Showing papers on "Limit price published in 1984"

The Timing of Sales

Abstract: This paper presents a model of intertemporal price discrimination. A fixed number of sellers produce a homogeneous good. Consumers with different preferences enter the market in each period and leave when they make a purchase. The sellers typically vary their prices over time, charging a high price in most periods, but occasionally cutting the price to sell to a large group of customers with a low reservation price. In some equilibria, all stores lower their price at the same time and to the same level.

The Maximum Likelihood Estimation of Security Price Volatility: Theory, Evidence, and Application to Option Pricing

Abstract: the market requires efficient estimation of the Assuming security price dynamics are governed by a diffusion process and given the publicly most available form of data, this paper provides the maximum likelihood estimator of security price volatility. A Monte Carlo simulation compares the small-sample properties of this and other proposed security price volatility estimators. The resultant maximum likelihood estimator of the Black-Scholes call option price formulation is also derived. For small sample sizes a Monte Carlo simulation study facilitates comparison with other proposed estimation procedures. Also, the statistically most powerful confidence intervals for the BlackScholes call option price are constructed. * We would like to thank the participants of the Statistics Department Seminar and Finance Department Workshop at the University of Michigan for their helpful comments. We are especially grateful to Fred Hoppe, Adrian Tschoegl, and an anonymous referee for their insightful suggestions. Any remaining errors are our responsibility.

Commodity price stabilization in imperfect or cartelized markets

Abstract: Most studies of commodity price stabilization assume that all agents behave competitively. However, many commodities suitable for stockpiling are produced by countries with a significant share of the world market, and commodity agreements themselves often result in cartelization of the market. The paper explores the consequences of market power for the choice of storage rule and the degree of price stabilization. It finds that with linear demand, dominant producers choose more stable prices than under perfect competition and price stability increases with their market share. With constant elastic demand the competitive degree of price stabilization is achieved.

The Decline of Dominant Firms, 1905–1929

Abstract: The theory of dynamic limit pricing implies that a firm maximizes its wealth by gradually sacrificing its dominant market share. We extend the theory by simulation methods to show that higher structural entry barriers generally result in both higher profits and a slower sacrifice of market share. The model is applied to 42 once-dominant firms in U. S. manufacturing to explain jointly the declines of their market shares and the profit rates earned during 1905–1929. The statistical results agree substantially with the hypothesis that these firms behaved consistently with maximizing their wealth through dynamic limit pricing.

Retail Pricing and Clearance Sales

Abstract: Sellers of new products are faced with having to guess demand conditions to set price appropriately. But sellers are able to adjust price over time and to learn from past mistakes. Additionally, it is not necessary that all goods be sold with certainty. It is sometimes better to set a high price and to risk no sale. This process is modeled to explain retail pricing behavior and the time distribution of transactions. Prices start high and fall as afunction of time on the shelf. The initial price and rate of decline can be predicted and depends on thinness of the market, the proportion of customers who are "window shoppers," and other observable characteristics. In a simplecase, when prices are set optimally, the probability of selling the product is constant over time. Among the more interesting predictions is that women's clothes may sell for a higher average price than men's clothes, given similar cost, even in a competitive market. Another is that the initial price level and the rate of price decline are positively related to the probability of selling the good. Other observable relationships are discussed.

A Model for Constrained Optimum Water Pricing and Capacity Expansion

Abstract: Previous studies of optimum water pricing and capacity expansion have ignored the political and administrative factors which limit the range of feasible decisions. A general model is presented for identifying the water price horizon so as to maximize the present value of net benefits. Constraints on the range of water price, the rate of price change, and financial cost recovery are included in the model. The model is applied to a hypothetical case study of an urban water supply system. The results indicate that optimum water pricing and capacity expansion policies are likely to achieve some increase in economic benefits when compared with average cost pricing. Administrative and political constraints tend to reduce these benefits but result in more acceptable pricing policies.

Social Costs of Oligopoly and the Value of Competition

Abstract: In this study we present a new methodology for estimating welfare losses caused by market power. We depart from past studies by explicitly taking into account different levels of market power. We provide estimates of: (a) actual social costs arising from existing market structures and (b) expected monopoly social costs that would occur if there were no competition actual or potential. The difference between actual and monopoly welfare losses represents the value of competition in existing markets. We further estimate the separate contributions of actual and potential competition to this value. Our methodology is based upon an empirical model of oligopoly behaviour and limit pricing. From this model we estimate the markup which would occur were there no competition. We use this markup in turn to estimate industry demand elasticity at the monopoly price. With this elasticity and the assumption of linear demand we can characterise demand, cost, and welfare conditions at each equilibrium: monopoly, actual, and competitive. With this new methodology and some other modifications of earlier techniques we provide not only new estimates of welfare losses, but also estimates of the value of competition under existing conditions. We find that the actual deadweight loss triangle averages 2-9 % of value of shipments for a sample of 37 industries. We also estimate that were these industries to maximise joint profits with no threat of entry, the welfare loss would be I I *6 %. The difference, 8-7 %, we attribute to the beneficial effects of potential competition (4 9 %) and actual competition (3.8 %). Our monopoly benchmark thus yields additional understanding of the value of competition. We cannot represent our study as having solved all of the problems associated with social cost estimation of monopoly power. Indeed, given general equilibrium problems associated with horizontal, vertical, and cross-industry aggregation interacting with the 'second best' problem, we doubt that all the problems can be solved, although we can point out some of the potentials for bias. After presenting our estimates we discuss the implications of sampling methodology and aggregation problems, demonstrating that potentially strong, but possibly offsetting, biases exist in all studies, including ours.

Stochastic inflation and the optimal policy of price adjustment

Abstract: This paper analyzes the optimal policy of price adjustment for a monopolistic firm in the presence of stochastic inflation. It shows that an increase in the expected rate of inflation or in the cost of price adjustment leads to an increase in the initial real price and a decrease in the terminal real price in each period with a fixed nominal price. It also shows that the effects of increased riskiness of inflation are ambiguous.

Non-linear prices and price-taking behavior

Abstract: The solution of the non-linear pricing problem when consumers are fully rational price takers is compared to that obtained when consumers act as if prices are linear, with the price per unit equal to the average price actually paid. I show that for a broad class of economics the alternative behavior reduces the monopolist's profits and increases utility for at least some of the consumers.

Commodity price stabilization : the theory and its application

Abstract: This essay attempts to clarify and simplify the results of the literature on price stabilization in order to provide a better sense of the conditions under which commodity stabilization schemes will be successful and the welfare effects of such schemes. After introducing the early framework under which price stabilization was analyzed, the paper demonstrates the variance of results under alternative and more realistic situations. It treats topics such as storage and food security, inflation and economic development, public storage and futures markets, and non-storable goods. The conclusions are: (i) some countries may lose from price stabilization even though there is a net global gain; (ii) liberalized trade reduces the need for buffer stocks; (iii) futures markets reduce instability at a lower cost than buffer stocks; (iv) many national price stabilization schemes are actually price support systems used to improve farmers' incomes; (v) good price forecasting is a prerequisite to well-managed buffer stocks; (vi) price stability in poorer countries is not sufficient to avoid occasional food shortages; and (vii) food is costly to store and may not alleviate famine if transportation and distribution systems are inadequate.

The Role of Pricing in Managing the Demand for Water

Abstract: Pricing will efficiently and effectively manage the demand for water. Marginal cost pricing which requires consumers to pay the costs of servicing them finds an ideal application in peak period pricing. Charging those responsible for the system capacity necessary to fulfill their peak demands is both efficient and equitable. Estimates of the price elasticity of demand for water and case studies both show that price increases will reduce the demand for water.

Economies of scale, strategic advertising and fully credible entry deterrence

Abstract: Recent work on entry deterrence has emphasized the distinction between a monopolist’s reversible and irreversible preentry strategic moves (e.g., limit pricing) will not credible deter a rational potential entrant. Dixit (1980) and other have demonstrated, however, that irreversible preentry capacity investments can result in credible deterrence. In this paper, we examine preentry advertising investments which irreversibly alter postentry demand conditions. Using an infinite horizon model, we show that preentry investments in advertising may result in credible deterrence even for the extreme case where an entrant expects a collusive postentry price, and the monopolist ceases all advertising at the moment of entry.

Price Discrimination or Price Stabilization: Debating with Models of U.S. Dairy Policy

Abstract: Two views on U.S. dairy policy are, first, that it is an instance of the "capture" theory of economic regulation -- that • ••• it serves the interests of dairy producers at the expense of - ) ••• consumers and taxpayers by raising dairy product prices -- and second 2 that. dairy policy to correct - market failure is an instance of governmental action that dairy policy serves the joint interests of producers, consumers, and taxpayers. This paper discUsses several analytical issues which have been important in the debate between these views.

Drug innovation and price competition

Abstract: This study is designed to examine the relationship between drug innovation and price competition. The empirical results presented here support the hypothesis that new drugs-as measured by new chemical entities-exert downward pressure on the prices of existing competitors within the same therapeutic class. The implication of this finding for public policy is that drug innovation not only provides new therapy but also stimulates price competition.

Price behavior in tight oligopoly

Abstract: The study examines price behavior in tight oligopoly. The investigation proceeds from the premise that tacit cooperation is the rational response of firms comprising tight oligopoly. The study’s thesis is that cooperative conduct in tight oligopoly will reflect one of two general pricing patterns: (1) shared monopoly pricing, or (2) mark-up pricing. A unique empirical test of this dual price hypotheses is developed. The test focuses on the nature of price responses to cost and demand changes as reflected in a price equation that is estimated for each of fifty four-digit SIC industries. The study’s results indicate infrequent, but still notable, instances of shared monopoly pricing. More common is evidence of mark-up pricing, a general category within which demand proved to be significant in roughly half of the industries examined. Theoretical implications of these findings are discussed.

The Inefficiency of Marginal-Cost Pricing and The Apparent Rigidity of Prices

Abstract: Under conditions of natural monopoly, private contracts or government regulation may attempt to avoid inefficiency by setting up a pricing formula. Once the capital stock is chosen,the right price to charge the buyer is marginal cost. But the point of this paper is that marginal-cost pricing provides the wrong incentives for the choice of the capital stock by the seller. If the seller can achieve a high price by deliberately under-investing and driving up marginal cost, there will be asystematic tendency toward too small a capital stock. One type of contract or regulatory policy that avoids this problem charges marginal cost to each buyer, but provides a revenue to the seller that is equal to long-run unit cost, not short-run marginal cost. Such a contract or policy will make the price, in the sense of the revenue of the seller per unit of output, appear to be unresponsive to market conditions.

Producer Preference for Price Stability

Abstract: Producer preference for product price variability vis-a-vis price stability at the mean has been analyzed extensively. Turnovsky has surveyed this literature. Oi assumed that all producer decisions are executed after the actual price is revealed. He showed that riskneutral producers prefer price variability to price stability.1 Schmitz, Shalit, and Turnovsky relaxed the assumption of risk neutrality and showed that risk-averse producers may prefer price stability. Tisdell (1963), on the other hand, criticized Oi's assumption that all decisions are made ex post and instead assumed that all producer decisions must be made before the actual price is observed. He showed that risk-neutral producers are indifferent between price variability and price stability.

Shadow price principles applied to regulated pricing of natural gas

Abstract: Inclusion of the shadow prices for natural gas in a dynamic fuels model for the United States shows that the primary reason for the relatively large, fly-up in new marginal gas prices in the early 1980's was the release of the pent-up price effects of the U.S. government's price regulations. In accordance with principles, the shadow price of natural gas fell siginificantly following de-regulation of the highcost gas (section 107) in 1980, which represented the precursor for downward adjustments in marginal wellhead prices of new high-cost gas and drilling activity. The modeling results show that no significant fly-up in new marginal gas prices for lower-cost gas (section 102) is likely to occur in 1985, when its phased de-regulation ends and it is finally de-regulated, because no shadow price precursor currently exists for this gas. Shadow price principles clear up the primary misconceptions with regard to natural gas pricing. This application indicates the significance of shadow price principles for regulated pricing in general.

Off Pricing, Price Fixing and Advertising

Abstract: (1984). Off Pricing, Price Fixing and Advertising. Journal of Advertising: Vol. 13, No. 1, pp. 3-3.

Oil Price Instability and Domestic Energy Substitution for Imported Oil

Abstract: This paper considers the effects of unstable world oil prices on domestic firms seeking substitutes for imported oil. Price instability manifested as price uncertainty is shown to inhibit domestic potential competitors' substitution activities, being analogous to a tax imposed on domestic firms by the dominant oil-exporters. This tax analogue of price uncertainty is in distinction to the mutual gain scenario of stochastic limit pricing when there is price variability but no uncertainty.

Price Forecast for Energy Lending

Abstract: The movement of world oil prices continues to be a topic of interest and concern. While political forces are a factor in price projections, banks primarily use the long term oil supply and demand situation as the underlying support for making oil and gas price projections. Last year, price fluctuations and the uncertainty associated with price forecasts caused banks to follow their lending policies more closely and to become more prudent in their lending guidelines by assigning more risk to nonrevenue producing reserve categories. However, the ability of banks to lend against collateral composed of oil and gas reserves has not decreased. Thirty energy banks were surveyed to determine how they assign loan values and to compare their pricing and loan assumptions. The most notable change from last year's survey is that most banks have lowered their price escalation projections. Although the banks' lending policies for proved producing reserves remain similar to previous years, uncertainty regarding future prices and its associated risks for nonproducing and undeveloped properties increased. This paper compares the banks' pricing assumptions, and shows how price variations can have dramatic effects on loan value. This paper also compares the 1983 survey results with the previous two years.

Small Leading Firms

Abstract: We formally analyze the question of whether a price leader must control a large share of the market. Our main result is that if other producers have rising marginal costs and behave as price takers, even the smallest firm in a competitive industry with a rising supply curve can enhance its profits by cutting output and raising price, becoming a price leader. Therefore, we would expect pure competition to be destroyed under these technological conditions.