Showing papers on "Limit price published in 1985"

Perception of Price When Price Information Is Costly: Evidence from Residential Electricity Demand

Abstract: A bstract-Residential electricity consumption is an example of a good for which it is costly to determine marginal price, since price changes with the quantity purchased according to multistep block rate schedules. This paper investigates the effect of the price information problem on consumers' price perceptions. An alternative hypothesis of average price perception is tested against the marginal price postulate which assumes wellinformed consumers. The model, which includes a price perception variable, allows the estimation of the price to which consumers actually respond. The empirical results support the hypothesis that consumers respond to average price perceived from the electricity bill.

Optimal Ordering Strategies for Announced Price Increases

Abstract: The familiar model for determining the optimal ordering strategy, given an announced price increase, assumes that the buyer has an opportunity to place an order at the end of the next economic order quantity cycle before the price increase takes effect. This paper extends the price increase model by relaxing the requirement on the timing of the price increase. Specifically, we develop optimal ordering strategies for situations where the price increase becomes effective at any future specified time. We also calculate savings for alternate ordering strategies.

Marketing Margins and Price Uncertainty: The Case of the U.S. Wheat Market

Abstract: This paper seeks to determine the effect of changes in output price risk on marketing margins. A theoretical model of price determination in a marketing channel with risk-averse firms is developed. This model shows that if marketing firms are competitive and decreasingly absolute risk averse, then an increase in output price risk should result in higher expected marketing margins. Empirical evidence from the wheat marketing channel supports the theoretical model: increased price variability significantly increases wheat marketing margins for both the farm-mill margin and the mill-retail margin. These results suggest a potential benefit from price stabilization programs.

Uncertainty Resolution, Private Information Aggregation and the Cournot Competitive Limit

Abstract: A Cournot model of oligopoly in which otherwise identical firms have private differential information about the common cost of production and a shared (but unknown) demand curve is examined. A Bayesian equilibrium of the corresponding game of incomplete information is solved for explicitly and analysed. In the symmetric equilibrium, different firms produce at different output levels because they have different information. Because the information individual firms have is random, total output and hence market price is also random for any finite number of firms. The main result of the paper relates to the asymptotic properties of the equilibrium, when the number of firms becomes large. Under fairly general conditions on the joint distribution of demand and individual firms' information about demand, the random equilibrium price converges almost surely to a constant in the limit. More importantly, this price equals the perfectly competitive price. In other words, in large markets, even if no firm knows the true market demand curve and firms are not price-takers and do not use price as a signal to improve their information, the competitive price will prevail with certainty. In the limit, aggregate outcomes are as if all firms shared their private information with each other.

Competitive Storage, Rational Expectations, and Short-Run Food Price Determination

Abstract: This paper demonstrates that lags between retail and wholesale food prices can be explained by inventory behavior of retailers. Theoretical considerations indicate that the markup model should be modified to include a Jorgenson-type user cost variable, which depends on expected future wholesale price. The rational expectations hypothesis is used to derive price expectations. The retail price specification, therefore, depends on the stochastic process generating expected wholesale price. The econometric methodology, employing both causality testing and nonlinear estimation, is illustrated by estimating monthly price relationships for beef. The results are consistent with the theory and indicate rejection of the markup model.

Expected Consumer's Surplus and the Welfare Effects of Price Stabilization

Abstract: Suppose a consumer faces a price which is uncertain ex ante. A question which often arises is whether the consumer would benefit from a stabilization policy under which the price would then be fixed and known with certainty. Many authors have addressed this question by calculating the expected compensating variation of the price change; others have used expected Marshallian consumer's surplus, often with the explanation that it is a good approximation to expected compensating variation.2 An important unresolved issue, however, is whether expected compensating variation does in fact provide a valid ranking of stochastic prices against stabilized prices, i.e., a ranking in agreement with that given by expected utility. In Section 2, we demonstrate that expected compensating variation is not in general a valid utility indicator. In essence, while utility comparisons under uncertainty require the use of the cardinal properties of (von NeumannMorgenstern) utility functions, the expected surplus measures depend only on ordinal preference rankings. Expected compensating variation, then, is completely insensitive to, and cannot reflect, the precise factor of interest in suchstudies: the consumer's attitudes toward risk. We then derive a set of restrictions on the utility function which are necessary in order for expected compensating variation to be a valid measure. We see that price stabilization policies can only be evaluated with compensating variation if consumer preferences are assumed to satisfy quite stringent requirements. This is in constrast to the familiar certainty case in which compensating variation always provides correct rankings.

Measuring Price and Quality Competition

Abstract: Portfolio management requires precise measures of price and quality competition across relevant lines. A methodology is proposed that uses the Law of Comparative Judgment to transform ordinal compa...

Risk A version and Information Structure: An Experimental Study of Price Variability in the Securities Markets

Abstract: This study investigates the differences in the behaviors between the speculative investors and the conservative investors in two separate experimental markets. Although the market for speculators shows greater price volatility in both bid/ask spread within a trade as well as with intraperiod variances, it exhibits several desirable properties. Specifically, the price patterns tend to converge closer, and at a greater speed to either the prior information equilibrium price or the rational expectation equilibrium price. It also achieves better allocational efficiency. And, it is also less likely to be misled by potentially "false" price information.

An assessment of the deregulation of electric power generation using network models of imperfect spatial markets

Abstract: Proposals have been made to deregulate the generation of electric power. But unregulated generators would be spatial oligopolists, because transmission costs would insulate them from competition from distant producers. The purpose of this analysis is to estimate the degree to which unregulated power generators would be able to exercise market power. This is accomplished by calculating spatial price equilibria for a hypothetical deregulated power market in New York state. Two types of equilibria are calculated: Nash/Bertrand equilibria, representing a lower bound to unregulated prices, and limit pricing, defining an upper bound. Equilibria are obtained for the years 1980 and 2000.

The Pricing Decision: A Service Industry's Experience

Abstract: THE PRICING DECISION: A SERVICE INDUSTRY'S EXPERIENCE Of the many difficult problems faced in business, few are as troublesome as the pricing decision. Traditional price theory holds that firms will continue to supply goods or services until the marginal (i.e., incremental) revenue of the last unit sold equals the marginal (i.e., incremental) cost of production and sales. However, this model assumes (1) perfect information about the market and the firm's cost per product, (2) no barriers to entry into the market (financial, legal, technical, cultural or otherwise), and (3) a "rational economic man'--a profit maximizer. In pactice, these assumptions often prove unrealistic: First, it is generally not easy to estimate the demand curve for a firm's products. Second, the marginal cost curve can rarely be obtained from the firm's accounting records and can be computed only after considerable analysis, judgment, and, finally, even arbitrary allocations.1 1 Robert S. Kaplan, Advanced Management Accounting (Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1982), p. 224. Moreover, barriers to entry do exist. Some are sanctioned--e.g., patents, licenses, certifications. Others force their presence--e.g., cartels, monopolies. Finally the profit maximizer assumption has been challenged repeatedly by behavioralists. Thus the marginal revenue-marginal cost equality concept probably cannot be expected to provide firm-specific pricing decision rules. EMPIRICAL STUDIES The absence of a comprehensive predictive pricing model has led a number of researchers to investigate how prices are determined in practice. Curiously, almost all of the empirical studies have been drawn from the manufacturing or retailing sectors.2 For the most part, service firms have been ignored. 2 See, for example, Lawrence A. Gordon et al., The Pricing Decision (New York: National Association of Accountants, 1981); W. W. Haynes, Pricing Decisions in Small Business (Lexington, Kentucky: University of Kentucky Press, 1962); Lee E. Preston, Profits, Competition, and Rules of Thumb in Retail Food Pricing (Berkeley: University of California Institute of Business and Economic Research, 1963); F. C. Ripley and L. Segal, "Price Determination in 395 Manufacturing Industries,' Review of Economics and Statistics (August 1973), pp. 263-71; A. Sahling, "Price Behavior in U.S. Manufacturing: An Empirical Analysis of the Speed of Adjustment,' American Economic Review, 67 (December 1977), pp. 911-25; and Y. Shinkia, "Business Pricing Policies in Japanese Manufacturing Industry,' Journal of Industrial Economics, (June 1974), pp. 255-64. That the service sector has not received much attention is unfortunate. Intuitively, we might expect some differences between services and manufacturing or retailing. For example, cost-based pricing is fairly common among manufacturers, especially those in less competitive markets. Cost-based pricing could prove more difficult for service firms, however, due to the lack of a tangible product on which to hang the costs. Further, service firms would seem to incur more common or joint costs, making pricing even more difficult. RATIONALE AND METHODS The principal focus of this study was to determine how the managers of fabricare firms (the drycleaning and laundry industry) make pricing decisions. The following questions were addressed: What are the pricing objectives of fabricare firms? What strategies are used to accomplish those objectives? What factors are important in establishing those strageties? Among the issues explored are: the relative importance of various pricing objectives (profits, market share, etc.); whether prices are based more on costs or on market conditions; and the relationship, if any, between pricing and price leadership. "Price leadership' refers to whether or not a firm sets its own prices (a price leader) or tends to react to prevailing prices set by others (a price follower). …

Arbitrage Opportunities in The Australian Share Price Index Futures Contract

Abstract: This study examines the pricing behaviour of share price index futures contracts traded on the Australian market. Particularly, we investigate the relationship between futures prices and the no-arbitrage price predicted by the current spot prices. Consistent with similar studies of U.S. markets, we find that the observed share price index futures prices differ from those predicted by the no-arbitrage prices, but that the size and sign of this difference is not constant across the contracts or across the time period included in our sample. The explanations suggested in the literature for the existence of these price differences are predominantly institutional in nature. These include differential tax treatment, short selling constraints, thin trading and transaction costs. We find that these explanations do not appear to be capable of explaining the size or sign of the pricing differences we observe.

Peak-load pricing and short-run marginal cost*

Abstract: The conventional wisdom of peak-load pricing (following Williamson, 1966, see for example Rees, I976, p. 69), is: (i) Thefirm peak case. The off-peak price equals marginal variable cost or shortrun marginal cost (SRMC), and the peak price equals SRMC+ MCC/a (where MCC = marginal capacity cost and a is the length of the peak period) if off-peak demand at SRMC does not exceed peak demand at SRMC + MCC/a; (ii) The shifting peak case. Prices are set to equate peak and off-peak demand, and consumers in both periods contribute towards capacity costs if off-peak demand at SRMC exceeds peak demand at SRAIIC + MCC/a. This conventional argument is based on a model in which demand at each price is constant throughout the peak period, and constant at a lower level throughout the off-peak period. There is a discontinuity in demand at each price at the start and end of the peak period. A general analysis of the more realistic case in which demand at each price varies continuously over time, but in which there can be only a finite number of price changes, is given in Craven (I 97 ). The purpose of this note is to draw out a conclusion from that model which was not made explicit in that paper, and which has important implications for the conclusions of conventional theory quoted above. The result (propositions i and 3) is that

Price inelasticity: not all that meets the eye

Abstract: Managers often do research to help them determine the optimum price for a new product. Several different price‐points are ordinarily tested in order to determine the impact of price on sales of the product. Aside from its impact on demand, price also has been studied for its effect on consumers' perceptions of products. For example, research has indicated that people use price as a cue for evaluating the quality of a complex product such as stereophonic equipment for the home. That is, price is used in lieu of knowledge of the technical aspects of the product. Research presented in this paper reveals a yet deeper aspect of price's effect on perception. In this case, variation in price was associated with changes in the way people perceived a new product's function, perceptions that differed from the manufacturer's intended positioning for the product.

Modeling Imperfect Spatial Energy Markets

Abstract: Coal, electricity, natural gas, and oil markets are imperfect spatial markets. In such markets, consumers, haulers, and/or producers possess market power which derives from the insulation that transport cost provides from competition with distant rivals. Policy analysis tools have been recently developed for simulating such markets. In this chapter, models for predicting prices in imperfect spatial markets are summarized and their application to energy problems is critiqued. It is concluded that much research remains to be done, and that regional scientists, geographers, operations researchers, and economists all must contribute.

Housing prices: An empirical analysis of the determinants of the price level in the metropolitan area of Helsinki

Abstract: The paper examines the relative importance of various factors affecting the housing price level in the Helsinki area in the 1970s and the early 1980s. The demand for housing stock is modeled along the lines of simple consumer choice theory. The supply is taken exogenous in the short run. The empirical results suggest, with some reservations, that demographic factors, particularly net migration, have been behind the major swings in the real price of housing. Additionally, the availability of credit has been of importance in the short run. In the long run, new completed units have put downward pressure on the price level. In contrast with many other studies, income does not appear to be an important factor. This may, though, be more a result of data deficiency than the true state of affairs. In spite of the rather good performance of the model in explaining price developments in the 1970s, the model falls seriously short of accounting for the continued rise of the price level in 1982 and 1983. This underlin...

Resource allocation with factor price differentials under price uncertainty

Abstract: The authors adapt the price uncertainty model to examine the implications of four types of marginal changes in price uncertainty: changes in commodity price level, the variance of price, a proportional change in both the mean and the standard deviation of price, and an equiproportionate change in the moments. The analysis focuses on the effect of price uncertainty on sectoral capital/labor ratios, factor employment, output levels, factor rewards, and expected profits. The stability issue and its meaning for the determinant of the basic system is also discussed. 11 references.

Capacity, OUtpL!t, and Sequential Entry: Comment

Abstract: Two behavioral assumptions that are often made in the industrial organization literature are that an established firm (or group) may deter entry either through limit pricing (the Sylos Postulate) or by holding excess capacity (the Excess Capacity Hypothesis). In an interesting recent article in this Review (1981), Daniel Spulber examines these behavioral assumptions to see whether they are consistent with rational behavior by an established firm. Spulber's analysis is based on a two-firm, two-period game model in which the established firm is given a first-in advantage. By introducing this dynamic element into the model, Spulber is able to explicitly address the issue of the optimality of entry-deterring behavior. Spulber finds that the use of limit pricing and/or excess capacity to deter entry is rational only under a very limited set of circumstances.' In particular, when the second-period outcome is determined by a Cournot-Nash equilibrium, he derives the following results. 1) The first-period output of the established firm is always less than or equal to the first-period output produced by a firm not anticipating entry. The established firm essentially accommodates entry and limit pricing does not occur. 2) The established firm never holds more capital than the amount that would minimize its production costs, given its output choices in periods one and two. This comment takes issue with Spulber's conclusions about the Cournot-Nash case. It will be shown that the two results cited above may be reversed when the production technology is characterized by variable proportions. This reversal hinges on the particular type of Nash equilibrium employed in the analysis of the two-period model. Spulber implicitly uses a Nash equilibrium that is not subgame perfect.2 It is shown below that, when one requires the Nash equilibrium to be subgame perfect, both limit pricing and excess capital investment outcomes are possible for the variable proportions technology case. The subgame perfection property thus seems to capture an important strategic element in decision making for the established firm. In some cases, this type of strategic behavior leads to entry barriers that would not exist under "innocent" profit maximization by the established firm. Strategic entry barriers are discussed by Steven Salop (1979). Spulber's notation and assumptions about demand and costs are adopted below.

The specification of price in studies of consumer demand under block price scheduling - comment

Abstract: The problems of price variable specification in demand models of commodities priced by block schedules are well known and in 1975 Taylor suggested a ". . . simple, but yet substantially correct procedure . . ." This procedure, when modified by Nordin (1976), required both marginal price and an expenditure difference variable to be included in demand models. Unfortunately, it is often difficult to obtain data for these variables and much debate, but little evidence, about the empirical consequences of misspecification has resulted. In this comment we focus on Polzin's (1984) recent attempt to expand the empirical evidence. We find several problems with the evidence presented by Polzin and as a result we are unsatisfied with his conclusion that, "despite its theoretical and conceptual elegance, the Taylor/Nordin (price) specification may not be the best description of consumer behavior when faced with a block-rate price schedule" (1984, 309). The major problem with Polzin's approach stems from his use of aggregate data. We argue that comparisons of alternative price specifications must be based on disaggregate data for actual as opposed to representative or "typical" households. Some of the problems with data for typical households in the case of block pricing can be demonstrated by assuming two consumers, A and B, reacting to the hypothetical natural gas rate structure below: