Showing papers on "Limit price published in 1981"

Consumer Perceptions of Comparative Price Advertisements

Abstract: The authors analyze the issue of comparative price advertising from a behavioral perspective. Because public policy recognizes that comparative pricing may lead to consumer misperceptions, the auth...

Replicating Options with Positions in Stock and Cash

Abstract: In most situations of practical relevance, the price behavior of a call option is very similar to a combined position involving the underlying stock and borrowing. The call price and the stock price will change in the same direction. The effect on the call price of a one dollar change in the stock price, however, will depend on the current price of the stock; the number of shares of stock in the replicating portfolio must equal the slope of the call price curve at that price. When the call is deep out of the money—i.e., when the stock price is much lower than the striking price—a one dollar change in the stock price has little effect on the call price. When the stock price is equal to the striking price, a one dollar change in the stock price produces roughly a half-dollar change in the call price. If the stock price rises until the call is deep in the money, a one dollar move in the stock price results in nearly a one dollar move in the call price. Because the call price behaves this way, we must revise ...

On the Specification of Price in Studies of Consumer Demand under Block Price Scheduling

Abstract: Using a new model formulation and data from a sample of Colorado utilities, we investigated the price specification controversy (marginal price versus average revenue) when estimating residential water demand. The improved statistical fit using average ...

Average and marginal price changes and the demand for electricity: an econometric study

Abstract: The empirical literature on the demand for electricity has, hitherto, failed to adequately deal with increasing block pricing. While it is desirable, in principle, to include the entire price schedule in the demand function, the convention has been to include, as an argument, either an average or a marginal price. Yet use of either to the exclusion of the other one leads, inter alia, to biased estimates of own-price elasticity. With this in mind, a residential demand function is estimated employing both average and marginal price. While a number of interesting results emerge, it is significant that the coefficient on marginal price is ‘right’; that is, the expected inverse relationship between the quantity of electricity demanded and the marginal price it obtains. On the other hand, the positive sign on average price is troubling. Because average price is in this case exactly the same concept as the intra-marginal payment, a change in average price is exactly the same concept as a change in real income. T...

Price discrimination in related markets

Abstract: The Pigou-Robinson pricing rule for third degree monopolistic price discrimination states that price ratios vary inversely with ratios of direct price elasticities of demand. The rule holds when markets are sealed, and cross price elasticities of demand are zero. We show how the rule can fail when imperfect sealing permits leakage. We also develop a general discriminatory pricing rule that holds when leakage causes market demands to be related. The general pricing rule is based on all direct price elasticities of demand, all cross price elasticities of demand, and the size distribution of the markets

Location choice when price is also a decision variable

Abstract: One of the fundamental contributions of Hotelling's classic “Stability in Competition” paper is the focus on the interaction of the price and location choice variables. In most of the subsequent research in this area, the price dimension has been assumed away. In this paper the jointness of the two decisions is reintroduced and the results for N firms in a linear market are compared to the parametric price equilibria developed by Lerner and Singer and Eaton and Lipsey. Their conclusions are found to be valid for the N-2 interior firms in the more general model. But what has been lost because of the equal price assumption is the actions of the two exterior firms who exploit their uniqueness by charging higher prices to their “captive” buyers. A simulation of the dynamics of the price and location choice process confirms the analytically defined equilibria.

Toward a Theory of Competitive Price Adjustment

Abstract: In his 1959 essay "Toward a Theory of Price Adjustment" Arrow argued that "there exists a logical gap in the usual formulations of the theory of perfectly competitive economy, namely, that there is no place for a rational decision with respect to prices as there is with respect to quantities". (See also Koopmans (1957).) This gap is especially felt in macroeconomics where the basic framework is that of perfect competition and many results depend on the existence of some lag in the adjustment of prices. Here I propose a first step toward a theory of price adjustment in a competitive environment.' I shall consider here a simple exchange economy with no money. The application to the question of the real effects of changes in the money supply is discussed in a separate paper (Eden (1980)). The main cost of adjustment considered here is the cost of information about changes in aggregate excess demand. The question is who will gather and pay for the information. This public good problem is analysed in a model in which the artificial entity of the auctioneer is replaced by firms (sellers) who seek information about excess demand and announce the prices of their products. The public good aspect of the problem emerges when there is a unique optimal price which would be announced on the basis of "old" information shared by all participants. Then if a single firm buys "new" information and announces a different price all firms which are aware of this revised price will rightly think that it is based on updated information and will therefore follow the lead. In this case the announced price transmits all the relevant new information to all firms and the firm that updates the information therefore provides that public good which in the Walrasian model is provided by the auctioneer.2 The question is which firm will undertake the function of 'the auctioneer? The solution suggested here is that all firms will adopt a mixed strategy in which they undertake this function with a certain probability. It is shown however that there is always a positive probability that the prices advertised in a particular market will not be based on updated information, since otherwise there would be no incentive to buy information. In the second section I describe the process of advertising prices for the case in which the aggregate demand that sellers in a particular market face is exogenously given and infinitely elastic. I then discuss the type of framework required to justify such demand curves and show that, in general, the Walrasian price is not the average of advertised prices.

An optimal middleman firm price adjustment policy: the “short‐run inventory‐based pricing policy”

Abstract: This paper examines the optimum pricing policies of middleman firms who carry an inventory of goods bought for resale. Each period the firm in the theoretical model is required to post a price before it observes its realized demand. In disequilibrium situations, the firm's profit-maximizing pricing policy is shown to be a “short-run inventory-based pricing policy” which requires the firm to post a price below the long-run equilibrium price upon observing its actual beginning inventory level above its optimum level, and to post a price above the long-run equilibrium price upon observing its actual inventory level below its optimum level. The final section suggests that the use of such policies by middleman firms will lead to market price adjustments which are both consistent with the “law of supply and demand” and which are based on explicit maximizing behavor.

Duopoly with Differentiated Products and Entry Barriers

Abstract: Product differentiated duopoly with a potential entrant facing a single period fixed cost entry barriers is modeled as a noncooperative game. In addition to characterizing the equilibrium solutions and relating them to entry costs and product differentiation, a comparison of price and quantity competition shows that entry conditions are qualitatively sensitive to the strategic variables used in a given industry. Quantity competition appears to be more favorable for entry than price competition. The use of threats and other exclusionary tactics, such as limit pricing, decisively determine the outcome when entry costs are moderate.

Advertising, Price Competition and Market Structure

Abstract: This is an empirical study concerned with the structure-performance relationship in consumer goods manufacturing industries, with a particular emphasis on the role of advertising in this relationship. It differs from the many previous studies concerned with this issue primarily in the variable employed as a proxy for industry performance. The index of performance utilized here is derived from the contents of the advertising messages conveyed by the firms in their respective industries. Specifically, it is the observed frequency with which the industry participants disclose product price in their advertising messages. In section I we briefly review the existing theoretical and empirical literature concerned with the factors which determine industry performance. Section II contains a discussion of the significance of differences in the contents of advertising messages and a presentation of the rationale for our belief that the frequency with which an industry's advertising messages disclose price information is a barometer of industry performance. In section III we present evidence that industry performance, as reflected in this variable, varies with industry structure. The final section contains a summary of our findings.

Price adjustment and market structure: a reply1

Abstract: Winters' comment essentially concerns the econometric methods used to estimate the adjustment-concentration relationship. In this reply it will be shown that the suggested estimation methods do not alter our earlier conclusions. Some new econometric estimates indicate that the original findings should stand without major qualification and consequently Winters' criticisms of our methodology are unjustified. But first the broader question regarding the alleged link between concentration and inflation is examined. Anyone who reads the paper carefully cannot fail to realise that it is not about inflation. What it does is to estimate the relationship between the speed of price adjustment and concentration as a test of the 'administered prices' hypothesis.2 To suggest that the findings could have implications for inflation is entirely different from saying that they explain inflation. These implications are twofold. First, bigger As associated with greater concentration lead to higher shortrun peaks in the rate of inflation following a shock which, given the evidence on thresholds in the formation of inflationary expectations, could have a significant influence on wage-price dynamics.3 Second, constraints on the rate at which cost increases can be passed on could lead firms to absorb or resist these changes, a factor stressed by the Monopolies Commission (1973, p. 30) to which reference was made in the article.

Value-Maximizing Price and Advertising with Stochastic Demand

Abstract: Two inescapable characteristics of the monopoly firm's decision problem are imperfect information and the interdependence of its price, advertising and output choices. In the large modern corporation imperfect information concerning the final product demand that will materialize within the firm's planning period is perhaps the most common source of uncertainty or risk. Previous work in the theory of the firm under risk has demonstrated two avenues by which stochastic demand may influence the firm's pricing and advertising decisions. Edwin Mills [21; 22] argued that if both price and output must be chosen before random demand is known, then firms will attempt to avoid incurring surplus production costs or foregoing potential sales by setting ex ante prices and outputs that depend upon capacity costs, the costs of carrying inventory, the price-cost differential for the marginal sale and "all the moments of the probability distribution of demand" [22, 88]. Mills demonstrated that with constant marginal cost and a demand distribution independent of the price level, even the expected-profit-maximizing (EPM) firm would respond to risk by lowering ex ante price as demand variance increased. Nevertheless, without capacity constraints or production lags (i.e., with output set ex post), Mills concluded "uncertainty plays no essential role in the [EPM] decision process" [22, 85]. Later research into alternative objectives that might motivate managerial decisions has shown that even a firm that can with ex post output clear its market at a previously quoted price will alter its pricing behavior as the variance of stochastic demand increases. Indeed precisely Mills's result that ex ante price falls with increased risk has emerged from ex post output models in which risk-averse managers maximize the expected utility of stochastic profits [15; 16, 378-400; 18; 20]. Similar results have been derived for advertising as well as price in a two-variable model of such managerial-utility-maximizing (MUM) choices [16; 9; 7; 26]. Yet all these MUM models have focused too little attention on the representative in-

Duopoly with Differentiated Products and Entry Barriers

Abstract: Product differentiated duopoly with a potential entrant facing a single period fixed cost entry barriers is modeled as a noncooperative game. In addition to characterizing the equilibrium solutions and relating them to entry costs and product differentiation, a comparison of price and quantity competition shows that entry conditions are qualitatively sensitive to the strategic variables used in a given industry. Quantity competition appears to be more favorable for entry than price competition. The use of threats and other exclusionary tactics, such as limit pricing, decisively determine the outcome when entry costs are moderate.

The Dominant Firm Structure: Theoretical Myth or Empirical Reality?

Abstract: The dominant firm market structure is characterized by a single firm which delivers the major portion of the output of an industry and by a "fringe" of smaller firms. It typifies a number of American industries which are both large and important; computers, photographic supplies, and canned soup are but a few examples. Although the dominant firm is important empirically, there are two principal weaknesses in its theoretical treatment. First, a "theory" of the dominant firm is in fact nonexistant. Rather than a single dominant firm model there exists a collection of models which purport to describe or characterize the behavior found in markets having dominant firms. The two best known of these are the price leadership and limit pricing models. Although dominant firms have been closely associated with these models, there has been no empirical test of their ability to predict dominant firm behavior. The dominant firm may therefore be a theoretical myth. Second, these models contain no explicit definition of dominance. That is, they do not precisely specify the size of the dominant firms necessary to produce price leadership or limit price behavior. Firms with large absolute size or large market share are a reality, but "dominant" firms may not be. Each of these firms may be unique so that as a group no distinct and observable dominant firm structure exists. The objective of this research is to test empirically the various dominant firm models. The study reviews the models and then tests their predictions in a cross section study of large and small firms. The method of analysis permits the criterion of dominance to be estimated to provide a test of the existence of a distinct dominant firm structure as well as a test of the predictions of the models. Section II contains a development of the hypotheses to be tested and a description of the estimation method. The data sources are reviewed in Section III. Empirical findings and policy implications are discussed in Sections IV and V, respectively.

Inflation, Costs of Adjustment and the Real Price Amplitude: Am Empirical Study

Abstract: The menu-cost model (Sheshinski-Weiss, 1977) demonstrated that in the presence of fixed price adjustment costs, monopoly firms who face an inflationary trend in rival prices will adjust their nominal price level periodically, following an (S,s) policy in real price space. This paper tests the implications of the model on the real price amplitude and the expected frequency of price adjustments, using Israeli data. It is shown that exceptfor the lower end of the real price cycle, the theory is supported by the data.

An econometric model of the world cobalt industry

Abstract: This study presents an econometric model of the world cobalt industry, relatively disaggregated to incorporate different demand equations for the United States, and rest of the non-communist world, as well as a breakdown into types of cobalt used. Largely due to reasons of data availability, the model is an annual one and the breakdown by end use categories has been restricted to the United States. Particular attention in the model construction has been given to price setting in the cobalt market. Existing evidence by Burrows (1971) and Charles River Associates (1976) suggests that Zaire sets the price so as to maximise its own profits. The aim of this study is to estimate aggregate and disaggregate short run and long run elasticities with respect to price and activity variables, and to test whether the own profit maximization hypotheses is representative of current producer price setting behaviour when Zaire's share in total world mine production has fallen from nearly two thirds to less than half between 1972 and 1978. Finally, the model constructed is used to simulate the effect of marginal cost pricing by major producers and the movements in price resulting from an exogeneous increase in supply. The latter exercise was motivated by the possibility of a substantial long run source of supply of cobalt from seabed mining.

A queueing model for egg price determination

Abstract: The determination of the price paid to its suppliers and by its customers is a major task for some marketing authorities. The commodity arrives randomly at the authority's facility and is removed randomly by customers. Between arrival and departure, the commodity awaits processing, is processed (graded, packed), and awaits removal by a customer. It is suggested that this similarity to a queue enables a profit function, dependent on price, to be constructed. Determination of the price maximising this function is seen to be one solution to the price setting problem. 1981 The Australian Agricultural Economics Society

Futures Markets and the Cooperative Firm Under Price Uncertainty

Abstract: A number of authors1 have recently considered the impact of price uncertainty on the behavior of the cooperative firm operating in a competive market. One interesting result demonstrated by Paroush and Kahana is that under price uncertainty the cooperative firm will employ a greater amount of labor input than a cooperative firm facing a non-random price-equal to the mean price in the uncertainty case.2 This result is in contrast to the capitalist firm, where the firm facing price uncertainty employs a lesser amount of labor than the firm facing a non-random price. In this paper this result is reexamined in a situation where the firm faces not only an uncertain future spot price for output, but also a current non-random futures price. It is demonstrated that under such an environment