Showing papers on "Limit price published in 1980"

Market Fundamentals versus Price-Level Bubbles: The First Tests

Abstract: When current market price depends partly on the expected rate of market price change, it is possible that the market will launch itself onto a price bubble with price being driven by arbitrary, self-fulfilling elements in expectations. The purpose of this paper is to provide some tests of the proposition that bubbles were absent during the German hyperinflation, a proposition we are unable to reject. The test methodology that we propose is general enough to be applied to other historical or contemporary episodes.

Price elasticities for water: a case of increasing block rates

Abstract: A model for estimating the price elasticity of demand for water when increasing block rates and for availability of service charges appear in the rate schedule is described. The model requires the use of two price-related variables - the marginal price of water and the difference between the actual payment for water and what the payment would be if all units of water were sold at the marginal price. Biased estimates of the price elasticity of demand result if the difference variable is omitted. The price variables are measured for the typical consumer, using actual water consumption and the rate schedule. The use of this model should make predictions of consumer response to rate structure changes more accurate when block rates or availability of servie charges appear in the rate schedule. 16 references.

The Effects of Monetary Change on Relative Commodity Prices and the Role of Long-Term Contracts

Abstract: The traditional explanation for the pattern of commodity price adjustment to monetary change, which stresses factors affecting the short-run elasticities of supply and demand in different markets, does not take into account price flexibility. This paper offers an explanation for the pattern of commodity price adjustment to monetary change based on differing degrees of price flexibility across industries, where price flexibility is determined by contract length. An extension to product markets of the theory of implicit long-term wage contracts leads to a simple hypothesis which explains the pattern of industry and sectoral price response to monetary change by implicit contract length, the latter being determined by relative price variability. Tests of this hypothesis across broad sectors and industries using postwar U.S. data produce favorable results. Also confirmed by the empirical evidence is the pattern of industry and sectoral price response to monetary change suggested by the tradition approach.

Transfer pricing by multinational manufacturing firms

Abstract: This paper deals with the determinants and implications of the pricing of intra-firm trade by manufacturing firms operating in different countries. Intra-firm trade is defined here as transactions involving international shipments of commodities (including capital, intermediate and finished goods, but excluding technology or services) between branches or affiliates under the control of one firm. Only firms in the manufacturing sector (called multinational enterprises, MNEs, for short) are considered: while similar issues of transfer-pricing have arisen in primary sectors, they seem to have been understood more clearly and dealt with in an explicitly bargaining framework.

Price Uncertainty and the Cooperative Firm

Abstract: The behavior of a cooperative firm which is interested in the well-being of its members has attracted economists' attention in quite a few studies The pioneer work of Benjamin Ward compares the policy of such a firm with that of a profit maximizer under perfect competition The analysis is further carried out by Evsey Domar (1966) and Jaroslav Vanek (1969) The comprehensive study of Vanek (1970) establishes a general theory of labor-managed market economies The theory of cooperatives and participatory structures of enterprises has recently been further extended in several directions by S Charles Maurice and Charles E Ferguson, J E Meade, Eirik Furubotn, among others However, the basic assumption in all these studies is that the cooperative operates with complete information about the prices of the final demand markets This paper is concerned with the behavior of a competitive cooperative firm under price uncertainty That is, the price of the final product is not perfectly anticipated, for instance, as a result of inflation, but is rather uncertain and takes the form of a stochastic variable with a known distribution A recent paper of Allan Taub deals with the very same subject However, the treatment here is more comprehensive and the results are entirely different' Compare the output policy of two types of firms: The profit maximizer whose labor input consists of workers with no share in the firm's profits and a second firm which seeks the optimum number of members to maximize profits or net income per member We shall call the first type a capitalist and the second type a cooperative As noted by Vanek (1970) and others, there are several aspects which distinguish the cooperative firm from the capitalist firm However, we disregard all the other characteristics and concentrate in this paper on the difference of the objective functions of the two types of firms Ward has already shown that under perfect competition and with complete price anticipation, a cooperative produces less than a capitalist who has the same production technology On the other hand, Agnar Sandmo and Hayne Leland have found that under price uncertainty a risk-averse capitalist firm produces less than under complete certainty The main finding of this paper is that Sandmo's result does not apply to cooperatives That is, a cooperative even if risk averse produces more under uncertainty and therefore increases its demand for labor input As a consequence of this result, Ward's conclusion is weakened and becomes less significant That is, in the case of price uncertainty the discrepancy between cooperative and capitalist with respect to production and occupation is smaller than under price stability Section I states the assumptions of the model and compares the optimum solution of a capitalist with that of a cooperative firm under certainty as well as under risk conditions Section II presents comparative statics first with respect to the basic parameters of the price distribution (the average price and the variance), and second, with respect to the basic parameters of the profit function (the wage rate and the fixed cost)

The Enforcement of Public Price Controls

Abstract: Price controls differ across industries systematically as predicted by the theory regulators maximize political support. This approach views the price controllers as choosing, subject to technology and budget constraints, the appropriate enforcement to balance the support from holding down prices against the opposition from dead-weight loss. Differences in enforcement depend on weights in the official price index, elasticities of supply and demand, and structural characteristics of industries. Data from the 1971-74 regime of price controls are used to test the theory. The empirical evidence clearly shows the predicted differences in price controls for a cross section of industries.

The energy market

Abstract: Publisher Summary This chapter discusses the energy market. Prices influence the level of energy consumption. In the long run, the demand for energy is elastic than it is in the short run. Thus, the short-run relationship between price and energy consumption is likely to be a misleading indicator of how price influences the uses of energy over a longer period of time. The vertical demand for energy is a myth that is refuted by economic reasoning and by careful inspection of the empirical evidence. Prices influence the production of energy. The gestation period of production for energy resources is 3–5 years. Therefore, the supply of most energy resources is highly inelastic. However, higher prices attract additional exploration and capital investment. Thus, the supply of energy resources is more elastic than it is during the short run. The major determinants of the quantity demanded of a product are its price, income in the market area, and the price of closely related products. According to the first law of demand, the quantity of a product consumed is negatively related to its price. According to the second law of demand, the adjustment in consumption that is made in response to a price change is greater in the long run than during the immediate time period. The demand for energy products is not an exception to these general rules.

On the hidden revenue effects of wool price stabilisation in australia: initial results

Abstract: A preliminary analysis of demand in eight major OECD wool-consuming countries is used to provide up-to-date estimates of price elasticities of demand for wool. Those elasticities are employed to calculate ex ante market prices, assuming no wool price stabilisation in Australia. The computed ex ante prices are used in a dynamic simulation to estimate demand and, hence, revenue from wool sales to the eight countries in the absence of reserve price operations in Australia. Based on the preferred semi-log demand curve, the variability of wool prices is estimated to have been reduced by 44 per cent, due to Australian intervention in the market up to 1977/78. However, price stabilisation is estimated to have lowered the revenue from Australian wool sales to the eight countries by S139m, or by 2 per cent, in the period up to 1977/78.

Cost of production: a defensible basis for agricultural price supports?

Abstract: Price supports have been used to increase the price of various agricultural commodities in the United States since the 1930s. Although price supports were conceived as a way of increasing farm income relative to nonfarm income, the level at which prices should be supported has been a key issue. Various farm organizations, economists, and politicians have maintained since the early 1920s that prices of farm commodities should be maintained at levels sufficient to cover production costs (Luttrell). The parity price concept was, in itself, an attempt to relate the support price to production costs through the prices-paid index. The shortcom

Optimal Pricing to Retard Entry

Abstract: In analogy to the notion of delayed gratification, economists have long been aware that profit maximization entails taking account of the entire planning horizon with a mind to balance immediate profits against long term profits As applied to the oligopolist, Bain (1949) noted that the threat of competition might cause established firms to sacrifice current profit in order to preclude entry and the concomitant competition However, in defining the " limit price " as the highest price the established firms can set without inducing entry, it is clearly revealed that Bain viewed entry as a deterministic event The first probabilistic approaches to the entry issue were suggested by Williamson (1963) and Stigler (1968) where it was noted that the probability of entry is an increasing function of the product price and that retarding rather than precluding entry is associated with the profit maximizing strategy More recently, Kamien and Schwartz (1971), Baron (1973), Deshmukh and Chikte (1976), and Deshmukh and Winston (1979) have treated models with probabilistic entry In the model presented here the industry is composed of (nearly) identical firms selling the same product and experiencing the same constant average cost of production, with industry demand divided amongst the established firms A product price must be selected at each instant of time during the time horizon Entry occurs according to a Poisson process with the arrival rate at any given point in time an increasing function of the product price at that time; thus, any number of firms can enter during the time horizon The profit rate is a function of both the current product price and the current industry size The crucial feature of this model as well as in those cited above is the fact that there is a dominant firm or price leader or, equivalently, the established firms (industry) act collectively as a cartel to maximize industry profits Competition appears not within the industry but rather with potential entrants The problem is to find the prices, termed optimal, that maximize the expected discounted value of the price leader's profits over the time horizon as a function of the industry size (which increases with the passage of time) Our model is nearly that of Deshmukh and Chitke (1976) and Deshmukh and Winston (1979) The fundamental difference between our model and Baron's discrete time model is that there the immediate profit is a function of the product price only if there is no entry during the period The basic model is presented in Section 2, whereas the fundamental result, one not found elsewhere in the literature, regarding the nature of the optimal price as a function of the industry size is presented in Section 3 There we demonstrate that the optimal price increases with the number of firms in the industry and in the limit converges to the monopolistic price That is, in the presence of a price leader, a decrease in industry concentration leads to an increase in the product price rather than to a more " competitive " price Of course, this result depends upon the price leadership being maintained even as the industry grows (See Telser (1972, Chapter 5) for a discussion of the problems associated with cartel maintenance) When we allow the entry rate to be a decreasing function of the industry size as well as the price, we can show only that the optimal price converges to the

Price Variability, Utility and Savings

Abstract: The observation that an increase in the variation of the price of a commodity about its mean raises the expected consumer surplus generated by that commodity originates with Waugh (1944). Waugh and subsequent investigators (e.g. Massell (1969), Turnovsky (1976) and Bradford and Kelejian (1977)) use this result to derive propositions on the welfare and distributional effects of price stabilization schemes.' This approach ignores the uncertainty in real income generated by price variability. It also fails to consider the role of hedging against price variation through appropriate portfolio diversification. In this paper demand theory is used to show that relative price variability has an ambiguous effect on expected utility when only a single asset is available as a store of value. A positive effect is more likely when the demand elasticity is large relative to the degree of relative risk aversion and when the marginal propensity to consume the commodity in question is large. When there exists a futures market for each commodity, the consumer can hedge against price variation to insure a positive effect. Increased variance in a log-normally distributed price unambiguously raises expected utility when the consumer hedges optimally. A second purpose of this paper is to explore the implications of price variability for optimal savings as well as for expected utility. While the effects of uncertainty in the value of future endowments and assets on optimal savings have been explored extensively scant attention has been paid to the effects of relative price uncertainty.2 The present paper attempts to fill this gap for the case in which utility is intertemporally additively separable. Section 2 presents a general framework for analysing expected utility maximization in a two-period, multi-commodity, multi-asset environment in wh;-" prices and income in the second period are stochastic. Section 3 analyses the effect on expected utility of increased variability in the relative price of a single commodity in a two-commodity context. Here and in Section 5 the geometric mean preserving spread of Flemming, Turnovsky and Kemp (1977) provides a definition of increased variability. Section 4 derives optimal portfolio behaviour for the special case in which the relative price is log-normally distributed. The effect of price variability on optimal savings in a two-period context is considered in Section 5. Some concluding observations and an extension to a general equilibrium problem appear in Section 6.

Producer-Consumer Trade-Offs in Export Cartels: The Wheat Cartel Case

Abstract: Since the formation of the Organization of Petroleum Exporting Countries (OPEC), several models of cartel-competitive fringe markets for an exhaustible resource have been developed. Derivations of Nash-Cournot equilibrium price paths under such a regime and insightful behavioral descriptions of limit pricing by monopolists facing potential competition have enriched the literature concerning this market structure (Salant and Gilbert and Goldman). In addition, the gains to producers from cartelization in the oil, copper, and bauxite industries have been derived empirically (Pindyck). Largely in reaction to OPEC, numerous discussions have focused on an important but different commodity than those mentioned above. Several proposals (supported by many producers and consumers) have been put forth to form a cartel in wheat among the major exporters: the United States, Canada, Australia, and Argentina.1 If such a cartel were organized, which group or groups have the most to gain? The above studies on exhaustible resources do not distinguish between producer and consumer effects in the exporting countries largely because domestic demand for this type of good is small relative to the total amount exported. In oil, for example, there is little need to distinguish between a producer export cartel, which maximizes producer returns, and a government cartel which maximizes the welfare of all groups since the solutions would be very similar. However, this is not necessarily the case for other commodities where domestic demand is an important component of market structure (e.g., in wheat the domestic demand is large relative to total wheat exports).2 The purpose of this paper is to consider a market in which the commodity in question has a relatively large domestic demand component and to demonstrate that a sharp distinction has to be made between a producer export cartel and a government export cartel. This paper shows (abstracting from implementation issues raised by Caves, Pindyck, and McCalla and Schmitz) that producers actually may lose from a government cartel. The conditions under which this can happen are derived theoretically. The model is then applied to the world wheat economy; and, interestingly, the empirical results suggest that there is a strong possibility that producers would, in fact, lose from a government wheat cartel if there are decreasing returns in production unless compensated by a tax on consumers. This result raises several important policy issues.

Monopoly and the case for price control in poor countries

Abstract: This paper challenges the view that there is little economic, as opposed to political, justification for the prevalence of government price controls in poor countries. It is shown how appropriate price control measures in the highly monopolistic conditions characteristic of the manufacturing sector of poor countries can contribute towards improved economic efficiency in that sector by inducing monopolist manufacturers both to increase their level of production and to cut their production costs. The role of price control in income redistribution is also discussed.

A model of weekly price discovery for florida celery: comment

Abstract: In their article entitled, "A Model of Weekly have been included in the demand model. FurPrice Discovery for Florida Celery," Shonk- thermore, changes in the marginal cost of wiler and Pagoulatos provide an analysis of the transporting the commodity to retail outlets pricing power of the Florida Celery Exchange, should also have influenced demand. The inclua marketing cooperative that represents all of sion of the dummy variable YEAR in equation that state's major celery producers. In their de- 2 (p. 116) undoubtedly captures these effects to scription of the activities of the Exchange, the some extent, but the exclusion of these variauthors cite several factors which indicate that ables from the demand specification may have Florida celery producers may have the ability altered the estimated price coefficient to raise prices above levels that would prevail (Kmenta, ch. 10). A more serious error, perin a competitive U.S. celery market. Such fac- haps, may be the inclusion of both the quantity tors include a market share of approximately of California celery sold in the previous week 40 percent and a marketing allotment program and the price received. These variables very which has prevented other producers from likely are correlated, and, if so, have introduced entering the industry since 1965. Shonkwiler bias to the estimated price coefficient and Pagoulatos then proceed to estimate the (Kmenta, p. 387). Given the demand model weekly demand faced by the Exchange and specification used, with quantity as the endoconclude, on the basis of the point estimate of genous variable, the appropriate explanatory an own-price elasticity, that the prices charged variable that would detect the influence of Caliover the period 1972-1978 are inconsistent fornia marketings on Florida demand would be with those that would have been charged by a the price of California celery. profit-maximizing monopolist. This conclusion My second reservation, the effects of the use leads them to state that the Exchange is of weekly prices and quantities in the study, socially beneficial because, they claim, it has arises from the results of earlier studies which provided price stability and market informa- indicate that the length of time of adjustment tion without raising prices much above compe- affects estimated price elasticities (Mandertition levels.

Modeling Price Rigidity or Predicting the Quality of the Good that Clears the Market

Abstract: To say that the price of some good is inflexible over time has little meaning if the "good" is changing over time. In this paper we concentrate on delivery lags as being the only dimension other than price that varies. We show how one can predict the relative importance of price and delivery lag fluctuations as equilibrating mechanisms. The complications of the theory as well as the surprising results underscore the complexity of predicting price behavior when the characteristics of the good are endogenous. The empirical results provide strong support for the theory that delivery lags are an important influence on market behavior and therefore that an understanding of their influence is crucial in predicting how markets will respond to supply and demand shocks.

Notes and Comments Economics of Depletable Resources and Price Ceiling Induced Bias

Abstract: In a recent issue of this Journal, Sweeney (1977) investigates the effects of different market imperfections on the extraction pattern of a depletable resource. The imperfections Sweeney considers are depletion allowances, monopoly power, externalities, price regulation, and international vulnerability. Unfortunately, his analysis has been misapplied in the case of price regulation, and in fact, has doubtful applicability to this particular market imperfection. It is the purpose of this note to explain why this qualification applies. This will serve not only to qualify an important piece of theoretical work, but also to exhibit a result which is of interest in its own right. The mistake Sweeney makes in analyzing price regulation is crucial, though quite understandable given the conventional view on the effect of a binding price constraint. As soon as he turns to the price regulation case, Sweeney states, " We will assume the prices are limited to not exceed P(t), . . . and that this is a binding constraint. That is, the demand for the resource at any time is assumed to be greater than the quantity supplied, and the actual sales are limited by supply decisions . . . "1 From this, it is concluded that the market price for the resource will be up against the ceiling P(t), with the necessary condition for profit maximization given by [P(t)-MC(Q(t))]D(t)-AO . 0 .(1) where MC(Q) is the marginal cost when the resource is being extracted at rate Q, D(t) is the discount factor, and 2 is a constant Lagrangian multiplier.2 It also follows that the market clearing price exceeds the ceiling price, this being reflected in the market imperfection function for this case g(Q, t) = P(Q(t))-P(Q(t))<0, ...(2)

Analysis of a world grain reserve plan proposed under a new International Wheat Agreement.

Abstract: A spatial price allocation model was used to assess the consistency of global wheat reserve stock levels with the stabilization of wheat prices as proposed within the framework of a new International Wheat Agreement. Like its predecessors, the International Wheat Agreement of 1971 consists of two instruments: a Wheat Trade Convention and a Food Aid Convention. This agreement, however, differs from earlier wheat agreements in that it does not contain price provisions or purchase and supply obligations by member coutries. So far, efforts to revise the Wheat Trade Convention and to turn it into an instrument for the moderation of price swings in the world wheat market have not met with success. In the interim, the earlier agreement has been extended.1 The aims of the Wheat Trade Convention as perceived at the most recent negotiations were: 1) to contribute to the stability of the international wheat market by ensuring continuity of supplies to importing members and markets to exporting members, 2) to contribute to world food secuturity, especially safeguarding the interests of developing members, 3) to moderate price fluctuations of wheat, 4) to promote the expansion of international trade in wheat, and 5) to encourage greater international cooperation on all aspects of wheat trade." The central mechanism for the achievement of these goals, especially the stabilization of prices, would be a reserve system based on nationally owned but internationally coordinated stocks to be used to limit price variability within a predetermined range. Generally, grain would be removed from market channels or released from reserve stocks in response to moveR.C. Whitacre is an assistant professor, Department of Agriculture, Illinois State University, and S.C. Schmidt is a professor, Department of Agricultural Economics, University of Illinois at Urbana-Champaign. The authors wish to thank Arlo Biere, Shlomo Reutlinger, and one anonymous Journal referee for their suggestions and comments. ments in minimum and maximum indicator (or trigger) prices.3 Although there was a broad cocnsensus on the form of the stabilization mechanism, the member nations differed on four issues: 1) the target size of world reserve stock, 2) the contribution of individual countries, 3) the price bands within which action should be taken to stabilize the market, and 4) the role of developing countries in reserve stock obligations. In the course of negotiations for a new IWA the following reserve positions and price bands were proposed: Reserves Price Range (million tons) (dollar/ton) Exporters 25-30 140-215 Importers 15-18 115-175 Developing Countries 30 125-160 The central objective of the study reported here was to assess the effectiveness of alternative global wheat reserve stocks, as proposed by the main exporters and importers, in stabilizing wheat prices within a specified band. The analysis focuses on: 1) the consistency of the exporters' proposed 25 million ton global reserve stock with the stabilization of wheat prices within a $140215 per ton band, 2) the price implications for the United States from the establishment of global reserve stocks in the range of 15 to 18 million tons as favored by the main importing countries, and 3) the implied 1978 wheat prices.had the proposed alternative global reserve stocks been adopted. A related objective was to trace the effects on the grain economies of selected trading countries and regions resulting from four production scenarios--three simulated and the 1978 actual--with and without reserve stock operations. A spatial price allocation model (SPA) was constructed and applied for the evaluation and solution of the specified problem. The production scenarios were developed from a 90 percent confidence band around the production trend. Scenarios were constructed at the trend level and 1The most recent extension covers the period July 1, 1979 to July 1, 1981. 2Elaboration of these aims is given in the FAO document [4, p.2]. 3More specifically, the reserve management mechanism would operate on a three-stage system: 1) consultations, 2) stock purchases and sales, and 3) additional supporting measures such as adjustments in production, consumption, and trade. This content downloaded from 157.55.39.124 on Sat, 23 Jul 2016 05:24:55 UTC All use subject to http://about.jstor.org/terms 84 NORTH CENTRAL JOURNAL OF AGRICULTURAL ECONOMICS, Vol. 2, No. 2, July 1980 at the upper and lower values of the confidence band. Various reserve stocks of differing magnitudes were introduced at each scenario's production level, and the effects analyzed. In the future, price-quantity relationships over time could be developed and introduced into a dynamic allocation model.4 MATHEMATICAL STRUCTURE OF THE MODEL Structurally, the SPA model is composed of sets of linear economic relationships classified into price relationships and quantity relationships. These sets of relationships (Kuhn-Tucker optimality conditions) regulate the generation of regional and market demand and supply prices, and regional and market consumption and production quantities.5 The following notations, definitions, and relationships are used to formulate a general i-region, k-commodity SPA model. Linear Price (-Quantity) Relationships Equilibrium Consumption MDki RDki > 0 (1.1) Dki (MDki RDki) = 0 for all ki (1.2) (1.1) and (1.2) state that if the equilibrium solution for the demand quantity of commodity k, in region i, is positive, then the market demand price (MDki) must be equal to the regional demand price (RDki), and if the market demand price is greater than the regional demand price, then the equilibrium demand (Dki) quantity must be zero.

Chapter Thirteen – PRICING TOPICS

Abstract: Publisher Summary Perfectly competitive firms usually have no appreciable influence over price, whereas the firms under imperfect competition are able to select the prices most consistent with their goals, at least most of the time. Consequently, monopolistic and oligopolistic firms generally possess a greater degree of market power and price-setting ability than their counterparts operating under conditions of perfect competition. This chapter reviews some additional pricing policies of price-making, or price-searching, firms. A firm is said to be engaging in first-degree or perfect price discrimination if it charges a different—unique—price to each customer. Another form of price discrimination is a diluted version of perfect price discrimination. Under second-degree price discrimination, or quantity-discount pricing, the firm charges successively lower prices for each additional range of output purchased. Yet another type of price discrimination occurs when a firm charges varying prices to different groups of customers. Such pricing is also referred to as multiple-market price discrimination.