Factor price

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

Does Price Elasticity Vary with Economic Growth? A Cross-category Analysis

Abstract: How does price sensitivity change with the macroeconomic environment? We explore this question by measuring price elasticity using household-level data across 19 grocery categories over 24 quarters. For each category, we estimate a separate random-coefficients logit model with quarter-specific price response parameters, and control functions to address endogeneity. Our specification yields a novel set of 456 elasticities across categories and time that we generated using the same method and therefore can directly compare them. On average, price sensitivity is counter-cyclical — it rises when the macroeconomy weakens. However, substantial variation exists, and a handful of categories exhibit procyclical price sensitivity. We show the relationship between price sensitivity and macroeconomic growth correlates strongly with the average level of price sensitivity in a category. We examine several explanations for this result and conclude a category’s share-of-wallet is the more likely driver versus alternative explanations based on product perishability, substitution across consumption channels, or market power.

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.

Customer poaching and advertising

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.

Optimal Inventory Policies when Purchase Price and Demand Are Stochastic

Abstract: In this paper we consider the problem of a firm that faces a stochastic (Poisson) demand and must replenish from a market in which prices fluctuate, such as a commodity market. We describe the price evolution as a continuous stochastic process and we focus on commonly used processes suggested by the financial literature, such as the geometric Brownian motion and the Ornstein-Uhlenbeck process. It is well known that under variable purchase price, a price-dependent base-stock policy is optimal. Using the single-unit decomposition approach, we explicitly characterize the optimal base-stock level using a series of threshold prices. We show that the base-stock level is first increasing and then decreasing in the current purchase price. We provide a procedure for calculating the thresholds, which yields closed-form solutions when price follows a geometric Brownian motion and implicit solutions under the Ornstein-Uhlenbeck price model. In addition, our numerical study shows that the optimal policy performs much better than inventory policies that ignore future price evolution, because it tends to place larger orders when prices are expected to increase.