Showing papers on "Limit price published in 1989"

Chapter 10 Price discrimination

Abstract: 4. Summary As we indicated at the beginning of this chapter, price discrimination is a ubiquitous phenomenon. Nearly all firms with market power attempt to engage in some type of price discrimination. Thus, the analysis of the forms that price discrimination can take and the effects of price discrimination on economic welfare are a very important aspect of the study of industrial organization. In this survey we have seen some of the insights offered by the economic theory of price discrimination. However, much work remains to be done. For example, the study of marketing behavior at the retail level is still in its infancy. Retail firms use a variety of marketing devices — sales, coupons, matching offers, price promotions, and so on — that apparently enhance sales. The marketing literature has examined individual firm choices of such promotional tools. But what is the ultimate effect of such promotions on the structure and performance of market equilibrium? What kinds of marketing devices serve to enhance economic welfare and what kinds represent deadweight loss? One particularly interesting set of questions in this area that has received little attention concerns the computational costs involved in using complex forms of price discrimination. In the post-deregulation airline industry of the United States, airlines have taken to using very involved pricing schemes. Finding the most inexpensive feasible fight may involve a considerable expenditure of time and effort. What are the welfare consequences of this sort of price discrimination? Do firms appropriately take into account the computational externality imposed on their customers? Even in more prosaic case of public utilities, pricing schedules have become so complex that households often make the “wrong” choice of telephone service or electricity use. Questions of simplicity and ease-of-use have not hitherto played a role in the positive and normative analysis of price discrimination. Perhaps this will serve as a fruitful area of investigation in future studies of price discrimination.

Volatility, price resolution, and the effectiveness of price limits

Abstract: Following the market crash in 1987, there has been increased interest in the usefulness of price limits as well as other forms of market controls. The purpose of this research is to investigate price limits and the empirical behavior of futures prices for a selected group of commodities around price limits. For the group of commodities examined in this research, the empirical results show that for the time periods analyzed, in general: 1 The period of time immediately preceding limit moves is characterized by major changes in the direction of the limit price while following the limit move; prices tend to either stabilize or reverse directions, thus suggesting that price limits may provide a cooling-off period for the market. 2 Price limits also appear to be accompanied by substantial reductions in volatility. This attenuation of volatility in the post-limit period and the maintenance of volume in the post-limit period tend to suggest that liquidity may not be severely impaired by the limit move process.

Commentary: Volatility, price resolution, and the effectiveness of price limits

Abstract: Since the market crash on October 19, 1987, it has been commonplace in policy circles to speak of the virtues of circuit breakers—devices for halting or limiting trading when prices have moved “too much.” Some see it as self-evident that devices such as price limits curb “excess volatility,” while others suggest that circuit breakers interfere with the price discovery process and the impounding of information in market prices. Surprisingly, few empirical researchers have attempted to measure the impact of circuit breakers on price volatility or to examine whether volatility fluctuations arise from “speculative overreaction” or “information arrival.”

The Role of Potential Competition in Industrial Organization

Abstract: Potential competition has been recognized as a mechanism to control the exploitation of market power at least since the work of J.B. Clark (1902), but it was not until 50 years later that economists, most notably Joe Bain and Paolo Sylos-Labini, refocused attention on the idea. With inputs from the theories of imperfect competition, optimal control, and dynamic games, their work evolved into ever more sophisticated models of the reactions of existing competitors to the threat of new competition. Although the most appropriate models of competitive interaction are those which begin with a specific industry, a number of theories have been proposed which attempt to develop more general conclusions. My purpose in this paper is to develop an understanding of the strengths and limitations of these alternative theories by examining the available theoretical, empirical and institutional knowledge. Rather than attempt the Sisyphean task of recounting every model which relates conditions of entry and market performance, I have partitioned the analysis into four major schools of thought, according to their most central propositions. These are the traditional model of limit pricing, dynamic limit pricing, the theory of contestable markets, and the market efficiency model. Traditional limit pricing models rest on the assumption that firms respond to entry, but are able to earn persistent profits when the structural characteristics of markets make entry difficult. Dynamic limit pricing is similar, but emphasizes that markets can only be temporarily protected from entry. Contestability theory, in its pure form, asserts that potential competition is as effective as actual competition in controlling market performance. The efficient markets hypothesis, broadly interpreted, states that markets are workably competitive and that the market structure reflects differential efficiency, not strategic behavior. While one can construct many other hypotheses about potential competition, these classifications

Entry and Exit

Abstract: Analyses of industrial competition have attained a new vigor with the application of game-theoretic methods. The process of competition is represented in models that reflect genuine struggles for entry, market power, and continuing survival. Dynamics and informational effects are captured explicitly, although so far only in simplified formulations. Recognition of the importance and intricate complexities of competitive processes began a half-century ago in the work of Joan Robinson (1933), and the first game-theoretic formulations were developed by Shubik (1959) a quarter-century later, but the flowering of this approach began in the 1980s with the recognition that informational asymmetries are crucial ingredients to bring the flavor of struggle to the ensuing dynamic processes. Models that admit both dynamics and private information formulate competition as essentially a bargaining process in which credible communication is limited to costly actions. Each firm’s claim to survival is signalled by its willingness to offer lower prices longer than others. Firms’ struggles for the advantages of monopoly power bring benefits to consumers by dissipating a substantial part of the subsequent profits in the battle to obtain them. This is not the entire story of competition, of course, since also important are, for example, races for cost advantages, product development and differentiation, as well as imposition of search and switching costs on customers to sustain monopoly pricing; nevertheless, it brings theories that describe more realistically the Darwinian aspect of competition.

The theory of food price stabilisation

Abstract: a small and very volatile fraction of total domestic food production. Many countries aim at food self-sufficiency, with the consequence that the country may be an exporter in good years, but an importer in bad years. International and domestic transport and handling costs are a significant fraction of the average price of cereals, so the domestic price fluctuations will tend to be an amplified version of international price fluctuations - the difference between the domestic price in exporting and importing years will be twice the transport costs if the world price is unchanged. It would require a strong negative correlation between domestic and world supply to offset this additional source of instability.1

Price Wars in Price-Setting Supergames

Abstract: This paper presents a method of generating price wars in price-setting supergames. The market is one where symmetric oligopolists produce a differentiated product and use price as a strategic variable. Prices are posted and can be observed by all. There is, thus, little uncertainty or scope for secret price cutting. Nevertheless, price wars occur; they are precipitated by periodic, but infrequent, demand shocks. Firms use the wars to learn about changed conditions in the market so that they can calculate the new stationary Nash equilibrium. Learning is modeled in a Bayesian fashion via the Kalman filter. Copyright 1989 by The London School of Economics and Political Science.

Price competition in multimarket duopolies

Abstract: In this article, we analyze the pricing strategies offirms that compete for the demand of an assortment of goods in a complete information static framework. In particular, we model the competition between two symmetric firms in a market that consists of two types of consumers, each of which may buy one unit of both goods sold by the two firms. We show that all Nash equilibria are such that neither firm charges the same price for both goods. Interestingly, under certain conditions, thefirms jointly price discriminate between the two types of consumers and may even achieve the same level of profits as if they maximized joint profits, for another set of conditions, the unique equilibrium is such that the price for one of the goods and the price for the bundle are the same as the price of the good in a standard Hotelling model with one good. Finally, we show that if these equilibria exist, both firms prefer to sell both goods rather than specialize in either one of them. These results are a direct consequence of the interplay between the multimarket rivalry and the existence of more than one market segment, as modelled in this article.

The Equilibrium and Optimal Timing of Price Changes

Abstract: This paper studies the welfare properties of the equilibrium timing of price changes. Staggered price setting has the advantage that it permits rapid adjustment to firm-specific shocks, but the disadvantages that it causes unwanted fluctuations in relative prices and that, by creating price level inertia, it can increase aggregate fluctuations. Because each firm ignores its contribution to these problems, staggering can be a stable equilibrium even if it is highly inefficient. In addition, there can be multiple equilibria in the timing of prices changes; indeed, whenever there is an inefficient staggered equilibrium, there is also an efficient equilibrium with synchronized price setting.

Incorporating Consumer Price Expectations in Diffusion Models

Abstract: In this paper the sensitivity of the optimal price path of a new durable product to the price expectations of consumers is examined. Consumers enter the market every period in a diffusion type framework. During the initial periods more consumers enter the market due to word of mouth influence, but in the latter periods saturation effects set in. The entering set of cohorts form expectations about future prices; and in a stable equilibrium, these expectations are fulfilled. It is shown that the price path is cyclical with the following properties: at the beginning of the cycle, the price is at its highest level; it falls monotonically over time reaching a low price at the end of the cycle equal to the reservation price of the consumers willing to pay less; the cycle lengths are not equal. The sensitivity of the optimal price path to model parameters is explored through a numerical procedure.

Spatial Price Policies Reconsidered

Abstract: The authors provide a comparison of three spatial price policies: uniform pricing, mill pricing, and spatial price discrimination. Profits, consumer surplus, and social surplus are compared in a duopoly model. Until recently, oligopoly analysis has been stalled because of nonexistence of equilibrium. Through the addition of product heterogeneity (using a logit specification), existence can be restored and price policies compared. In contrast to monopoly analysis, consumer surplus is highest under uniform pricing and lowest under mill pricing. Profit and social surplus follow the opposite ranking. Government regulation to encourage mill pricing may therefore benefit firms to the detriment of consumers. Copyright 1989 by Blackwell Publishing Ltd.

Optimal price dynamics and speculation with a storable good

Abstract: This paper analyzes as a dynamic game the optimal price and storage strategies of, respectively: (a) the seller of a storable good, who must keep pace with inflation but incurs a cost to changing his price; (b) his customers, who speculate on the timing of price adjustments to buy and store just before. A unique (Markov) perfect equilibrium is shown to exist, and is fully characterized. rt generally involves a phase of mixed strategies, during which the seller tries to deter speculation by injecting uncertainty into its price dynamics, while speculators store in increasing numbers, with possibly a final "run" on the good. The stochastic price policies of a large number of such firms are shown to aggregate back to a price index growing at the rate of general inflation in response to which they arose. The model thus establishes that: (a) a constant rate of aggregate inflation can at the same time generate and cover up significant uncertainty and social costs at the microeconomic level; (b) speculation can be destabilizing and socially wasteful, even in the absence of shocks and imperfect information. Most importantly, they provide a theoretical foundation for the frequently encountered claim that inflation causes price uncertainty.

Price reaction functions and conjectural variations

Abstract: Price conjectural variations are estimated to measure the degree of price competition in a product differentiated oligopoly. The empirical model is a simultaneous equation system of product demand and price reaction functions. Own and cross price demand elasticities are estimated in conjunction with the price conjectural variations and price reaction function elasticities. The conjectural variations are estimated for pairs of ready-to-eat breakfast cereal products using brand price and quantity data. The empirical results reject competitive brand pricing behavior in favor of independent or collusive pricing. Further, the hypothesis of a unique consistent conjecture is rejected.

Price Filtering: Restricting Price Deals to Those Least Likely to Buy Without Them

Abstract: Discusses methods of tailoring prices to buyers who differ in their willingness to pay while maintaining a semblance of fairness and uniformity – filtered pricing. Considers microeconomic theory, geographic discrimination, filtering methods such as couponing, skimming, quality and features, sales, as well as newer methods like rebates and price packaging. Surmises that there is a challenge to create new price filtering techniques, without ignoring the ethical questions involved.

Asymmetrical Price Conjectural Variation in Spatial Competition Models

Abstract: This paper examines the comparative statics of firms' equilibrium prices (generated by price reaction functions) in spatially competitive oligopolies. Implications for firms' pricing behaviors—generated by asymmetrical price conjectural variations—are discussed for one-dimensional markets. The analytical properties of equilibrium prices are first established for the case of inelastic consumer demand. Then the results of a price sensitivity analysis of market parameters (demand intensity, transportation rate, etc.) are presented for the more complicated case of elastic consumer demand. The paper demonstrates that the geographic extents of rivals' market shares are not only functions of firms' pricing behaviors but also the interaction of such behaviors with various market parameters.

Price variation in spatial markets: the case of perfectly inelastic demand

Abstract: This paper analyzes short-run price variation in one-dimensional (i.e., circular, linear) spatial markets where both producers and consumers are numerous. Price reaction functions are established for firms under symmetrical price conjectures. For perfectly inelastic consumer demand each firm's equilibrium price is shown to depend upon distance-decay effects in both firms' locations and marginal costs. The rate of distance decay in these effects is inversely related to the degree of price conjectural variation in the market. Boundary effects in spatial markets are also shown to influence these distance-decay rates and, thus, patterns of firms' equilibrium prices.

Flanking in a Price War

Abstract: This study tested the notion that stock-up grocery goods would have a different pattern of price sensitivity than nonstock-up goods. We used covariance design within a Bayesian decision framework to select the optimum price treatment strategy as well as the dollar risk associated with this strategy. The Bayesian decision framework also provided an optimal stopping rule for the experiment. The test results were successfully employed in a real-life retail grocery setting when an anticipated price war occurred. A small grocery chain, rather than responding in kind to competitive price cuts, implemented a precise, profit-preserving counterattack. As a result, the chain increased market share substantially, at the cost of only 1.2 percent of its gross margin, during the price war.

Customer Markets and Price Sensitivity

Abstract: This paper investigates the behavior of prices in customer markets of the Phelps-Winter type under uncertainty. It is shown that the responsiveness of prices to short-run demand and cost changes depends crucially on whether the marginal customer is price risk averse or price risk loving. If he is price risk averse (loving), then the customer market price is less (more) flexible than the monopoly price. Competition makes the customer market price more rigid (flexible) if the marginal customer is price risk averse (loving). The scope of rigid customer market prices is wide if near-rational behavior of customers and the adjustment cost in the consumption process are taken into consideration. Copyright 1989 by The London School of Economics and Political Science.

Domestic energy pricing policies

Abstract: The first chapter of the report sets out a general pricing framework for formulation of domestic pricing policies for pricing of crude oil, petroleum products, and natural gas. The second chapter examines the formulation of electricity pricing policy meeting the equity, economic efficiency, and financial viability criteria. In this regard, the chapter discusses the long run marginal cost approach as a framework for analyzing system costs and for setting tariffs. The third chapter focuses on the need for evaluating the macro economic implications, and analyzing the effects of energy price adjustments on industry, transport, and household sectors. It examines international experience of domestic energy price adjustments in the oil importing and the oil exporting countries, and presents alternative pricing policy options. A common theme in the report is that given the problems of debt and public revenue, the policy makers in the developing countries need to continue to pursue the goal of economic pricing of energy products and electricity. The present situation of low international fuel prices offers the best opportunity for completing the process of adjustment of domestic energy prrices to reflect their economic costs.

The demand for energy by u.k. manufacturing industry

Abstract: Using an intertemporal maximizing model incorporating the costs of adjustment of the capital stock, demand elasticities for aggregate energy input and for individual fuel inputs are derived for the U.K. manufacturing industry for the postwar period. The results confirm the price sensitivity of energy subtypes and aggregate energy. In the long run, the demand for gas and petroleum appear to be significantly price elastic. The results also suggest that the full effects of the 1978-79 energy price shock have yet to be felt. Copyright 1989 by Blackwell Publishers Ltd and The Victoria University of Manchester

Costing and pricing

Abstract: If you ask most people about cost and price they believe they understand exactly what is meant. Cost is what you pay for an item and price is what the seller asks — and for most buyers the transactions are the same. However, cost and price are different to different players in a transaction. There is the cost of creating, developing, producing, marketing, supporting, distributing, storing, and selling an item. There is the retail or list, wholesale, sale, or discounted price at which the item is sold and which the purchaser pays. It sounds simple, but in reality it is a complex process involving a high degree of subjective judgment.

Price Leadership with Incomplete Information

Abstract: The dominant firm is a price searcher for the market. As such, it is in the position of providing a public good for fringe suppliers. This public good consists in the price setter's search for the best price. This paper presents a model of the dominant firm's behavior in acquiring information about demand where such information is costly. The results accord with intuition. For example, the larger the market share of the dominant firm, the more information it acquires.

Price discrimination in retail markets

Abstract: The hypothesis that price discrimination exploiting the consumer's willingness to pay for quality can occur in multi-firm industries is confirmed using microdata on retail gasoline prices. A test based on the price differentials at stations providing only one service quality (full or self service) and stations providing both qualities is developed and implemented with controls for variations in outlet, brand and local market characteristics. The data suggest that price discrimination at the retail level adds at least ten cents per gallon on average to the price of full-service gasoline.

Producers' markets: A model of oligopoly with sales costs

Abstract: A producers' market is one in which individual producers set prices and incur most transaction costs, as they engage in sales promotion or marketing activities. 1 show that non-collusive profit-maximizing behavior leads to the emergence of the lowest marginal-cost producer as the ‘price leader’ (but not as a monopolist) in a simple producers' market for a homogeneous good. The comparative statics of the simple model (which allows no price discrimination or buyer tradeoff between sales promotion and price) suggest that the prevailing price will not be very responsive to demand shocks, or to cost shocks that do not directly affect the price leader, but will respond via a roughly proportional mark-up to the price leader's costs. On the other hand, marketing costs and profits respond almost proportionately to demand shocks.

Chinese experience in the introduction of a market mechanism into a planned economy: the role of pricing

Abstract: . A brief review is first presented of the changes in pricing institutions in China since 1949, with particular emphasis on the shift from an equilibrium price system to a distorted price system. The authors argue that distorted prices are harmful to economic growth even in a planned economy, since even an experienced economic planner can never escape from the full implications of a distorted price system. Examples are given showing the detrimental results of such a system. The central point of China's economic reform is the extension of decision-making power to enterprises and the introduction of a market mechanism so as to improve microeconomic efficiency. But such a goal cannot easily be achieved due to the false information provided by the distorted price system. So price adjustment becomes an issue of primary importance, and the authors discuss the difficulties for price adjustment posed by various interest groups.

Electric power system planning under time-of-use rates

Abstract: Investment decisions under time-of-use rates and their relationship to utility system planning are examined. Optimal investment and price under social welfare maximization are derived and compared with the results of static analyses. For a multiplant case, the optimal pricing and investment policy are characterized by a plant of lower cost in a wide range of cost parameters. It is found that the second-best price, the so-called Ramsey price, is higher than the best price by an amount proportional to the ratio of deficit to revenue of an electric utility. >