Factor price

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

Production Flexibility, Price Uncertainty and the Behavior of the Competitive Firm

Abstract: THE PAST FEW YEARS HAVE WITNESSED important advances in the theory of the firm under price uncertainty, with increasing attention being devoted to the question of how a firm's decisions are affected by its attitude towards risk taking.' Specifically, recent work by McCall [7] and Sandmo [15] has established that a competitive firm's output under uncertainty will be smaller, larger, or the same as it would be under certainty, depending upon whether it is risk averse, risk attracted or risk neutral, respectively.3 Leland [6] has shown that, with the addition of a mild restriction on the stochastic demand function, these results obtained under quite general conditions by Sandmo, extend to the case of a quantity setting monopolist as well.4 He also analyzes the same question for the price setting monopolist and indicates some additional complications that arise in that case. Practically the entire literature on the subject makes the assumption (either implicitly or explicitly) that the firm is required to make all its production decisions for a given period before the selling price for that period is known and that once these decisions are made, they are irrevocable.5 Demand and sales are then determined after the market price has been established. In other words, the firm has no flexibility in its production decisions and this is a rather restrictive assumption. The purpose of this paper is to develop a one period model of the competitive firm relaxing this assumption and to determine how a firm having production flexibilities responds to uncertainty. The firm being considered here makes its production decisions on the basis of stochastic information about the selling price of its product, but possesses the ability to modify these plans-at additional cost-after it learns the true selling price. Hence the

Failing to Choose the Best Price: Theory, Evidence, and Policy

Abstract: Both the “law of one price” and Bertrand’s (J Savants 67:499–508, 1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and/or show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons difficult and soften competition. Possible regulatory interventions include: simplifying the choice environment, for instance by restricting price to be a scalar; advising consumers of their expected costs under each option; or choosing on behalf of consumers.

Price Smoothing and Inventory

Abstract: This paper explains the phenomenon of price rigidity (or price smoothing) as the outcome of the optimal inventory policy of a multi-period profit-maximizing firm under demand and output uncertainties. Price smoothing may be manifested in two forms. First, price changes may be moderated with respect to those implied by the demand function; and second, the firm may choose to restrict price fluctuations by establishing upper and/or lower bounds on prices. We show that the extent of the asymmetry in price smoothing depends on the relationship between the inventory holding cost and the backlog penalty cost. Our model accommodates a wide range