Showing papers on "Limit price published in 1990"

A pricing method for options based on average asset values

Abstract: In this paper, we present a new strategy for pricing average value options, i.e. options whose payoff depends on the average price of the underlying asset over a fixed period leading up to the maturity date. Such options are of particular interest and importance for thinly-traded assets (e.g. crude oil), since price manipulation is inhibited, and both the investor and issuer enjoy a welcome degree of protection from the vagaries of the market. These options are often implicit in a bond contract, although they also appear in a straightforward form. Our results suggest that the price of an average-value option will always be lower than that of a standard European option. Our pricing strategy involves Monte Carlo simulation with variance reduction elements and offers an enhanced pricing method to both arbitragers and hedgers, as well as to the issuers of such bonds.

Price formation of fish : An application of an inverse demand system

Abstract: Inverse demand systems explain price variations as functions of quantity variations. They have properties analogous to those of regular demand systems. There are very few examples of their empirical application. In part this is due to lack of data for which price is the decision variable and the quantity given. The case of fish landed at Belgian sea ports appears to suit an inverse demand system well. A Rotterdam variant of such a system in estimated. Allais interaction intensities have been derived and show a reasonable pattern.

The Formation of Expected Future Price: A Reference Price for Forward-Looking Consumers

Abstract: Among numerous possible reference prices, expected future price is important. A consumer's expectation of the future price of a brand plays a crucial role in the decision to buy now or later. Failure to characterize reference price as a forward-looking concept, a common practice in the reference pricing literature, violates premises of neoclassical economic theory and leads to questionable modeling applications. Explicit measures of future price expectations were obtained and used to test various models of expectations formation, providing insight into the effect of expected future price on consumers' responses to price promotions and brand choice decisions.

Actively Learning About Demand and the Dynamics of Price Adjustment

Abstract: By observing the quantity demanded at particular prices, a firm may learn about the parameters of its demand curve. In such an environment, price changes obstruct the learning process by inducing additional noise. The authors' paper constructs a dynamic model where a price-setting firm endogenously controls the speed of learning. The model provides a possible explanation for price inertia, as a stable pricing policy allows the firm to learn more rapidly, which improves future expected profits. Furthermore, even in the long run, learning continues to affect the firm's optimal price. Copyright 1990 by Royal Economic Society.

Uncapacitated plant location under alternative spatial price policies

Abstract: Given a spatial system of clients' demand functions, this paper proposes solution methods to determine the prices, the number, the locations, the sizes, and the market areas of the plants supplying the clients in order to maximize the profit of the firm. Three alternative spatial price policies are considered: i uniform mill pricing, in which the same price is charged to the clients at the plant door, ii uniform delivered pricing, in which clients pay the same delivered price irrespective of their locations, and iii spatial discriminatory pricing, which is such that the firm sets client-specific prices based on their locations. Computational results are reported.

Potential Competition in the Deregulated Airlines

Abstract: Using a new and unique data set, this paper applies a systems approach to the study of potential competition, prices, and entry relations in airline city-pair markets. Consistent with limit pricing models, future entry is directly influenced by current prices. Current prices thus appear to provide an important signal to potential entrants about the probability of profitable entry. While results indicate the existence of barriers to entry, these barriers appear to have no independent effects on price beyond there effect on actual competition through increases in concentration. Copyright 1990 by MIT Press.

Regional Fed Cattle Price Dynamics

Abstract: The lead-lag relationships present in the regional price discovery process are important indicators of market performance. Differences across markets in the speed of adjustment to evolving information may have implications for pricing efficiency within these markets. This study estimates intertemporal price relationships among 11 regional slaughter cattle markets. Larger volume markets, located in the major cattle feeding regions, were the dominant price discovery locations. Price adjustments across markets were completed in one to two weeks in the large volume markets located relatively close to each other and in two to three weeks in the more remote, smaller volume markets. Commodity price at a particular location is determined by local supply and demand conditions. Spatial arbitrage should force the differences in prices across locations to be no greater than transportation costs. Thus, with efficient arbitrage activities, market prices will approach a unique spatial equilibrium. However, spatial arbitrage may not be instantaneous. This is, the physical arbitrage process may take time to complete, and it may take time for arbitragers to recognize that an arbitrage opportunity is present. Thus, commodity prices may be slow to adjust to changes in supply and demand. The purpose of this study is to determine the dynamic price relationships among regional slaughter cattle markets. Price discovery is the process by which buyers and sellers arrive at specific transaction prices through negotiation, bidding, formula, or public establishment (Tomek and Robinson). Price discovery is primarily "concerned with the actions of buyers and sellers as they interact in the market place on the basis of something less than perfect information concerning the level of supply and demand" (Purcell, p. 107). The level of information origi

Market Structure, Entry, and Performance in Korea

Abstract: This paper applies a recursive model of structure-entry-performance with structural feedbacks to sixty-two Korean manufacturing industries for 1976-81. The results strongly support the market power hypothesis. The results also indicate that, despite active government intervention, the invisible hand is working: structure is evolving as expected with high profits leading to entry and consequently lower profits. However, there is little support for limit pricing hypotheses in this explosively growing economy. Copyright 1990 by MIT Press.

Maintaining Price Stability: A Proposal

Abstract: The Neal Resolution would make price stability the dominant goal of monetary policy. This paper proposes giving the Fed and Fed-watchers a measure of whether ongoing policy is consistent with this goal.

Privatization, price regulation, and market entry an asymmetric multistage Duopoly model

Abstract: This paper deals with a privatized firm facing potential market entry. The firm has inherited excess capacity from its public past. The players have asymmetric costs. Only the entrant must install new capacity, which incurs positive capacity installation costs. The paper considers the subgame perfect equilibria in a four-stage game with perfect foresight. The incumbent and the entrant first decide on the capacities and subsequently on the prices. In both cases the incumbent moves first. The second main part of the paper deals with price-cap constraint on the incumbent. The paper shows that a binding price constraint does not necessarily lead to an increase in capacity and output (capacity trap). If the price constraint is binding and market entry occurs, the entrant sells at a higher price than the incumbent.

Results of a Price Forecasting Competition

Abstract: ployed by each are described in detail in preceding papers and are only briefly described here. Berck and Chalfant employed a statistical package shown as ACE which, when given a dependent variable, y, and a set of independent variables, X, searches for the 4 = g(y) and 0 = h(X) that maximizes the correlation coefficient between 0 and 4. It then uses these transformations of the variables to forecast 4 and recover a forecast of y by applying the inverse transformation 9 = g-'(4). To forecast the price of feed, Berck and Chalfant included one-period and two-period lagged values of the price of feed deflated by the price of other goods and real per capita income lagged three times as independent variables. They used the deflated price of feed as the dependent variable, then recovered it with an AR(1) prediction of the price of other goods. For the forecasts of the price of livestock, Berck and Chalfant used seven independent variables: the deflated price of feed lagged once and four periods, per capita consumption of livestock lagged one, two, and four periods, lagged real per capita income, and the lagged price of other goods. They did not deflate the price of livestock.

Testing Implications of Spatial Economics Models: Some Evidence from Food Retailing

Abstract: Testing Implications of Spatial Economics Models: Some Evidence from Food Retailing A major implication of standard economic theory is that adding firms to a market will increase competition and reduce prices. Adding space to the economic problem complicates the analysis and possibly alters this result. Specific sites are strictly limited in that a site cannot be replicated. If only one firm can occupy a given site, then each firm has locational characteristics that cannot be exactly copied by other firms. Thus, the standard assumption of the ability of identical firms to enter and exit the market does not hold. One of the interesting questions addressed by spatial economics models is the effect on product price (termed mill price in the models) when new firms enter a given spatial market area. Does product price fall, as predicted by standard (nonspatial) economic theory, or is there a different result? Food retailing is an excellent market in which to study this issue. Consumers make frequent visits to retail food outlets, and location of the outlets is important to consumers' transportation costs. The purpose of this paper is twofold. First, theories of spatial economics are reviewed for their implications about the effect of new entrants on product price, and application is made to food retailing. Second, the effect of an entrant on retail food prices in a given spatial market is tested using a unique data set from supermarkets located in Raleigh, North Carolina. REVIEW OF SPATIAL THEORIES The spatial economics problem has been modeled as an oligopolistic market. Due to the small number of firms, it is assumed that each firm must take into account the potential responses of competing firms before settling upon a market strategy. Two conjectures about the potential responses of rival firms dominate the spatial economics literature: the Hotelling-Smithies (H-S) conjecture (Hotelling 1929; Smithies 1941) and the Loschian conjecture (Losch 1954). H-S assumes that each firm conjectures the prices of competitors to be fixed. (1) Under normal assumptions, the model gives results consistent with standard, spaceless theory: the entry of new firms lowers product price. Capozza and Van Order (1978) show that entry in the H-S conjecture can have the opposite result of raising, rather than lowering, prices. This occurs when firm density is low and consumer transportation costs are a large proportion of total product price at the edge of the market. Capozza and Van Order (1978) also show that the results of the H-S conjecture are qualitatively unaltered for any price conjectural variation between one and minus one, that is, firms react to the price changes of competitors, but they don't react on a one-to-one basis. The Loschian conjecture assumes that each firm matches price changes by competing firms on a one-to-one basis. (2) Loschian conjecture results in new entrants raising, rather than lowering, product price for the following reason. The Loschian firm assumes its market area is fixed and consequently sets prices like a monopolist within its market area. Firms are subject to demand elasticities that are net of transport costs. When a linear consumer demand is assumed, price elasticity for any given firm increases when transport costs are subtracted from consumer demand. Higher transport costs result in an increase in price elasticity. As new firms enter the market, each firm loses its most distant customers, resulting in a decrease in average transport costs for consumers, a decrease in aggregate price elasticity, and an increase in product price (Benson and Faminow 1985). This Loschian result, however, is dependent on the assumption of a linear demand curve. Benson (1980a) shows that when a negative exponential demand curve is assumed in the Loschian conjecture, product price falls as new firms enter. The H-S conjecture as modified by Capozza and Van Order (1978), in which firms react to the price behavior of competitors but not on a one-to-one basis, would seem to be the more applicable spatial economics model for food retailing. …

Price rigidity, inflation and market concentration: Some Canadian evidence from the 1970s

Abstract: In the literature on industrial pricing there is a long-standing dispute over the theoretical rationale for, and the empirical validity of, price rigidity. Briefly, the arguments is that the speed of price adjustment is a function of market structure: in competitive markets prices are flexible (they adjust rapidly to supply and demand shocks), but in oligopoly they can be relatively rigid (they adjust only slowly, if it all, to these same shocks). 1 But, because the theoretical basis fot the rigidity hypothesis is decidedly ad hoc, it is often summarily dismissed. 2 Empirically, however, a number of studies for various countries and time period have found relationship between concentration (a proxy for oligopolistic market structure) and price change and/or some other measure of the speed of price adjustment, compatible with price rigidity. 3 Although these result are not totally unambiguous, 4 the Canadian evidence, at least prior to the 1970s, strongly supports the rigidity hypothesis (Sellekaerts and L...

Disjoint search for the prices of two goods consumed jointly

Abstract: The extensive literature on searching for price information deals almost exclusively with the search for the price of a single good. Casual empiricism shows that consumers buy more than one good and search for the price of more than one good before any single purchase. More importantly, not all of these goods are sold at the same store. Search theory should therefore consider the problem of multiple search in order to determine the robustness of conclusions based on a theory developed from the problem of search for the price of a single good. This paper reveals a number of insights that emerge when decisions taken in other markets are made explicit. Consider the situation facing the builder and designer of a new house. Among other things, the builder must decide on the amount of insulation and the method of heating before construction starts. The decision depends on the prices offered; hence the builder will search for an acceptable offer when prices are not known with certainty. If a low price for heat is found, then little insulation is needed because the cost of lost heat is relatively low. When relatively little insulation is needed, the potential savings from a lower price of insulation are also small. Therefore the builder may be willing to accept a relatively high price for insulation in the event of costly search and having already found a low price for heat. More generally, the price that would be accepted in one market depends on what has been found in the other market. The influence of one market on another is not clear. Consider another example. When a low price for heating is known, the cost, in terms of lost heat, of windows may be low. Thus the builder can' install more windows at a lower opportunity cost

The Transmission of Price Information at Queensland Cattle Auctions

Abstract: In. the ideal competitive market, perfect or near perfect information flows will guarantee that prices andlor quantities will adjust quickly to any cha.nge in demand or supply conditions. There will be no long run opportunities for arbitrage. between geographically separate market places with price differentials refiectingpnly the cost of transfer between the markets. In this paper ~ the transmission of price information in Queensland cattle ~!lct~()ns is examined and the existence of long run arbitrage opportunities is inve~tigated.

Costs and benefits of agricultural price stabilization in Brazil

Abstract: In recent years, agricultural price stabilization policies have been recommended in Brazil as a way to reduce government intervention and open the sector for international trade without internalizing the instability of world prices The proposal discussed (and eventually implemented in 1987) was to establish a system of price bands around a moving average of past prices, with the government relying on stocks to defend the bands The authors evaluated the"band proposal"for six commodities, using historical data and posing this question: what would have happened if price bands had been adopted in the past six to ten years (compared with free trade)? There were two major findings First, the implications of adopting a band-rule policy depend heavily on the specific characteristics of the commodities Second, the welfare gains for risk reduction through agricultural price stabilization are unlikely to be large relative to the welfare gains from price reform that reduces market distortions for these six agricultural commodities More research into the macroeconomic implications of price stabilization policies is necessary, particularly in countries with unstable but moderate rates of inflation

Tariff-Limit Pricing, Relative Plant Scale, and the Eastman-Stykolt Hypothesis

Abstract: This paper provides a formal basis for the widely held proposition, sometimes called the Eastman-Stykolt effect, that the interaction of tariff protection and small domestic market size prevents Canadian firms from achieving scale efficiency. It considers a free-entry, Cournot-Nash equilibrium in a homogeneous goods industry protected by tariffs. The model demonstrates that the tariff-limit pricing effect can arise without appeal to collusion or product differentiation. Moreover, it is not appropriate to test for the Eastman-Stykolt effect by simply including the interaction of market size and tariffs in a regression explaining relative plant scale.

Product and Price Competition in a Regional Context

Abstract: In this paper, we use the concepts product and price competition to describe the early and late stages of the product cycle respectively. Central regions are expected to offer locational advantages to product competing production, while the opposite is true for price competing production. Based upon this expectation we develop hypotheses concerning the characteristics of product and price competition in central and peripheral regions with regard to productivity, employment, gross profit shares, and changes in such characteristics over time. Our empirical tests show that the differences between the periphery and the central regions with regard to product and price competition are in line with our expectations.