction costs. We investigate three possible explanations for this finding: storage and contango, marketing costs that increase with price, and trader entry that raises search time. We test and reject the storage and marketing costs explanation, but we find some evidence of trader entry in response to a rise in export price. Our findings suggest that small itinerant traders enter in response to an export price increase, probably taking advantage of farmers’ ignorance of the rise in wholesale price.
119 citations
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TL;DR: The authors revisited these three stylized facts using massive amounts of US and Canadian data that share a common barcode classification, and found that none of these three main stylised facts survive. But their work is supportive of simple pricing models where the degree of market segmentation across the border is similar to that within borders.
Abstract: The empirical literature in international finance has produced three key results about international price deviations: borders give rise to flagrant violations of the law of one price, distance matters enormously for understanding these deviations, and most papers find that convergence rates back to purchasing power parity are inconsistent with the evidence of micro studies on nominal price stickiness. The data underlying these results are mostly comprised of price indexes and price surveys of goods that may not be identical internationally. In this paper, we revisit these three stylized facts using massive amounts of US and Canadian data that share a common barcode classification. We find that none of these three main stylized facts survive. We use our barcode level data to replicate prior work and explain what assumptions caused researchers to find different results from those we find in this paper. Overall, our work is supportive of simple pricing models where the degree of market segmentation across the border is similar to that within borders.
111 citations
TL;DR: In this paper, an empirical analytical framework for agglomeration economies based on a translog production-inverse input demand system is proposed to identify effects on total factor productivity (TFP), partial factor productivity, factor prices and factor demands.
Abstract: This paper proposes an empirical analytical framework for agglomeration economies based on a translog production-inverse input demand system. Estimation of the system allows us to identify effects on total factor productivity (TFP), partial factor productivity, factor prices and factor demands. It also provides a decomposition of the aggregate agglomeration elasticity into returns that arise from the increased efficiency of factor inputs and a “direct” agglomeration effect which exists over and above any factor augmentation. This enables us to indirectly address the problem of unobserved heterogeneity in factor “quality”. The paper provides an empirical application of the model using firm level data for UK manufacturing and service industries.
93 citations
TL;DR: This article developed a model where firms make state-dependent decisions on both pricing and acquisition of information and showed that when information is not perfect, menu costs combined with the aggregate price level serving as an endogenous public signal generate rigidity in price setting even when there is no real rigidity.
Abstract: This paper develops a model where firms make state-dependent decisions on both pricing and acquisition of information. It is shown that when information is not perfect, menu costs combined with the aggregate price level serving as an endogenous public signal generate rigidity in price setting even when there is no real rigidity. Specifically, firms reveal their information to other firms by changing their prices. Because the cost of changing price is borne by a firm but the benefit from better information goes to other firms, firms have an incentive to postpone price changes until more information is revealed by other firms via the price level. The information externality and menu costs reinforce each other in delaying price adjustment. As a result, the response of inflation to nominal shocks is both sluggish and hump-shaped. The model can also qualitatively capture a number of stylized facts about price setting at the micro level and inflation at the macro level.
84 citations
TL;DR: The authors show that differences across countries in intermediation costs and enforcement generate differences in occupational choice, firm size, credit, output and income inequality, and isolate the quantitative effect of these financial frictions in explaining the performance gap between each country and the United States, and depend critically on whether a general equilibrium factor price effect is operative.
76 citations
TL;DR: In this article, the authors developed a two-stage model of the generation market in which capacity construction occurs in stage 1, before demand realization, and price determination occurred in stage 2, when the equilibrium price ensures that the realized demand does not exceed the installed capacity.
68 citations
TL;DR: In this article, a Cointegration and Error-Correction Model (ECM) was used to analyze the impact of the Ethiopian coffee marketing system on the domestic coffee market.
Abstract: Coffee producers in Ethiopia have historically received a very small share of the export price of green coffee. Reasons that are often mentioned are heavy government intervention and high marketing and processing costs. Prior to 1992, government regulation of the domestic coffee market in the form of fixed producer prices and the monopoly power of the Ethiopian Coffee Marketing Corporation put a substantial wedge between the producer price and the world price of coffee by imposing an implicit tax on producers. The domestic coffee marketing system in Ethiopia was liberalised after 1992, which was envisaged to have a positive effect on producer prices and price transmission signals from world markets to producers. This paper, with the help of Cointegration and Error-Correction Model (ECM), attempts to analyse its impact. As findings indicate, the reforms induced stronger long-run relationships among grower, wholesaler and exporter prices. The estimation of the ECM shows that the short-run transmission of price signals from world to domestic markets has improved, but has remained weak in both auction-to-world and producer-to-auction markets. This might be explained by the weak institutional arrangement coordinating the domestic coffee system and contract enforcement. In general, the domestic price adjusts more rapidly to world price changes today than it did prior to the reforms. However, there is an indication that negative price changes transmit much faster than positive ones.
56 citations
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TL;DR: In this paper, the effect of price caps on equilibrium production and welfare in oligopoly under demand uncertainty was analyzed and it was shown that price caps close to marginal cost may lead to zero production, depending on the nature of uncertainty.
Abstract: We analyze the effect of price caps on equilibrium production and welfare in oligopoly under demand uncertainty. We find that high price caps always increase production and welfare as compared to the situation without price cap. Price caps close to marginal cost may lead to zero production, depending on the nature of uncertainty. We characterize the optimal price cap and show that typically, the optimal price cap is bounded away from marginal cost.
51 citations
TL;DR: In this paper, the authors analyze how flexible international outsourcing and labour taxation affect wage formation, employment and welfare in dual domestic labour markets in European welfare states. But they focus on the low-skilled workers in low-salary countries, while the high-salaried workers are typically unionized.
Abstract: In European Welfare States, low-skilled workers are typically unionized, while the wage formation of high-skilled workers is more competitive. To focus on this aspect, we analyze how flexible international outsourcing and labour taxation affect wage formation, employment and welfare in dual domestic labour markets. Higher productivity of outsourcing, lower cost of outsourcing and lower factor price of outsourcing increase wage dispersion between the high-skilled and low-skilled workers. Increasing wage tax progression of lowskilled workers decreases the wage rate and increases the labour demand of low-skilled workers. It decreases the welfare of low-skilled workers and increases both the welfare of high-skilled workers and the profit of firms.
TL;DR: In this article, the authors consider variants of a dynamic duopoly model where one firm has a stronger market position than its competitor, and consumers' past purchases may reveal their different valuations for the two firms' products.
Abstract: This paper considers variants of a dynamic duopoly model where one firm has a stronger market position than its competitor. Consumers' past purchases may reveal their different valuations for the two firms' products. Price discrimination based on purchase histories tends to benefit consumers if it does not cause the weaker firm to exit; otherwise it can harm consumers. The effect of price discrimination also depends on firms' cost differences, market competitiveness, and consumers' time horizon. The stronger firm may price below cost in the presence of consumer switching costs, with the purpose and effect of eliminating competition.
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TL;DR: The authors empirically examined the effects of different types of FDI into and out of the United Kingdom on domestic productivity and on the demand for skilled and unskilled labour at the industry level.
Abstract: We relate the technological and factor price determinants of inward and outward FDI to its potential productivity and labour market effects on both host and home economies. This allows us to distinguish clearly between technology sourcing and technology exploiting FDI, and to identify FDI which is linked to labour cost differentials. We then empirically examine the effects of different types of FDI into and out of the United Kingdom on domestic (i.e. UK) productivity and on the demand for skilled and unskilled labour at the industry level. Inward investment into the UK comes overwhelmingly from sectors and countries which have a technological advantage over the corresponding UK sector. Outward FDI shows a quite different pattern, dominated by investment into foreign sectors which have lower unit labour costs than the UK. We find that different types of FDI have markedly different productivity and labour demand effects, which may in part explain the lack of consensus in the empirical literature on the effects of FDI. Our results also highlight the difficulty for policy makers of simultaneously improving employment and domestic productivity through FDI.
TL;DR: In this paper, a constant-returns neoclassical model of economic integration is proposed to account for the fact that Eastern Germany's recovery from the "unification shock" has been characterized by deep structural change and an integration process involving both capital deepening and labor thinning.
TL;DR: In this paper, the authors quantified what is meant by higher price level and dispersion in an oligopoly market with imperfectly informed consumers for both fixed sample search and sequential search.
Abstract: This paper qualifies and quantifies what is meant by higher price level and dispersion in an oligopoly market with imperfectly informed consumers for both Fixed Sample Search and Sequential Search. The objective is to identify the conditions under which prices become lower and price dispersion reduces as a function of consumers’ information. Surprisingly, the mean price is an increasing function of search intensity and price dispersion is an inverse U-shaped function of the proportion of informed consumers.
TL;DR: In this paper, the authors examined collusive price leadership in homogeneous good capacity-constrained repeated price competition and showed that a large firm has an incentive to move early in order to demonstrate its commitment not to deviate.
TL;DR: This article develops supply contracts covering environments with changing prices by determining expressions of the contract's expected low price and its second moment for a given horizon and identifying an expected optimum time before the contract expires at which the lowest price occurs.
Journal Article•
TL;DR: PANAKEIA as mentioned in this paper argued that if an increased ability to price discriminate, whether driven by technological changes or changes in copyright law, leads to the production of more works of authorship, the resources to produce those additional works must come from some other productive sectors of the economy.
Abstract: TABLE OF CONTENTS I. INTRODUCTION II. PRICE DISCRIMINATION AND COPYRIGHT IN A PARTIAL EQUILIBRIUM ANALYSIS A. The Existing Theoretical Background of Price Discrimination B. Application of Existing Theories to Copyright III. PRICE DISCRIMINATION IN A SECOND-BEST ANALYSIS A. Reality and Assumptions: The Practical Concerns that Motivate a Second-Best Analysis B. Illustrating the Intuition: A Simplified, Two Good Model with Price Discrimination C. Extending the Analysis to a Continuum of Goods D. Extending the Framework to Encompass Imperfect Price Discrimination E. A Final Case: Perfect Price Discrimination in Both Industries F. A Comparison of the Partial and More General Equilibrium Results IV. EVALUATION OF EXISTING PRICE DISCRIMINATION SCHEMES IN COPYRIGHT INDUSTRIES V. MORE GENERAL SECOND-BEST IMPLICATIONS APPENDIX I. INTRODUCTION PANACEA: FROM GREEK PANAKEIA, A REMEDY OR CURE REPUTED TO HEAL ALL DISEASES. (1) According to the conventional wisdom, price discrimination offers two advantages compared to uniform or linear pricing in the production of copyrighted works. (2) First, it can reduce the deadweight losses (3) otherwise associated with the higher prices that copyright makes possible. (4) Second, it can increase the producer surplus or rents (5) associated with the production of any given copyrighted work and thus ensure the expected profitability of a wider range of works. (6) This increase in profitability should, in turn, lead to the production of more copyrighted works. If the conventional wisdom is right, then the proper response would be not merely to tolerate, but to actively promote price discrimination schemes with respect to works of authorship. Accordingly, if changes to copyright's existing legal rules would enable more, or more perfect, price discrimination, then such changes should be adopted. (7) Of course, not everyone is so sanguine about price discrimination. Existing economic and legal critiques have focused on the first supposed advantage, and have shown that a shift to price discrimination will not always reduce, and may sometimes increase, deadweight losses. (8) Yet, these critiques have not reduced the pervasive, almost absurdly utopian perception of price discrimination (9)--perhaps because they do not address price discrimination's second supposed advantage. As a result, these critiques leave open the argument that even if a price discrimination scheme only converts consumer surplus into producer surplus, it still enhances social welfare by increasing the incentives to produce more and better works of authorship. This Article reexamines the second supposed advantage and offers an alternative critique of price discrimination as a panacea for the monopoly costs copyright can impose. Both the traditional theoretical account of the desirability of price discrimination and the existing critiques rely on a partial equilibrium analysis. They examine the consequences of various price discrimination schemes only for the specific market at issue--the market for a specific copyrighted work or for copyrighted works more generally--and ignore or assume away any effects on the remainder of the economy. This use of partial equilibrium analysis is troubling. If an increased ability to price discriminate, whether driven by technological changes or changes in copyright law, leads to the production of more works of authorship, the resources to produce those additional works must come from somewhere. Over the long run, we cannot assume that the necessary resources would otherwise have been left idle. (10) Rather, to produce more works of authorship, the resources must be taken from some other productive sectors of the economy. This is not to say that the resource necessary to produce more works of authorship, namely creativity, is ultimately limited--a nonrenewable resource, as it were--but simply an acknowledgement that creativity, like any other resource, is scarce. …
TL;DR: This article examined the compilation methods of the general construction price index in Britain and found that the indices measure the price movement of more traditional building trades but failed to capture the productivity growth rate of the construction sector.
Abstract: The major message that I will be trying to convey is that we often misinterpret the available data because of inadequate attention to how they are produced … (Griliches, 1994, p. 2) The importance of accurate measurement and pertinent modelling of the general level of construction prices cannot be overemphasized. Uses range from macroeconomic statistics such as real value of investment to micro‐level budgeting like construction project price forecasts. Numerous research studies posit that the measured productivity growth rates of the construction sector are distorted and that an inaccurate general construction price index is a main villain of the piece. The academic research published in this arena has primarily focused on models to forecast or predict changes in the general construction price level, whereas this research scrutinizes the compilation methods of the general construction price index in Britain and finds that the indices measure the price movement of more traditional building trades but almos...
TL;DR: In this paper, the authors test various price equations using quarterly U.S. data from 1952 to the present and find that the best specification is a price equation in level terms imbedded in a price-wage model.
01 Nov 2008
TL;DR: An oligopoly model with a general cost structure is presented and conditions under which such an adverse price effect occurs are derived and the results offer guidelines to e-tailers on how to price their products and decide their service offerings.
Abstract: The majority of theoretical vertical differentiation models in the literature derive equilibrium prices that exhibit what we call an ''adverse price effect:'' for a low quality firm, the equilibrium price may decrease when the product quality increases. This seemingly counterintuitive theoretical result has received little attention in the literature. In order to check whether this result is simply an artifact of model assumptions (such as a duopoly under absence of differentiation costs), we present an oligopoly model with a general cost structure, and derive closed-form solutions for two special cases. Our model shows that the adverse price effect continues to hold in a more general setting and we derive conditions under which such an adverse price effect occurs. We then attempt to find empirical evidence of this phenomenon using data from the online retailing (e-tailing) industry where e-tailers selling identical products mainly differentiate with their service offerings. Our analytical and empirical results offer guidelines to e-tailers on how to price their products and decide their service offerings. The results may also have implications for firms in other industries that are characterized by vertical differentiation.
TL;DR: In this article, the authors investigate price competition in a segmented market, where each segment contains one seller and one consumer, and consumers incur transportation costs when they buy from a seller located in another segment.
TL;DR: In this article, an alternative competitive model, based on online retailers' differentiation, was proposed to explain price dispersion in online e-commerce, and empirically test the predictions of this model and find that the model is a viable alternative to the hedonic price model.
Abstract: The Internet has changed the nature of doing business as well as the nature of competition in many industries. Consumers are more empowered than ever with valuable information such as prices, products, and store ratings. Because of this, some researchers even predicted, during the early stage of e-commerce, a frictionless economy in which online prices would be driven down to marginal costs. However, many studies have subsequently observed the wide price dispersion online, and its existence and persistence has now been well documented. Possible explanations of this price dispersion, derived mainly using hedonic price models, have seen only modest success. In this paper, we propose an alternative competitive model, based on online retailers' differentiation, to explain price dispersion. We empirically test the predictions of this model and find that the model is a viable alternative to the hedonic price model. In addition, our competitive model is able to predict and explain observations that are seemingly inconsistent with a hedonic model. Practically, our model yields important recommendations for the online etailing industry and can help an e-tailer to choose a desirable position in the competitive market.
TL;DR: In this paper, the authors study how bargainers impact on markets in which firms set a list price to sell to those consumers who take prices as given, and find that an increase in the proportion of consumers seeking to bargain can lower consumer surplus overall, even though new bargainers receive a lower price.
Abstract: In this paper we study how bargainers impact on markets in which firms set a list price to sell to those consumers who take prices as given. The list price acts as an outside option for the bargainers, so the higher the list price, the more the firms can extract from bargainers. We find that an increase in the proportion of consumers seeking to bargain can lower consumer surplus overall, even though new bargainers receive a lower price. The reason is that the list price for those who don't bargain and the bargained prices for those who were already bargaining rise: sellers have a greater incentive to make the bargainers' outside option less attractive, reducing the incentive to compete for price takers. Competition Authority exhortations to bargain can therefore be misplaced. We also consider the implications for optimal seller bargaining.
TL;DR: In this paper, a theory of how capital, skilled labor, and unskilled labor interact at the plant level has been developed for the relationship between factor allocation and plant size and the effects of trade and growth on the skill premium.
Abstract: This article develops a theory of how capital, skilled labor, and unskilled labor interact at the plant level. The theory has implications for the relationship between factor allocation and plant size and the effects of trade and growth on the skill premium. The theory is consistent with certain facts about factor allocation and factor price changes in the 19th and 20th centuries.
TL;DR: In this article, the authors analyze the experience of an emerging economy, Slovakia, using a large micro-level dataset that accounts for a substantial part of the consumer price index (about 5 million observations).
Abstract: Most empirical studies on price setting that use micro data focus on advanced industrial countries. In this paper we analyze the experience of an emerging economy, Slovakia, using a large micro-level dataset that accounts for a substantial part of the consumer price index (about 5 million observations). We find that market structure is an important determinant of pricing behavior. The effect of market structure on persistence of inflation results from two conflicting forces. Increased competition may reduce persistence by increasing the frequency of price changes. In contrast, higher competition may increase persistence through inertial behaviour induced by the strategic complementarity among price setters. In our case study, we find that the latter effects dominate. Indeed, the dispersion of prices is higher while persistence is lower in the non-tradeable sectors, suggesting that higher competition is not conducive to lower persistence. Furthermore, we find that the frequency of price changes depends negatively on the price dispersion and positively on the product-specific inflation. These results seem consistent with predictions of Calvo's staggered price model.
TL;DR: In this paper, the authors examined the cross-sectional effect of the nominal share price and found that stock return is inversely related to its nominal price, and that a strategy of buying these penny stocks can generate a significant alpha even after considering the transaction costs.
Abstract: This study examines the cross-sectional effect of the nominal share price. We endeavor to understand two interesting puzzles associated with share price. First, the nominal share prices of the US stocks have remained remarkably constant since the Great Depression despite inflation. Second, there is no consensus about the motivations for firms to split their stocks, since financial theory suggests share price is independent of its value. The findings indicate that share price per se matters in cross-sectional asset pricing: stock return is inversely related to its nominal price. It is shown that a strategy of buying these penny stocks can generate a significant alpha even after considering the transaction costs. The abnormal returns of these penny stocks are robust in the presence of other firm characteristics such as size, book-to-market equity, earning/price ratio, liquidity and past returns; and are also not explained by the existing factors. These results also cast some light on the stock-split phenomenon. Intuitively, if firm managers know that low price would generate higher future returns, they are more likely to split their stocks on behalf of shareholders.
TL;DR: The authors compare price level and income convergence for eleven developed economies using implicit price deflators derived from the GDP data of Maddison (1995, 2001, 2003) and find that "sigma" and "beta" convergence for prices occurs later and to a lesser extent than income.
Abstract: We compare price level and income convergence since 1870 for eleven developed economies using implicit price deflators derived from the GDP data of Maddison (1995, 2001, 2003). We find that “sigma” and “beta” convergence for prices occurs later and to a lesser extent than income. Price levels converge after 1950 while income convergence begins in the 1880s. We find no evidence for stochastic price convergence or for “club” price convergence.
TL;DR: In this paper, the authors summarize the current research in disciplines outside marketing that applies to price fairness: research by behavioral economists, primate behavior researchers and social neuroscientists, concluding that consumers can actually harm themselves to punish what they perceive to be an unfair price.
Abstract: Purpose – The purpose of this paper is to summarize the current research in disciplines outside marketing that applies to price fairness: research by behavioral economists, primate behavior researchers and social neuroscientists.Design/methodology/approach – The approach is descriptive, summarizing the extensive research into fairness being done in disciplines other than marketing.Findings – Research outside marketing indicates that a fair price is a preference. It has social utility that is independent of the economic utility of a low price. Consumers can actually harm themselves to punish what they perceive to be an unfair price. Conversely, a fair price triggers the reward center of the mind, stimulating happiness. The research also indicates that the response to a fair or unfair price is emotional: fast and automatic. The strength of that emotional response to unfairness varies across people. However, despite the variation in reactions, to ignore the concern for fairness is to miss a major motivation ...
TL;DR: In this paper, the authors extend the price discrimination literature and apply it to market definition and competitive effects analysis in recent mergers in the cruise line industry and show that with fixed output, firms have increased ability to engage profitably in price discrimination as the intensity of competition decreases, and the average price of price-sensitive and "insensitive consumers increase with reduced competition.
Abstract: This article extends the price discrimination literature and applies it to market definition and competitive effects analysis in recent mergers in the cruise line industry. In that industry, short run output is fixed. If firms want to increase price and restrict output to price‐insensitive customers, they have to increase the output and lower price to the price‐sensitive customers. We show that with fixed output (1) it is in firms’ interest to engage in price discrimination, (2) firms have increased ability to engage profitably in price discrimination as the intensity of competition decreases, and (3) the average price of price‐sensitive and ‐insensitive consumers increase with reduced competition. Unlike the economists at the Federal Trade Commission, our analysis suggests that cruise lines engage in third‐degree price discrimination. Moreover, the cruise industry could be a separate market and a reduction in the number of competitors might raise average prices.