Showing papers on "Limit price published in 1976"

Price-cost margins and market structure

Abstract: In this thesis, the relationship between some aspects of industrial market structure and industry price-cost margins or profit-revenue ratios is investigated. This is done mainly by building mathematical models based upon the tenet of profit maximisation. Empirical tests of the hypotheses developed are carried out using regression analysis on recent UK data. After an introductory chapter, the arguments are developed by successively taking structural features into account. Thus initially, problems involved in relating the structure of established firms in an industry to price-cost margins are considered. Then the possibilities and problems of potential entry into an industry are opened up. After that, the power of buyers from and sellers to the industry are brought into partial account. Additional potentially relevant structural factors receive a more cursory treatment before the analysis passes to empirical testing. At every stage, the relevant established literature is reviewed. It is found theoretically that the price-cost margin may be related to two main aspects of market structure, the "Herfindahl" index and a bilateral power index developed here. However, the commonly included "entry barrier variables need not, under reasonable assumptions, be considered relevant. The empirical results lend support to the theoretical conclusions regarding the Herfindahl and bilateral power indices. The contribution to knowledge in the subject area achieved herein is (hopefully) mainly in the rigorous development and application of models which have, in general, previously been rather vaguely based upon commonsense extensions of the fundamentals of economic theory. In fact, the thesis consists to a large extent in the belief that industrial economic problems often considered as having theoretically indeterminate solutions may be profitably examined and "solved" rigorously, with the judicious use of restrictive assumptions.

A Proposed Modification of Taylor's Demand Analysis: Comment

Abstract: In estimating demand functions for electricity, it is inappropriate to use as a variable (in addition to marginal price) either average price for blocks other than the final one or total payment for blocks other than the final one. It is appropriate to use (in addition to marginal price) a variable equivalent to a lump-sum payment the customer must make before buying as many units as he wants, at the marginal price.

Factor Demand with Output Price Uncertainty

Abstract: The effects of output price uncertainty on a competitive firm's supply and factor demands have recently been explored under the assumption that all decisions are made before the price is observed. Agnar Sandmo has shown that a risk-averse, competitive firm with a nonrandom cost function will produce a smaller output if the price is random than it would if the price were known with certainty to equal its mean. Raveendra Batra and Aman Ullah and I have extended the analysis by considering the effects of output price uncertainty on factor demands. Among other things, Batra and Ullah show that the firm will choose its inputs to minimize the cost of producing whatever level of output is chosen. This result, combined with the Sandmo result that the presence of uncertainty reduces output, implies that the effects of uncertainty on factor demands depend on what effect the decreased output due to uncertainty has on the cost minimizing levels of inputs. Except for the rare case of inferior factors, the presence of uncertainty reduces factor demands. Finally, it is clear from these analyses that if the firm is risk neutral, the uncertainty has no effect on supply and factor demands. In this paper I relax the assumption that all inputs are chosen before the output price is observed. My conclusions show that the results noted above are really rather sensitive to that particular assumption. A simple two-input, one-output model of the firm is employed. One of the inputs, which I call capital, is quasi fixed in the sense that it must be chosen before the output price is observed. The other input, which I call labor, is variable since it is not chosen until the output price is observed. Clearly, this implies that the level of output is not determined until its price is known. Although labor may be a poor name for the variable input in view of the recent discussions of its "quasi-fixed" character, it seems apparent that in many situations there are inputs which can be varied on short notice. By allowing a variable input in this sense we considerably alter the situation facing the firm. If, after observing the output price, it turns out that the firm made a "poor" choice regarding the quasi-fixed factor, it is able to partially "adjust" by choosing an appropriate level of the variable input. This ability to make adjustments for what, ex post, appears to be a poor decision is totally lacking if all inputs must be chosen before the uncertainty is resolved. In Section I the basic model is presented. In Section II the analysis for a risk-neutral firm is carried out, and Section III contains an example. In Section IV the analysis is extended to a risk-averse firm. The final section contains some brief concluding comments.

The Economics of Information and Retail Gasoline Price Behavior: An Empirical Analysis

Abstract: This paper provides empirical results which indicate that consumer responses to imperfect, costly information have an important impact on price behavior in the retail gasoline market. Two aspects of price behavior are investigated: the market price dispersion at a point in time and the variability of price over time. Through use of a multiple-regression cross-city analysis of price behavior, both of these characteristics are shown to depend on a set of proxy variables representing the benefits and costs to consumers of acquiring information. In addition, prices vary more within a given city at stations catering to relatively well informed customers.

Spatial price policies revisited

Abstract: This paper reexamines the theory of spatial price policies under more general conditions to compare mill pricing, uniform delivered pricing, and discriminatory local pricing and to interpret their implications when market regions are given. The analysis assumes that demand functions are linear and identical in all locations, that marginal production cost is constant, and that transportation cost is proportional to distance. The results go beyond previous findings, but do not seriously contradict them. [Авторский текст]

Price Dispersion in the Government Securities Market

Abstract: This paper investigates the characteristics of price dispersion in the U.S. Treasury securities market. After a theoretical treatment of why such dispersion exists, empirical evidence is presented which shows that dispersion is influenced by characteristics of securities (such as volume and maturity) and by market supply-demand conditions (as reflected in price-level changes). It is also shown that the cost of liquidity services in a competitive market is determined by price dispersion and is not equal to the bid-ask spread.

Limit pricing: uncertain entry and the entry lag

Abstract: An established seller's pre-entry price policy is studied under the assumption that this policy affects the probability of entry and that rivals need an entry lag to make their entries effective. The analysis is conducted using a modified Kamien-Schwartz limit pricing model.

Price Regulation and Quality Rivalry In a Profit-Maximizing Model: The Case of Bank Branching

Abstract: Since the 1930s commercial banks have been under the Federal Reserve's Regulation Q with respect to the price they can pay to attract deposits. More recently, savings and loan associations (S&L's) and mutual savings banks (MSB's) have been subject to similar price regulation. Facing this kind of price regulation, firms are likely to turn to nonprice or quality variables on which they can compete for business (see [12, 19, 20] ). Indeed, casual observation indicates that banks and other financial institutions in some markets have engaged in a good deal of nonprice competition or rivalry. This takes the form of free gifts for new deposits, longer banking hours for depositing or withdrawing money, and other extra conveniences.l Unfortunately, the absence of speciflc data on these kinds of services and expenditures forecloses a rigorous test of whether the provisions of these extra features and services are a response to competitive pressures, i.e., whether market structure influences the quality level.2 There is one type of quality variable, however, for which good data are available: the extent of branch banking. Increased numbers of banking offices are likely to

Dynamic Pricing with Stochastic Entry

Abstract: It has been recognized that an intelligent oligopolist should take into consideration both potential as well as existing competitors while determining his price-output policies. Bhagwati [1] and Modigliani [6] present excellent surveys of various assumptions and strategies proposed by different authors in setting a " limit price " to prevent a new entry. The general conclusion is that an oligopolist can charge an entry-preventing price which is higher than the competitive price. Since the existing competition affects the firm's " short run " profit, while the " long run " profit is determined by potential competition, it seems reasonable that the firm should seek to maximize some weighted average of the two, as suggested by Hicks [4]. Consequently the optimal price should lie between the monopolistic price and the competitive one. These and similar other interesting conclusions about the optimal pricing strategies were also obtained by Gaskins [3] and Kamien and Schwartz [5] using the optimal control theory framework. In this paper we propose a semi-Markov decision model for determining a sequence of optimal prices to be charged and the corresponding long-run profit streams, along with their limiting behaviour as the number of firms in the industry tends to infinity. The assumptions are stated and the model is formulated in the next section. The third section presents the main results about the transient and the limiting behaviour of the model along with their interpretation, while the proofs are presented in the last section.

Firm Demand for Information about Price and Technology

Abstract: Firms are often required to commit resources to production without complete knowledge of price, technology, or other factors which influence output. Familiar examples occur in agriculture where planting decisions are made before commodity price levels and weather conditions are known. Furthermore, as new crops and farming techniques are introduced, the productivity of these innovations is not always completely understood before they are implemented. The construction industry faces similar problems as do most industries in which there is a significant lag between the time when resources are committed to production and the time when output is forthcoming. In these situations, firms may be able to acquire, at some cost, information about unknown factors before making a production decision. For example, market surveys and trade publications provide information about price. Similarly, agricultural extension services supply farmers with technological information about new crops and techniques and about soil conditions. The weather bureau is another important source of information to farmers as well as homebuilders. When this kind of information is available, firms must decide on the basis of the costs and benefits involved whether it is worth obtaining. The firm must make an even more complicated demand decision when information is available in increasing degrees of reliability at increasing cost. This situation occurs when the firm has control over the size of a sample or the sophistication of information-gathering techniques. A rigorous analysis of the determinants of firm spending for information requires a general model of the firm's information demand decision. In the model proposed in this paper, as in Kihlstrom (1974b), the statistical concept of sufficiency, introduced by Blackwell (1951, 1953), is used as the basis for a general definition of the "amount of information." This definition identifies the quantity of information with its reliability. Using this measure of information it is possible to formally describe the

Marketing Quotas as an Alternative to the Present Price Support Program for Peanuts

Abstract: Use of peanuts in edible products is expected to increase five percent in 1975-76 to 1.9 billion pounds. Despite the increase in consumption, supplies are well in excess of edible requirements. The 1975-76 peanut supply is estimated at a record 5.0 billion pounds, about 20 percent above the previous year. Surplus production is an increasingly important problem for the peanut sector. Total peanut production has doubled since 1960, although planted acreage has been restricted by the peanut program to a maximum of 1.61 million acres. Due to increasing yields, acquisitions by the Commodity Credit Corporation have increased from 17 percent of total production in 1960 to 30-35 percent in 1975.

Industry Mix and the Sensitivity of State Economies to Energy Price and Policy Changes

Abstract: The Multiregional Earnings Impact Model (MEIM) used here was derived initially in order to help measure and assess the spatial implications of alternate policy scenarios for Project Independence [FEA 1974]. Knowledge of energyrelated regional impacts is needed to evaluate various policy options in terms of efficiency and equity and to serve as a forewarning of the need for extra federal assistance for impacted areas. The federal role might consist of helping to alleviate unemployment and other forms of social distress in such areas or to provide the necessary public infrastructure required to support rapidly accelerating economic activity. Increasingly, governments at all levels find that they must anticipate economic change in order to: (1) plan for and provide the requisite infrastructure and services for economic growth; or (2) react to impending economic decline. Economic activity resulting from energy development will cause change and disruption. As is true of all economic change, however, this will not occur uniformly among all segments of the population or all areas of the country. In considering the nation’s energy needs, therefore, we must also study the possibilities for disparity. Large divergencies among regions of benefits or

The Effects of the Price Code

Abstract: Manufacturers' and distributors' views on the effects of the Price Code towards the end of Stage 4 are summarised in this article Since the onset of the recession, market conditions rather than price controls have determined price- levels Market constraints have limited the use of profit safeguards and low profit relief as well The Price Code, however, was widely blamed for contributing to lower profit-margins, particularly in its earlier stages; this was mainly because of the productivity-deduction, lack ofpricingflexibility, and delays in obtaining price increases Less generally affected were investment, sales and marketing activities, and price-differentiation Views on the changes to the Code required in a reviving economy are summarised

Soviet Pricing, Profits and Technological Choice

Abstract: It is an article of faith in Western economic thought that the only useful prices are scarcity prices, that is, marginal-cost prices which equate supply and demand. This idea receives its most vigorous support when the pricing of inputs is to be used as a means of bringing about productive efficiency. Even some socialists accepted this view. In his essay, " On the Economic Theory of Socialism ", Oskar Lange [2, p. 94] wrote that " the rule to produce at the minimum average cost has no significance . . . unless prices represent the relative scarcity of the factors of production ". Official Soviet policy requires that prices of producers' goods be set so as to ensure a "profit for each normally functioning enterprise ". Prices obtained under these circumstances reflect production costs associated with the entire range of production techniques in use, rather than those associated with only the " marginal " technique. These prices do not in general equal marginal costs (and they do not equate supply and demand) so it is hardly surprising that Western economists are sceptical about their efficacy. In particular, because prices of intermediate goods do not reflect their relative economic scarcity, one would expect the Soviet pricing policy to have an adverse impact on technological choice. Nevertheless, I believe that Soviet pricing policy does not inherently result in inefficient production. With the aid of a mathematical model designed to resemble certain aspects of the Soviet economic framework, I shall argue that the Soviet pricing policy will, under certain conditions, tend to promote the adoption of optimal production techniques.

Public Utility Pricing for Joint Demand Involving a Durable Good

Abstract: When a utility invests in a large discrete increment of capacity, several years may pass before the additional capacity can be fully used, if the utility's customers need to buy major durable goods to be used jointly with the utility's product For such a period of adjustment, this study derives price time-paths for the utility for specific models of welfare and (regulated) profit maximization Among other results, it is shown that if a particular form of price discrimination is permitted, then a stable price level (advocated by some earlier authors) is not optimal

The Role of Entry in Oligopoly

Abstract: The literature on entry has become very extensive over the years.1 Although the question of entry-preventing behaviour was first raised by Kaldor,2 the main discussion arose out of the basic prediction of the model of monopolistic competition that firms would earn only normal profits in the long run, and that each firm would be operating with excess capacity (see p. 37). Harrod argued3 that firms would forgo some potential profit in the short run by setting a price lower than that which would maximise their profits in order to discourage new entrants into the industry. Subsequently, the discussion of the role of entry has largely evolved into an attempt to provide an answer to the question as to whether it is more profitable for a firm to maximise short-run profits in the knowledge that this will attract new entrants and hence erode the firm’s market share in the long run, or for a firm to deter entry by holding down prices in the short run in the expectation that it will be able to retain a substantial share of the market over time. These possibilities are illustrated in Figure 10.1.