Showing papers on "Limit price published in 1986"

The Rigidity of Prices

Abstract: This paper presents evidence on the amount of price rigidity that exists in individual transaction prices Using the Stigler-Kindahi data, I examine the behavior of individual buyers' prices for certain products used in manufacturing My most important findings are: 1The degree of price rigidity in many industries is significant It is not unusual in some industries for prices to individual buyers to remain unchanged for several years 2Even for what appear to be homogeneous commodities, the correlation of price changes across buyers is very low 3There is no evidence that there is an asymmetry in price rigidity In particular, prices are not rigid down-ward 4The fixed costs of changing price at least to some buyers seem trivial There are plenty of instances where small price changes occur 5The level of industry concentration is strongly correlated with rigid prices The more concentrated the industry, the longer is the average spell of price rigidity 6There appears to be a relationship between price rigidity, size of price change, and the length of time a buyer and seller deal with each otherI interpret the findings as evidence that it is erroneous to focus attention on price as the exclusive mechanism to allocate resources Nonprice rationing is not a fiction, it is a reality of business and may be the efficient response to economic uncertainty

Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model

Abstract: In this article we investigate the nature of equilibrium in markets in which firms choose the scale of operation before they make pricing decisions. We analyze a duopoly model in which firms choose their capacities before engaging in Bertrand-like price competition. We demonstrate that the Cournot outcome is unlikely to emerge in such markets and that the equilibrium tends to be more competitive than the Cournot model would predict. In addition, our results indicate a tendency toward asymmetric firm sizes and price dispersion that results from the mixed strategies firms use in equilibrium.

Price competition vs. quantity competition: the role of uncertainty

Abstract: We analyze the Nash equilibria of a one-stage game in which the nature of the strategic variables (prices or quantities) is determined endogenously. Duopolists producing differentiated products simultaneously choose either a quantity to produce or a price to charge. In the absence of exogenous uncertainty, there exist four types of equilibria with differing levels of output. (price, price), (quantity, quantity), (price, quantity), and (quantity, price). The multiplicity ofequilibria stemsfrom each firm's indifference between settingprice and quantity, given its conjecture about its rival's strategy. But exogenous uncertainty about market demands, which makes firms uncertain about their residual demands, even in equilibrium, gives firms strict preferences between setting price and quantity. As a result, the number of equilibria is reduced. When uncertainty is exogenous, we analyze the effect of the slope of marginal costs, the nature of the demand disturbance, and the curvature of demand on firms' propensities to compete with price or quantity as the strategic variable. These three factors are likely to influence the nature and intensity of oligopolistic competition.

Most-Favored-Customer Pricing and Tacit Collusion

Abstract: This article examines the role of the most-favored-customer pricing policy as a practice facilitating coordination in a dynamic model of price-setting duopoly. This policy is a promise by a firm that if it later lowers price, it will rebate to current customers the difference between the price they pay now and the lower future price. By reducing each firm's incentive to reduce price, the policy enables both firms to offer higher prices and to enjoy higher profits. Consequently, at least one firm offers the policy in equilibrium. We illustrate these general results in an example.

Feeder Cattle Price Differentials in Arizona Auction Markets

Abstract: This paper presents the results of an empirical study of price differentials for feeder cattle in Arizona auction markets. Emphasis is placed upon the estimation of price/ weight relationships for steers and heifers.- Estimation of a short-run feeder cattle price differential model resulted in an equation with a good empirical fit. The model also is in agreement with theoretical expectations. It is concluded that the model presented in the paper could be maintained and updated periodically to provide a useful supplement to market price information services commonly used by cattle producers. Price determination in feeder cattle markets is a complicated process. Conceivably, price premiums and discounts on the basis of factors such as weight and sex should reflect quality and thus also reflect differences in the relative supply and demand for the different weights and grades of cattle (Marsh). In a long-run equilibrium, price differences would reflect differences in the value (as determined by quality factors) of the various types of cattle. Buccola has determined that a mix of animal (e.g., weight, breed, sex, grade, and age) and market (e.g., lot size, market location, day of the week, auction sale order, and sale size) characteristics combine to determine feeder cattle price differentials. However, price/weight relationships are not static. Price differences between animal weights appear over time to display a dynamic adjustment process (Marsh, Schultz

The Relation between Price and Marginal Cost in U.S. Industry

Abstract: An examination of data on labor input and the quantity of output reveals that most U.S. industries have marginal costs far below their prices. The corilusion rests on the empirical finding that cyclical variations in labor input are small compared to variations in output. In booms, firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs. The paper documents the disparity between price and marginal cost,where marginal cost is estimated from variations in cost from one year to the next. It considers a wide variety of explanations of the flndings that are consistent with competition, but none is found to be plausible.

Excess Capacity and Limit Pricing: An Empirical Test

Abstract: Entry may be inhibited by expectations that incumbents have lower marginal costs. Incumbents may be able to use limit pricing or excess capacity to further this expectation. We construct an empirical model of oligopoly capacity and pricing decisions and of entrant responses. The results support the hypothesis that both lower prices and greater excess capacity inhibit entry. They further support limit pricing, but provide no evidence that oligopolies deliberately install excess capacity to deter entry. The results suggest, however, that limit pricing firms may exploit the entry-inhibiting effects of unintended excess capacity by raising their limit prices.

Profitable Pricing When Market Segments Overlap

Abstract: In this paper, we analyze profitable pricing strategies when market segments overlap. Overlapping markets are segments that are not perfectly sealed, and leakage between them can occur. Different consumers are assumed to incur possibly different transaction costs if they choose to purchase in the low-price market. A monopolist seller knows the distribution of transaction costs across consumers and must choose an optimal pricing strategy. In particular, the monopolist must decide whether to charge a single price or to price differentiate. Conditions are derived under which price differentiation will be the most profitable strategy. When price differentiation is optimal, the equilibrium amount of leakage is determined endogenously. Unlike the standard economics textbook model of price discrimination in which zero leakage is determined exogenously and is usually given as a necessary condition for price discrimination, we show that zero leakage is not necessary for differential pricing to be optimal, and that...

Do contraceptive prices affect demand

Abstract: This article explores the significance of price of contraceptives as a deterrent to use by studying demand shifts in response to changes in contraceptive prices. Where high fertility represents a net cost to society government subsidies are warranted to encourage utilization of family planning; the optimal amount subsidized is the price that maximizes cost recovery and minimizes loss of users. Costs of contraception to the consumer other than price of contraceptives include distance to source of supply opportunity cost of waiting opportunity and travel costs of futile trips to closed or oversubscribed family planning services. Quality of service also has an effect. Other studies have shown that consumers prefer to pay for goods and services as price reflects value and in many societies users distrust free services; fees also provide greater assurance of effective use and minimal wasting. Marginal charges may have a beneficial effect on demand. Evidence from studies conducted in Sri Lanka Jamaica Colombia and Thailand demonstrate that increased prices generally have no effect on demand but there are circumstances where contraceptive prices are too high for low-income households and in these cases price reductions will have a positive impact on utilization.

Mill pricing versus spatial price discrimination under bertrand and cournot spatial competition

Abstract: This paper asks two questions about spatial competition. First, does spatial price discrimination lead to lower prices and higher welfare than mill pricing? If firms hold the Bertrand conjecture, the answer is yes for most values of fixed cost. But for the Cournot conjecture, the opposite is true. Second, does the introduction of space into the oligopoly models of Bertrand and Cournot change their results? The answer is generally no; however, spatial Bertrand prices exceed marginal cost, unlike their spaceless counterparts. These answers are obtained using models of spatial competition, of which the Cournot mill pricing models are new. IN SPATIAL competition, significant transport costs and economies of scale bestow market power upon firms. This paper addresses two questions about spatial competition. First, does spatial price discrimination yield lower prices and higher social welfare (producer plus consumer surplus) than fo.b. mill pricing? Under spatial price discrimination, differences in the delivered prices charged by a firm bear no necessary relationship to differences in transport costs. In contrast, a mill pricing firm sets a single price at its plant, and customers bear the cost of transport. This paper answers this question for the cases in which firms adopt the Bertrand or Cournot conjectures concerning how rivals will react to price and output changes. This question is important because of the superficial appeal of mill pricing, which stems from its imitation of the spatial structure of marginal costs. The presence of spatial price discrimination, by contrast, is often considered to be evidence of the presence of market power. At least in part for these reasons, the US Robinson-Patman antitrust act and Great Britain's Price Commission favor mill pricing. Nevertheless, spatial price discrimination remains ubiquitous in the US, Europe, and Japan (Greenhut [1981]). The second question is: how does the introduction of space into the original oligopoly models of Cournot and Bertrand change their results? Cournot

Dynamic Nonlinear Pricing in Networks with Interdependent Demand

Abstract: We consider the pricing decision for a new product whose consumption value increases as the network of adopters expands. This demand interdependence is a characteristic feature of telecommunications networks. The paper analyzes the case of a single supplier offering the product to a heterogeneous population. Consumers decide on network access and consumption quantity. The pricing decision consists of choosing a pricing schedule over the dimensions of quantity and time that maximizes the present value of a weighted sum of total surplus and producer profits, subject to the dynamics of market growth. We find that the decision can be decoupled into two nested optimization problems: a given some market size, what should the optimal nonlinear price schedule be? and b how should the price schedule be changed optimally over time? This separation enables us to solve the pricing problem. Explicit consideration of the dynamics, the discounting of future surpluses, and the extent of market growth anticipation affect not only the price and network size trajectories, but also their steady-state equilibrium values.

Price Adjustment Costs and the Output-Inflation Trade-off

Abstract: When prices are costly to adjust, there is a trade-off between the rate of inflation and the firm's average level of output. This trade-off is the result of fully optimizing behaviour by the firm. Sufficient conditions are developed for inflation to have no effect on output. However, these conditions are unlikely to be met in practice. This suggests that the superneutrality of money hypothesis is incompatible with the type of demand and cost curves normally encountered in economic theory. If the discount rate is positive, moderate rates of inflation will always lead to higher levels of output.

Strategic Competition and the Persistence of Dominant Firms: a Survey

Abstract: In the struggle to create, maintain and expand favourable market positions, firms’ actions are intended not only to affect the current conduct of rivals directly, but also to have an indirect effect by altering market structure in a way which constrains the rival’s subsequent actions. In this dynamic process, market strategies or conduct (the control variables) interact with market structure (the state variable); and current conduct can become embedded in future market structure through strategic investments made by firms to bar entry and reduce intra-industry mobility. (For an analysis of this view of industry dynamics, see Jacquemin, 1972; Caves, 1976, Part I; Caves and Porter, 1977; Spence 1981a, p. 51; and Stiglitz, 1981, p. 187). Of course, not all investments made by firms have the intended effect on market structure, and the purpose of this survey is to consider a recent body of literature which has devoted itself to precisely this point.1 This work is of interest because of the new light it has shed on the combined structural and strategic origin of market power; that is, on the hoary question of the persistence and profitability of dominant firms (compare Posner, 1972, p. 130 with Williamson, 1975, p. 218 for contributions to this old debate). The literature seems to have coalesced around two basic types of model.

Nonlinear Prices and the Regulated Firm

Abstract: This paper examines the problem of a regulated utility that sells output according to a nonlinear price schedule. Three results are obtained. First, rate-of-return regulation lowers the price schedule charged by the firm along its entire length. Second, some units of output will always be sold at a marginal price below true marginal cost. Third, a move from linear to nonlinear prices at a given fair rate-of-return can lead to an unambiguous increase in welfare.

Optimal Dynamic Pricing in an Oligopolistic Market: a Survey

Abstract: The article deals with some important issues in relation to the determination of optimal pricing policies in an oligopolistic market This problem has been approached by using different bodies of research, eg economic theory, marketing science and game theory However, many models are still inadequate in their treatment of the dynamics of pricing as well as the problems of competitive interactions

Non-Price Provisions in Long-Term Natural Gas Contracts

Abstract: Current distortions in natural gas markets have raised questions about the general efficiency of the contracting process in the natural gas industry as it proceeds through phased-in wellhead deregulation under the Natural Gas Policy Act of 1978 (NGPA).1 Attention has increasingly focused on provisions in wellhead contracts that tend to limit price adjustments in an environment of market uncertainty, and on differences in minimum purchase requirements across field contracts which have led pipelines to "shut in" suppliers with low-priced contracts because of higher "take" obligations for high-priced gas. Some observers have suggested that strong oversight and supervision of wellhead contracts, or even government-instituted changes in the structure of such contracts, are necessary. In this article we argue that the principal nonprice provisions in wellhead contracts provide vital functions in allocating risks and reducing the costs of transactions between producers and pipelines in such a way that some degree of rigidity in gas markets is inevitable with or without price controls. However, we also argue that the incidence of these provisions in existing contracts signed during the 1970s, and thus the magnitude of current market rigidities, are the direct result of pent-up excess gas demand stemming from the earlier era of field price regulation.2 This hypothesis has significant implications for the design of public policy by highlighting the importance of distinguishing that portion of current contractual rigidities which is endemic to field markets from rigidities rooted in the legacy of field price regulation. The latter rigidities are diminishing over time as the upstream sector of the gas industry is increasingly deregulated and thus adjusts away from chronic excess demand toward market-clearing conditions.3 Thus, an important conclusion of our analysis is that while there may be a role for government in promoting adjustments of existing field market contracts, wholesale regulatory intervention in future contractual practices is unlikely to yield much benefit. However, a strong case can be made for regulatory reform aimed at promoting flexibility a d efficiency of market performance. The balance of the article is divided into five part . The next section analyzes the sources of transactions costs and risks inherent in the

Mortgage Pricing: What Have We Learned So Far?†

Abstract: Much progress has been achieved in the valuation of call options and mortgages. Preliminary evidence suggests that the observed term structure of interest rates (the full structure, not just the end-points) and a reasonable estimate of the volatility of spot rates is sufficient for pricing purposes. Knowledge of the precise nature of the interest-rate process and the exact market price of interest-rate risk, the not-well-identified determinants of the term structure, are not necessary for pricing. Moreover, the number of interest-rate state variables is also of little import, again holding the term structure and rate volatility constant.

Rational Expectations and Price Rigidity in a Monopolistically Competitive Market

Abstract: This paper analyses monopolistically competitive markets under incomplete information, facing unanticipated disturbances. Firms determine their prices before they have information about other firms' prices, and form their expectations about the average price rationally. If the market becomes very competitive in the sense that the price elasticity of individual demand is close to infinity, then the average price is completely insensitive to short-run unanticipated disturbances. In the intermediate case, if (a) cost disturbances are uniform and (b) demand and cost disturbances are correlated, then the average price is sensitive to cost and insensitive to demand.