Factor price

About: Factor price is a research topic. Over the lifetime, 2764 publications have been published within this topic receiving 86176 citations.

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

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

Price Cap Regulation and Investment Incentives under Demand Uncertainty

Abstract: We study the effect of price cap regulation on investment in new capacity in an oligopolistic (Cournot) industry, using a continuous time model with stochastic demand. A price cap has two mutually competing effects on investment under demand uncertainty: it makes the option of deferring investment very valuable, but it also reduces the interest of strategic underinvestment to raise prices. We show that there exists an optimal price cap that maximizes investment incentives. As with deterministic demand, the optimal price cap is the clearing price of the competitive market. However, unlike the deterministic case, we show that such a price cap does not restore the competitive equilibrium; there is still under-investment. Sensitivity analyses and Monte Carlo simulations show that the efficiency of price cap regulation depends critically on demand volatility and that errors in the choice of the price cap can have detrimental consequences on investment and average prices.

Pension Systems in Integrated Capital Markets

Abstract: The paper studies the effects on factor prices and welfare of the integration in a perfect world capital market of countries that differ in the degree of funding of their pension systems. It focuses on two large economies running respectively a pay-as-you-go and a fully funded pension system and it first analyzes the open economy implications of the different pension designs under the assumption that the pay-as-you-go system is balanced and in steady state equilibrium. It then elaborates on the institutional structure of the pay-as-you-go system to analyze how its degree of maturity, its expenditure profile and the presence of debt financing affect factor prices and welfare in open economy. Finally, it focuses on pension reform issues. The paper shows that, under perfect capital mobility, the differences in the degree of funding of the pension systems cause divergent welfare effects across generations and across countries. It shows that the design features of the pay-as-you-go scheme play a role in the world equilibrium and it identifies which of them can amplify or reduce the open economy linkages operating through the pension schemes.

Price Leadership in a Homogeneous Product Market

Abstract: The present paper reexamines the price-setting Stackelberg duopoly with asymmetric and strictly convex cost functions in a homogeneous product market. It demonstrates that in a generic environment, the higher-cost firm is likely to be the price leader. That is, leadership by such a firm is either (a) a unique equilibrium or (b) a payoff- and risk-dominant equilibrium in the observable delay game. Thus, while this paper complements and generalizes the findings of recent studies that indicate the possibility of the higher-cost firm’s leadership in homogeneous product markets, it also contrasts with the traditional literature that predicts the dominant-firm price leadership in various environments.

Backward Integration by a Dominant Firm

Abstract: This paper studies the welfare consequences of a vertical merger that raises rivals' costs when downstream competition is a la Cournot between firms with constant asymmetric marginal costs. The main result is that such a vertical merger can nevertheless improve welfare if it involves a downstream firm whose cost is low enough. This is because by raising the input price paid by the nonmerging firms the merger shifts production away from those relatively inefficient producers in favor of the more efficient firm. Yet, there is a trade-off between the gain in productive efficiency and the loss in consumers' surplus caused by the higher downstream price that follows a higher input price. It is also shown, through an example, that this result extends to price competition with differentiated products.