Showing papers on "Factor price published in 2009"
TL;DR: Evidence is obtained suggesting that as the number of choices offered to individuals grows, their willingness to switch plans given a set of price dispersion differences declines, which allows large price differences for relatively homogeneous products to persist.
Abstract: The United States and other nations rely on consumer choice and price competition between competing health plans to allocate resources in the health sector. While a great deal of research has examined the efficiency consequences of adverse selection in health insurance markets, less attention has been devoted to other aspects of consumer choice. The nation of Switzerland offers a unique opportunity to study price competition in health insurance markets. Switzerland regulates health insurance markets with the aim of minimizing adverse selection and encouraging strong price competition. We examine consumer responses to price differences in local markets and the degree of price variation in local markets. Using both survey data and observations on local markets we obtain evidence suggesting that as the number of choices offered to individuals grows, their willingness to switch plans given a set of price dispersion differences declines, which allows large price differences for relatively homogeneous products to persist. We consider explanations for this phenomenon from economics and psychology.
163 citations
TL;DR: In this paper, a first look at the dynamic effects of customer poaching in homogeneous product markets, where firms need to invest in advertising to generate awareness, is presented, and it is shown that only the firm which advertises the highest price in the first period will engage in price discrimination.
Abstract: This paper is a first look at the dynamic effects of customer poaching in homogeneous product markets, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. It is shown that only the firm which advertises the highest price in the first period will engage in price discrimination, a practice that clearly benefits the discriminating firm. This poaching gives rise to ‘the race for discrimination effect,’ through which price discrimination may act actually to soften price competition rather than intensify it. As a result, all firms may become better off, even when only one of them can engage in price discrimination. This paper offers a first attempt to evaluate the effects of price discrimination on the efficiency properties of advertising. In markets with low or no advertising costs, allowing firms to price discriminate leads them to provide too little advertising, which is not good for consumers and overall welfare. Only in markets with high advertising costs, might firms overadvertise. Regarding the welfare effects, price discrimination is generally bad for welfare and consumer surplus, though good for firms.
83 citations
TL;DR: In this article, the authors compared the technological and factor price determinants of inward and outward foreign direct investment (FDI) to its potential productivity and labour market effects on both host and home economies.
Abstract: We relate the technological and factor price determinants of inward and outward foreign direct investment (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 that is linked to labour cost differentials. We then empirically examine the effects of different types of FDI into and out of the UK on domestic (i.e. UK) productivity and on the demand for skilled and unskilled labour at the industry level.
75 citations
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TL;DR: In this paper, the authors present a survey of the economic effects of behavioral-based price discrimination in imperfectly competitive markets, which is the most common economic setting for imperfect competition.
Abstract: Economists have long been interested in understanding the profit, consumer surplus and welfare effects of an ancient marketing strategy: Price Discrimination. While it is not new that firms try frequently to segment customers in order to price discriminate, what has dramatically changed, with recent advances in information technologies, is the quality of consumer-specific data now available in many markets and how this information has been used by firms for price discrimination purposes. Specifically, thanks to information technology it is nowadays increasingly feasible for sellers to segment customers on the basis of their purchasing histories and to price discriminate accordingly. This form of price discrimination has been named in the literature as Behaviour-Based Price Discrimination (BBPD). For a long time economists have been concerned in understanding the economic effects of price discrimination in monopolistic markets. However, because imperfect competition is undoubtedly the most common economic setting, recent research on the field has been concerned with the following issues. Firstly, how are profit, consumer surplus and welfare affected when firms practice some form of price discrimination in imperfectly competitive markets? Secondly, in which circumstances may competitive firms have an incentive to price discriminate or rather to avoid it? As we will see, conclusions regarding the profit and welfare effects of price discrimination are strongly dependent upon the form of price discrimination, which in turn depends upon the form of consumer heterogeneity and the different instruments available for price discrimination. Basically, the aim of this survey is to clarify the two aforementioned issues in imperfectly competitive markets.
72 citations
TL;DR: The authors developed a model of consumer search consistent with the evidence of substantial price dispersion and time spent shopping within countries to study international deviations from the law of one price (LOP) and relative price fluctuations.
Abstract: This article develops a model of consumer search consistent with the evidence of substantial price dispersion and time spent shopping within countries to study international deviations from the law of one price (LOP) and relative price fluctuations. Search frictions lead firms to price discriminate across markets based on the opportunity cost of search, which depends on the local wage. With productivity and taste shocks estimated from the data, deviations from the LOP are as volatile and persistent as in the data. Fluctuations in relative wages, real exchange rates, and the terms of trade are also consistent with the data.
71 citations
TL;DR: In this article, the authors study the impact of price cap regulation on the level and timing of investment in an oligopolistic (Cournot) industry facing stochastic demand and find that a price ceiling affects investment decisions in two mutually competing ways.
58 citations
TL;DR: In this article, the authors argue that resources constitute the fundamental area of overlap between the interests of input-output economists and industrial ecologists, and they present a quantity and a price model with both resource prices and product prices.
Abstract: This paper argues that resources constitute the fundamental area of overlap between the interests of input-output economists and industrial ecologists. Three misconceptions about input-output economics obscure this fact: the frequent failure to utilize combined quantity and price input-output models, treatment of value-added as a monetary concept only, and the belief that all input-output models assume a linear relationship between output and final deliveries. The paper dispels these misconceptions by describing a quantity input-output model with resources measured in physical units and the corresponding price model with both resource prices and product prices. The model is illustrated with a numerical example of a hypothetical economy and analysis of a scenario where that economy is subsequently obliged to extract a lower grade of ore. Then three other input-output models are presented: a model closed for household consumption, a dynamic model, and a model of the world economy. Unlike the basic model, the last two are non-linear in final deliveries and in factor prices while also retaining the desirable features of the basic model.
57 citations
01 Mar 2009
TL;DR: This paper models a noncooperative pure pricing game among multiple competing retailers who sell a certain branded product under price-dependent stochastic demands and demonstrates the use of service level to build price walls which can prevent a huge drop in price, as well as profit.
Abstract: In this paper, we apply the game theory to study some strategic actions for retailers to fight a price war. We start by modeling a noncooperative pure pricing game among multiple competing retailers who sell a certain branded product under price-dependent stochastic demands. A unique Nash equilibrium is proven to exist under some mild conditions. We demonstrate mathematically the incentives for retailers to start a price war. Based on a strategic framework via the game theory, we illustrate the use of service level to build price walls which can prevent a huge drop in price, as well as profit. Three kinds of price walls are proposed, and the respective strengths and weaknesses have been studied. Analytical conditions, under which a price wall can effectively prevent big drops in both market share and profit, are developed. Aside from the proposed price walls, two other pricing strategies, which can lead to an all-win situation, are examined.
53 citations
TL;DR: In the median sector, 100 percent of the long-run response of the sectoral price index to a sector-specific shock occurs in the month of the shock as mentioned in this paper, while the standard Calvo model and the standard sticky-information model can match this finding only under extreme assumptions concerning the profit-maximizing price.
52 citations
TL;DR: A decision analysis under multiplicative production uncertainty, both with and without price uncertainty, is provided and it is found that increases in risk or input prices reduce expected output.
37 citations
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06 Nov 2009
TL;DR: In this paper, the problem of simultaneously determining a pricing and inventory replenishment strategy under reference price effects is addressed, and the authors show that the potential benefits from simultaneously determining optimal prices and stocking quantities compared to a sequential procedure can increase considerably, when reference price effect is included in the model.
Abstract: In many firms the pricing and inventory control functions are separated. However, a number of theoretical models suggest a joint determination of inventory levels and prices, as prices also affect stocking risks. In this work, we address the problem of simultaneously determining a pricing and inventory replenishment strategy under reference price effects. This reference price effect models the empirically well established fact that consumers not only react sensitively to the current price, but also to deviations from a reference price formed on the basis of past purchases. The current price is then perceived as a discount or surcharge relative to this reference price. Thus, immediate effects of price reductions on profits have to be weighted against the resulting losses in future periods. We study how the additional dynamics of the consumers' willingness to pay affect an optimal pricing and inventory control model and whether a simple policy such as a base-stock-list-price policy holds in such a setting. For a one-period planning horizon we analytically prove the optimality of a base-stock-list-price policy with respect to the reference price under general conditions. We then extend this result to the two-period time horizon for the linear and loss-neutral demand function and to the multi-period case under even more restrictive assumptions. However, numerical simulations suggest that a base-stock-list-price policy is also optimal for the multi-period setting under more general conditions. We furthermore show by numerical investigations that the presence of reference price effects decreases the incentive for price discounts to deal with overstocked situations. Moreover, we find that the potential benefits from simultaneously determining optimal prices and stocking quantities compared to a sequential procedure can increase considerably, when reference price effects are included in the model. This makes an integration of pricing and inventory control with reference price effects by all means worth the effort. (author's abstract)
TL;DR: Using the rolling bicorrelation test statistic, the authors compared the efficiency of stock markets from China, Korea and Taiwan in selected sub-periods with different price limits regimes.
Abstract: Using the rolling bicorrelation test statistic, the present paper compares the efficiency of stock markets from China, Korea and Taiwan in selected sub-periods with different price limits regimes. The statistical results do not support the claims that restrictive price limits and price limits per se are jeopardizing market efficiency. However, the evidence does not imply that price limits have no effect on the price discovery process but rather suggesting that market efficiency is not merely determined by price limits.
TL;DR: This paper explores the inventory replenishment policy for the kind of items in which the demand is sensitive to stock and selling price and gives a sufficient condition for optimal decision rules and develops the closed form of the optimal prices.
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TL;DR: In this article, the authors exploit the natural experiment of Japan to test the general validity of the Heckscher-Ohlin theorem and provide strong empirical support for the price version of the theorem.
Abstract: We exploit the ‘natural experiment of Japan’ to test the general validity of the HeckscherOhlin theorem. In contrast to existing tests of the quantity version of Heckscher-Ohlin, which are all based on restrictive assumptions about preferences and technologies, we test a price version of the Heckscher-Ohlin theorem where the existence of positive gains from trade is the only critical assumption. Given that our previous research on the natural experiment of Japan (Bernhofen and Brown, 2005) provided evidence of positive gains from trade, the data environment fulfils the critical assumption of the theory. Our test combines factor price data in the autarky period with commodity trade data and a technology matrix in the early free trade period. Our data on wages, rental rates of capital and land rents stem from a range of historical studies of the late Tokugawa period. Our technology matrix is derived from a major Japanese survey of agricultural techniques during the early Meiji period, accounts by European visitors and numerous studies by Japanese and western scholars that draw on village records, business accounts and other historical sources. Our results provide strong empirical support for the price version of the Heckscher-Ohlin theorem. Our factor content analysis reveals that Japan was a net exporter of skilled labour, which was used relatively intensively in silk, which dominated its exports. On the import side, our
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TL;DR: In this paper, the authors examined nominal rigidities in the euro area and their importance for the functioning of markets and found that economic adjustment to nominal shocks depends both on the frequency of price changes and on the degree of price rigidity (prices are defined as being rigid in the study if they less then fully adjust to a change in demand or costs).
Abstract: The study on price stickiness examined nominal rigidities in the euro area and their importance for the functioning of markets. The study examined nominal rigidities in the euro area and their importance for the functioning of markets. It analysed the price setting behaviour of firms at the micro-level, developed several indicators to measure the degree of producer and consumer price rigidity at sector and product level and examined the various factors affecting consumer and producer price rigidity. One of the main findings of the study is that economic adjustment to nominal shocks depends both on the frequency of price changes and on the degree of price rigidity (prices are defined as being rigid in the study if they less then fully adjust to a change in demand or costs). The study also distinguished between intrinsic price rigidity (prices only adjust partially to changes in demand and costs that have significant effects on the optimal price) and extrinsic price rigidity (prices do not adjust because demand and costs are stable and the optimal price does not vary a lot). Making this distinction leads to important conclusions concerning the degree of price rigidity for certain product categories and has important policy implications.
TL;DR: In this paper, the effects of price discrimination in the Stackelberg competition model for the linear demand case were examined, and it was shown that the leader does not use any price discrimination at all, whereas the follower does all price discrimination.
Abstract: We examine the effects of price discrimination in the Stackelberg competition model for the linear demand case. We show that the leader does not use any price discrimination at all. Rather, the follower does all price discrimination. The leader directs all of its first mover preemptive advantage to attract the highest value consumers who pay a uniformly high price. We observe that profits and total welfare are larger and consumer surplus is smaller than those of the standard Stackelberg competition model.
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TL;DR: In this paper, the impact of exogenous changes in factor supply and factor demand on factor allocation and factor prices in economies with a large number of goods and factors is investigated, and sufficient conditions for robust monotone comparative statics predictions in a Roy-like assignment model are provided.
Abstract: This paper develops tools and techniques to study the impact of exogenous changes in factor supply and factor demand on factor allocation and factor prices in economies with a large number of goods and factors. The main results of our paper characterize sufficient conditions for robust monotone comparative statics predictions in a Roy-like assignment model. These general results are then used to generate new insights about the consequences of globalization.
TL;DR: In this article, the authors model technological change as endogenous in the sense that it is affected by economic, behavioral, and institutional variables, such as relative input prices and their level, of which the price of labor is particularly important.
Abstract: Technological change is modeled as endogenous in the sense that it is affected by economic, behavioral, and institutional variables. Technological change is especially affected by changes in relative input prices and their level, of which the price of labor is particularly important. Input prices are affected by institutional variables. Such prices also impact on the firm's efficiency, which in turn affects growth rates as well as the rate of technical change. As relative factor prices or their level increase, firms are induced to innovate or adopt extant technology to remain competitive or to maintain current profit rates. High wage firms can be expected to engage in such induced technological change, leading the growth process thereby yielding lower unit costs and increasing the level of material welfare. Relatively low wage economies can be locked into a state of economic inefficiency and laggard technological progress, especially in the long run.
TL;DR: In this paper, a context-dependent theory of how price changes influence consumer purchase choice for fast moving consumer goods (FMCGs) for manufacturer (large household share) and retailer (small household share).
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TL;DR: In this article, the role of institutions for labour market performance across European countries is investigated, and the authors suggest that higher flexibility and incentives of households to work appear to be appropriate strategies to improve the employment record.
Abstract: This paper investigates the role of institutions for labour market performance across European countries. As participation rates have been rather stable over the past, the unemployment problem is mainly caused by shortages in labour demand. Labour demand is expressed by its structural parameters, such as the elasticities of employment to output and factor prices. Institutional variables include employment protection legislation, the structure of wage bargaining, measures describing the tax and transfer system and active labour market policies. As cointegration between employment, output and factor prices is detected, labour demand equations are fitted in levels by efficient estimation techniques. To account for possible structural change, time varying parameter models and aysmmetries due to the business cycle situation are considered. Then, labour demand elasticities are explained by institutions using panel fixed effects regressions. The results suggest that higher flexibility and incentives of households to work appear to be appropriate strategies to improve the employment record. The employment response to economic conditions is stronger in a more deregulated environment, and the absorption of shocks can be relieved. However, the institutional database should be improved in order to arrive at more definite policy conclusions.
TL;DR: In this paper, the authors developed a computable general equilibrium (CGE) model for India by incorporating Harris-Todaro economic characteristics of unemployment, labor migration, farm dependant population, and labor-intensive agriculture.
Abstract: Since 1950s India has advocated import substituting industrialization policies to promote its manufacturing sector. The end result was creation of a dual economy: highly favored manufacturing sector with high and rigid wages and neglected agricultural sector with low wages and poverty. Because of the higher wages in the manufacturing sector, the rural laborers migrate to the urban sector, a typical characteristic of the Harris-Todaro developing economy. Realizing this crisis, the Indian government recently initiated policies to boost agricultural production to curb the labor migration and improve the welfare of the rural population. In this study, we develop a computable general equilibrium (CGE) model for India by incorporating Harris-Todaro economic characteristics of unemployment, labor migration, farm dependant population, and labor-intensive agriculture. We use the model to analyze the effects of agricultural production subsidy policies on employment, factor price, output price, output levels, and we...
TL;DR: It is shown that price rigidities help restore trade and could even enhance effectiveness of prices as signals of quality and develop this intuition by analyzing the strategic advantages ofprice rigidities.
Abstract: We analyze trade between a price setting party (seller) who has private information about the quality of a good and a price taker (buyer) who may also have private information. Differently from most of the literature, we focus on the case in which, under full information, it would be inefficient to trade goods of poor quality. We show that there is a unique equilibrium outcome passing Cho and Kreps (1987) Never a Weak Best Response. The refined outcome is always characterized by absence of trade, although trade would be mutually beneficial in some state of nature. This occurs: 1. Even if the price taker has more precise information than the price setting party, and 2. Even when the information received by both parties is almost perfect. The model thus implies that signaling through prices may exacerbate the effect of adverse selection rather than mitigate it. The price setting party would always benefit from committing to prices that do not reveal her information. We develop this intuition by analyzing the strategic advantages generated by price rigidities. Possible applications to professional bodies and compensation policies are discussed.
TL;DR: In this article, the authors consider the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialized inputs, and show that firms acquire the intermediate by either producing it in a wholly owned subsidiary or outsourcing it to a supplier who must make a relationship specific investment.
Abstract: We consider the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialized inputs. Factor price considerations dictate that firms acquire the intermediate abroad, by either producing it in a wholly owned subsidiary or outsourcing it to a supplier who must make a relationship-specific investment. Firms’ internationalization mode depends on cost and strategic considerations. Crucially, asymmetric equilibria emerge, with firms choosing different modes of internationalization, even when they are ex ante identical. With ex ante asymmetries, lower cost producers have a stronger incentive to vertically integrate (FDI), while higher cost firms are more likely to outsource. Externalisation contre FDI (Foreign Direct Investment) en equilibre oligopolistique Resume Cet article concerne la decision de fabriquer ou d'acheter des entreprises oligopolistiques dans une industrie dans laquelle la bonne production finale necessite des intrants specialises. Les co...
TL;DR: In this article, the authors focus on the institutional setting where Old Masters'Paintings (OMP) markets transactions are carried and develop a preliminary attempt to embody legal provisions in econometric, hedonic pricing models.
Abstract: In this paper, we focus on the institutional setting where Old Masters’Paintings (OMP) markets transactions are carried. We develop a preliminary attempt to embody legal provisions in econometric, hedonic pricing models. We consider a particular regulation applicable only in Italy, the “export veto” for art objects that are particularly relevant for the national cultural patrimony. We proxy such legal provision in order to include it in the statistical analysis and to check whether it affects the OMP price differentials between pre-auction estimated price and post-auction hammer price. Preliminary results show that the price differential is affected by the legal variable, therefore suggesting that the country’s institutional framework plays an important role in price dynamics.
TL;DR: This article investigated the existence of asymmetric price adjustment in 269 6-digit North American Industrial Classification System (NAICS) industries using quarterly financial data from 1966-2006 and found that positive price asymmetry is frequent in non-durable goods and natural resource manufacturing.
Abstract: Several studies document asymmetric price adjustment in gasoline and agricultural markets. Do these results extend to other subsectors of the economy? This paper investigates the existence of asymmetric price adjustment in 269 6-digit North American Industrial Classification System (NAICS) industries using quarterly financial data from 1966-2006. Results, which are consistent with the previous literature, show that positive price asymmetry is frequent in nondurable goods and natural resource manufacturing. However, price asymmetry is not readily evident in mining, durable goods manufacturing, and service sectors. The differing results may best be explained by theoretical explanations of price asymmetry based on inventory management.
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TL;DR: In this paper, the authors propose a model of price competition where consumers exogenously differ in the number of prices they compare and show that consumers who previously just sampled one firm start to compare more prices all types of consumers will expect to pay a lower price and if consumers who already sampled more than one price sample (even) more prices then there exists a threshold.
Abstract: We propose a model of price competition where consumers exogenously differ in the number of prices they compare Our model can be interpreted either as a non?sequential search model or as a network model of price competition We show that i) if consumers who previously just sampled one firm start to compare more prices all types of consumers will expect to pay a lower price and ii) if consumers who already sampled more than one price sample (even) more prices then there exists a threshold ?the digital divide? such that all consumers comparing fewer prices than this threshold will expect to pay a higher price whereas all consumers comparing more prices will expect to pay a lower price than before
TL;DR: In this paper, the authors considered third-degree price discrimination in two markets in the presence of asymmetric consumption externalities and established that under plausible conditions, a firm can increase its profits by reducing the price for these consumers and enlarging the demand for other consumers.
Abstract: In this paper, we consider third-degree price discrimination in two markets in the presence of asymmetric consumption externalities; we establish that under plausible conditions, a firm reduces its price in the market with low price elasticity of demand. The firm can increase its profits by reducing the price for these consumers and enlarging the demand for other consumers, provided that positive consumption externalities exist. Moreover, we show that third-degree price discrimination enhances not only the firm’s profit but also total consumer surplus.
TL;DR: In this paper, the effect of individual price sensitivity on holiday expenses is investigated and it is shown that price sensitivity has a non-linear influence on holiday expenditures, drawing a curious smile-shaped effect.
Abstract: The objective of this study is to test the effect of individual price sensitivity on holiday expenses. In the context of tourism, in such a markedly heterogeneous market, the great diversity of sensitivities to price leads the role it plays to become especially complex. Analysis of price sensitivity allows the analyst to observe how a tourist reacts when facing different product prices and, on the other hand, understanding the determinant factors of holiday expenses is crucial for organizations and destinations to implement their strategies. The methodology applied estimates random coefficient logit models that consider tourist heterogeneity. The empirical application carried out on a sample of 2127 individuals shows that price sensitivity has a non-linear influence on holiday expenditures, drawing a curious smile-shaped effect. The differentiated effect found for price sensitivities has important implications for management, as it confirms the existence of a great diversity of price sensitivities in the ...
TL;DR: This article developed a method for identifying departures from relative factor price equality across regions that is valid under general assumptions about production, markets and factors, and applied this method to the United States to reveal substantial and increasing deviations in relative skilled wages across labor markets in both 1972 and 1992.
Abstract: We develop a method for identifying departures from relative factor price equality across regions that is valid under general assumptions about production, markets and factors. Application of this method to the United States reveals substantial and increasing deviations in relative skilled wages across labor markets in both 1972 and 1992. These deviations vary systematically with labor markets’industry structure both in the cross section and over time.