Showing papers on "Limit price published in 1975"

Spatial Price Discrimination, Competition and Locational Effects

Abstract: Spatial price theory has typically assumed homogeneous gross demand curves among buyers who are dispersed over an economic landscape. Subtracting varying costs of distance to their locations yields a set of heterogeneous net demand curves. Any spatial monopolist subject to these conditions faces separable markets which are characterized by different effective demands. As a result price discrimination is feasible, and in theory straight-lined delivered price schedules of less than unit slope per unit cost of distance are customarily derived. But do spatial competitors ever discriminate (or appear to discriminate) over economic space? And if they do, what is the form of their delivered price schedules? Would their schedules also be linear given the same demand conditions that generate linear schedules for a discriminating monopolist? Without answering questions such as those raised above anti-trust regulations dealing with unfair price practices and, in particular, the determination of what is legal or illegal, ethical or not, cannot be readily accepted by economists. The present paper is designed to provide a basis for answering such questions by uncovering selected properties of spatial price discrimination under conditions of varying intensities of competition over an economic space. More generally, the paper is designed to determine the effect on prices of rival locations and the intensity of their competition. Sharp contrasts between spaceless and spatial price theory will thus be drawn, with competitive differences over the seller's trading area being revealed to generate differential discriminatory prices over the landscape. [Авторский текст]

Competitive Firm and the Theory of Input Demand under Price Uncertainty: Comment

Abstract: In a recent paper Batra and Ullah (1974) investigate a competitive firm's demand for factors of production when all inputs are chosen before the output price is observed. They conclude (p. 547) that \"the risk-averse firm utilizes smaller quantities of inputs . . . than a firm operating under certainty\" and that \"the marginal and overall impacts of uncertainty need not be the same for input demand.\" In this note I show that the first of these conclusions is incorrect and then argue that the marginal and overall impacts of uncertainty are the same provided the firm's von Neumann-Morgenstern utility function exhibits decreasing absolute risk aversion. The model and notation I use are the same as in Batra and Ullah. From the first-order conditions Batra and Ullah correctly show (p. 541) that r < jufK(K, L) (1)

Market-making and the assessment of market efficiency

Abstract: IN ASSESSING the efficiency of a trading market, two criteria are relevant.' First, can transactions take place in the market at relatively low cost? Second, are there opportunities for systematic profit as a result of serial correlation in price series? That is, are there market imperfections which prevent price from fully and immediately reflecting new information? These two criteria are applicable in evaluating a principal agent in organized trading markets-the market maker. They contrast, however, with the methods of evaluation currently used by the New York Stock Exchange and the Securities and Exchange Commission which focus on price continuity and price stabiliy and which may in fact tend to create inefficiency by causing price dependencies.2 This paper examines market-maker behavior. It argues that the chief cost of dealing with a market-maker is the difference between the theoretical but unobservable equilibrium price and the transaction price, rather than the bid-ask spread. A distinction is made between two types of trading, liquidity trading and information trading. The paper concludes that in both types of markets a competitive market-maker will perform more satisfactorily than a monopolistic market maker and that regulatory criteria are unnecessary. Organization follows these lines. Section II provides some background to the study of the market-maker. In Section III, price behavior in a market withough a market maker is discussed. Market-maker behavior in

The Two Price Systems in the Copper Industry

Abstract: During three periods from the end of World War II through 1970, some or all of the major copper producers held their price below the level that would have cleared the market and rationed their "available supplies." The central question posed by the two price systems is that of why any of the major producers would ever choose to ration. Bound up with this issue is the question of why several of the major producers rationed at times when the others did not. Two circumstances in which rationing may be profitable are identified. First, it is shown that rationing may be a profitable response to a large, unanticipated increase in demand if there is long-run substitution in demand; capacity cannot be quickly expanded; marginal cost is increasing; and price discrimination is infeasible. Second, it is shown that a partially integrated copper producer may find rationing profitable as a means of partially achieving the effects of price discrimination given that price discrimination itself is infeasible. Taken together, these motives for rationing provide an internally consistent set of hypotheses that account for the broad features of the two price systems. It is suggested on the basis of structural characteristics of the industry that these hypotheses are valid. However, the argument is not conclusive, so it can be claimed only that the results obtained provide a plausible explanation of the two price systems.

Cournot Oligopoly With Uncertain Entry

Abstract: The study of oligopoly has progressed along two lines. The first deals with the behaviour of a firm viewing existing rivals as responsive to its actions. The critical assumption in this analysis is the firm's conjecture about rivals' reactions to its price or quantity decisions. Cournot [4] provided the classic supposition that rivals will maintain their current level of output in response to a change in the given firm's output level. This implies price matching by rivals. Questions addressed include those of existence and stability of equilibrium in an oligopolistic market, its possible convergence to the competitive solution as the number of firms increases indefinitely, and whether the approach is monotone (quasi-competitiveness). A recent synthesis is provided by Ruffin [11]. The second strand of inquiry focuses on the firm's behaviour regarding potential rivals, especially actions designed to preserve positive profits. The strategy of pricing to retard or preclude entry, " limit pricing ", has received the most intense study. A summary of earlier theoretical developments is provided by Bhagwati [2]; more recent contributions include Gaskins [6], Pyatt [10], Baron [1], and Kamien and Schwartz [8, 9]. The first of these two lines of inquiry, focused on interaction among existing rivals, may be viewed as a short-run theory of oligopoly. The second approach, with its attention to consequences of potential rivalry, forms the complementary long-run theory. This paper constitutes an attempt to bridge these parallel developments, an objective shared with Fisher [5]. In the next section we present a model of a firm thatviews its existingrivals in accordance with the classic Cournot assumption and views potential rivals in the manner posited in our paper [8]. The timing of rival entry is regarded as a random variable whose probability distribution is dependent on current industry price. After obtaining necessary conditions for maximization of the firm's long-run expected profits, we extend the first four theorems of Ruffin's paper to the case in which potential rivalry is recognized. The classic Cournot oligopoly model is compared with the present one and our results are summarized. 2. THE MODEL

Psychic costs and factor price equalization

Abstract: There has been some perplexity among economists over the failure of interregional wage differentials to approach zero over time in an economy characterized by labor mobility. Johnson [7], and Sjaastad [14], among others, have hypothesized declining wage differentials among regions and have puzzled over contrary empirical results. It has generally been assumed that labor will flow toward regions paying the highest wage rate. This equilibrating framework has dominated economic thought on this problem area and has directed research along narrow market-oriented lines. The hypothesis of this paper is that nonmarket considerations, specifically psychic costs, are a major force in preventing a market-directed flow of human resources. Moreover, “nonoptimal” allocation of human resources results from differences in workers' perceptions of utility between various regions.

External diseconomies in consumption and monopoly pricing

Abstract: This paper deals with the relationship between the monopoly price and the socially optimal price in the presence of consumption diseconomies. The above relationship is derived from characteristics of the utility function. THE THEORY of external diseconomies asserts that the socially optimal price of a good causing a diseconomy should be above its marginal cost. We also know that a monopolist will charge a price above its marginal cost. The purpose of this paper is to determine the relationship between these two prices. In addition, we demonstrate that knowledge of consumer preferences permits one to infer whether the monopoly price would be higher or lower than the socially optimal price. This relationship is of both theoretical and applied interest. Baumol and Oates [1] suggested some practical ways to measure the marginal harm to the environment in the presence of external diseconomies, using certain environmental standards. In general, the determination of the socially optimal price is impossible because the elements determining the price are unobserved. We will prove a theorem based on elasticity characteristics of the utility function, which yields policy information necessary to achieve a social optimum. We shall also prove that a large class of utility functions will yield the same optimal prices; in particular, the socially optimal price is equal to the monopoly price. In the past, it has been commonly asserted that the monopolistic price would be higher than the socially optimal price in the presence of consumption diseconomies. This view is illustrated by Naor [8], and in a more general case by Knudsen [7]. They do not deal with a general model of external diseconomies, but rather with a specific case of a queuing model with a waiting line. Within this context, including some restrictions on the utility function, they derive the above relationship between the monopolistic and the socially optimal prices. Buchanan [2] also discusses the possibility of having a socially optimal price higher than the monopolistic price. Examples of such possibilities in the context of diseconomies arising from congestion are supplied by Edelson [6].2 Similar problems were discussed by Diamond and Mirrlees [5] in dealing with the relationship between the Pareto optimal situation and the competitive equilibrium. In addition, a general discussion of optimal surcharge in cases of consumption externalities is given in Diamond [4]. ' Research for this paper was done while I. Luski was Visiting Assistant Professor of Economics, University of Florida. We are indebted to Milton Z. Kafoglis and David Levhari for helpful comments and suggestions. 2 It can be shown that the results of his examples can be inferred from our theorem.

A Note on Optimal Fixed-Price Bidding with Uncertain Production Cost

Abstract: Firms often contract to deliver commodities at prices established before production costs are known If the amount sold is a function of the quoted price, then the expected benefit profit per unit sold is not, in general, the difference between the unit cost estimate and the price quotation, but rather some smaller amount Even though they may not understand why they are doing so, firms may learn by experience to add an amount to price quotations necessary to compensate for this effect An understanding of this effect can lead to more optimal pricing procedures

Recent Developments in the Theory of Limit-Pricing

Abstract: Sylos-Labini1 developed a model of limit-pricing based on scale-barriers to entry. His model is clumsy, due to its unnecessarily stringent assumptions and the use of arithmetical examples. However, his analysis of the economies-of-scale barrier is more thorough than that of Bain. He highlighted the determinants of the limit price and discussed their implications, thus providing the basis for Modigliani’s more general model of entry-preventing pricing.

Bain’s Limit-Pricing Theory

Abstract: Bain formulated his limit-price’ theory in an article published in 1949,1 several years before his major work Barriers to New Competition which was published in 1956. His aim in his early article was to explain why firms over a long period of time were keeping their price at a level of demand where the elasticity was below unity, that is, they did not charge the price which would maximise their revenue.2 His conclusion was that the traditional theory was unable to explain this empirical fact due to the omission from the pricing decision of an important factor, namely the threat of potential entry. Traditional theory was concerned only with actual entry, which resulted in the long-run equilibrium of the firm and the industry (where P = LAC). However, the price, Bain argued, did not fall to the level of LAC in the long run because of the existence of barriers to entry, while at the same time price was not set at the level compatible with profit maximisation because of the threat of potential entry. Actually he maintained that price was set at a level above the LAC ( = pure competition price) and below the monopoly price (the price where MC = MR and short-run profits are maximised). This behaviour can be explained by assuming that there are barriers to entry, and that the existing firms do not set the monopoly price but the ‘limit price’, that is, the highest price which the established firms believe they can charge without inducing entry.

Grain reserves and price stabilization

Abstract: This staff paper describes research on grain reserve stocks as a means of achieving price stability. It is assumed that price stabilization is desirable and the question of desirability is not investigated in this study. The paper is divided into two parts: Part I: Concept and Measurement of Price Instability and a Model of Price-Stocks relations Part II: A Model of Optimal Buffer Stocks for Price Stabilization -- Theory and Computation