Showing papers on "Limit price published in 1992"

Growth Opportunities and the Stock Price Response to New Financing

Abstract: The author documents the effect of growth opportunities on the stock price response to security offerings. For equity offerings, the stock price decline for mature firms exceeds the decline for growth firms. For straight and convertible debt offerings, mature firms experience a significant price decline while growth firms experience no significant price change. Regression analysis indicates that the stock price response to new financing is significantly, positively related to a variety of growth opportunity measures. Holding growth opportunities fixed, the stock price response depends on the type of security offered (equity vs. debt) and, for straight debt offerings, Moody's bond ratings. Copyright 1992 by University of Chicago Press.

Market-structure determinants of national brand-private label price differences of manufactured food products

Abstract: This paper estimates the relationships between market structure and the Lerner index of monopoly constructed from price data on processed food products sold through grocery stores. A theoretical model of a differentiated oligopoly specifies two determinants of price-cost margins: the Herfindahl-Hirschman index of seller concentration adjusted for the elasticity of demand and the industry advertising-to-sales ratio. The results indicate that the three principal determinants of price-cost margin variation, in order of their impacts, are: advertising intensity, elasticity of demand, and concentration. Previous structure-performance studies that did not incorporate the elasticity of demand were probably misspecified.

Imperfect Price-Reversibility of U.S. Gasoline Demand: Asymmetric Responses to Price Increases and Declines

Abstract: This paper describes a framework for analyzing the imperfect pricereversibility ("hysteresis") of oil demand. The oil demand reductions following the oil price increases of the 1970s will not be completely reversed by the price cuts of the 1980s, nor is it necessarily true that these partial demand reversals themselves will be reversed exactly by future price increases. We decompose price into three monotonic series: price increases to maximum historic levels, price cuts, and price recoveries (increases below historic highs). We would expect that the response to price cuts would be no greater than to price recoveries, which in turn would be no greater than for increases in maximum historic price. For evidence of imperfect price-reversibility, we test econometrically the following U.S. data: vehicle miles per driver, the fuel efficiency of the automobile fleet, and gasoline demand per driver. In each case, our econometric results allow us to reject the hypothesis of perfect price-reversibility. The data show smaller response to price cuts than to price increases. This has dramatic implications for projections of gasoline and oil demand, especially under low-price assumptions.

Managing price, gaining profit.

Abstract: The fastest and most effective way for a company to realize maximum profit is to get its pricing right. The right price can boost profit faster than increasing volume will; the wrong price can shrink it just as quickly. Yet many otherwise tough-minded managers miss out on significant profits because they shy away from pricing decisions for fear that they will alienate their customers. Worse, if management isn't controlling its pricing policies, there's a good chance that the company's clients are manipulating them to their own advantage. McKinsey & Company's Michael Marn and Robert Rosiello show managers how to gain control of the pricing puzzle and capture untapped profit potential by using two basic concepts: the pocket price waterfall and the pocket price band. The pocket price waterfall reveals how price erodes between a company's invoice figure and the actual amount paid by the customer--the transaction price. It tracks the volume purchase discounts, early payment bonuses, and frequent customer incentives that squeeze a company's profits. The pocket price band plots the range of pocket prices over which any given unit volume of a single product sells. Wide price bands are commonplace: some manufacturers' transaction prices for a given product range 60%; one fastener supplier's price band ranged up to 500%. Managers who study their pocket price waterfalls and bands can identify unnecessary discounting at the transaction level, low-performance accounts, and misplaced marketing efforts. The problems, once identified, are typically easy and inexpensive to remedy.

BUYERS' STRATEGIES, ENTRY BARRIERS, and COMPETITION

Abstract: In markets where sellers have customer-specific investments, and buyers can make credible, but costly, commitments to switch suppliers, buyers' strategies attenuate the market power of sellers. Furthermore, since current prices and a buyer's decision to switch suppliers are related, limit pricing becomes an equilibrium. Limit prices increase with the time it takes a buyer to switch suppliers, and with buyers' switching costs, but fall with the level of sunk investments. Thus, sunk investments may restrain the sellers' ability to exert market power. The paper questions, then, the standard inverse relationship between market performance and sunk investments.

Staggered and Synchronized Price Policies Under Inflation: The Multiproduct Monopoly Case

Abstract: This paper analyses the optimum pricing policies of a multiproduct monopoly in the presence of inflation and fixed costs of nominal price changes. We examine the conditions which lead to staggered or synchronized pricing policies when the timing of price changes is endogenous. Two aspects of the decision problem are emphasized: the interactions in the joint profit function between the prices of the various goods and the interactions in the costs of price adjustment. We show that with positive interactions in the profit function and costs of price adjustments that are independent across products, staggering is unlikely. Depending on initial conditions, a firm may follow a staggered steady state or a synchronized steady state path. But the former is locally unstable while the latter is attained from a broad set of initial conditions. For a small rate of interest the staggered policy is optimal if! the interaction in profits is negative.

Spatial pricing in interdependent marhets

Abstract: . Conditions for spatial price equilibrium are derived for a set of firms in oligopolistic spatial competition, distributed at fixed locations in a heterogeneous region where consumer purchasing patterns are a probabilistic function of the price distribution rather than a deterministic function of proximity to firms. The resulting prices vary with accessibility to consumers or with the degree of local spatial monopoly, and result in non-zero profits for firms. Conditions describing the existence and stability properties of this spatial price equilibrium are defined, and are shown to be equivalent for two different hypotheses concerning disequilibrium pricing behavior: a partial price adjustment model and a Bertrand game. For two different profit goals, total profit maximization and profit rate maximization, it is shown that a spatial price equilibrium exists and is at least locally quasi-stable.

Effects of price uncertainty on consumer purchase budget and price thresholds

Abstract: This article examines how uncertainty about prices affects: (1) the budget consumers allocate for purchasing a product and (2) consumer price thresholds (i.e., the prices that are considered “too high” or a “good deal”). In an experimental setting, the purchase budget as well as the absolute values of both thresholds for uncertain subjects were higher than those for certain subjects. Moreover, a relatively large decline from the budget was needed before a price was considered a “good deal,” whereas a relatively small increase from the budget was sufficient for a price to be considered “too high.” Price uncertainty widened the difference between the upper (i.e., “too high”) price threshold and the budget, making uncertain subjects more tolerant to prices exceeding the budget than certain subjects. However, price uncertainty did not have a significant effect on the difference between the budget and the lower (i.e., “good deal”) price threshold.

Price Dispersion in a Market with Advance Purchases

Abstract: This paper examines price discrimination in a market where consumers learn their preferences over time. The products are perfect substitutesex ante, but there is horizontal differentiationex post. Air travel provides one example of such a market. In equilibrium, there is more price discrimination under duopoly than under monopoly, which is consistent with recent empirical evidence from the U.S. airline industry.

Delivered pricing, FOB pricing, and collusion in spatial markets

Abstract: In this situation the choice variable for the firm is a price system that specifies a price per unit of product at each location: each firm must choose a function p(x), where x is the distance between the location of the consumer and the location of the firm. In practice, different industries use different types of pricing systems, p(x), and this suggests that the prevailing pricing system depends on the structural elements of the market. When the pricing policy is FOB,' consumers can pick up the product at the mill, paying the mill price p and incurring the transportation cost from the producer's to the consumer's location, i.e., p(x) = p + t(x), or the seller may deliver the good to the buyer's location, as long as it charges mill price plus transportation costs. Delivered pricing policies are pricing rules p(x) that are not based on consumers picking up the product at the mill; the firm delivers the product at the consumer's location. In a perfectly competitive world with a continuum of firms, an FOB pricing system would be expected: p(x) = c + t(x), where c is the marginal cost of production. In the case of a market with two firms located at the

Price Discrimination in Competitive Markets

Abstract: We present models in which price discrimination in the context of a two-part price can occur in some competitive markets. Purchases take place in groups, which choose which firms to patronize. While firms are perfectly competitive with respect to groups, they have some market power over individual consumers, who are constrained by their groups' choices. We find that firms will charge an entry fee that is below marginal cost, and the second part of the price is marked up above marginal cost. The markup not only is positive but increases with the quality of the product.

Evaluation of Supplier-Restricted Purchasing Options Under Temporary Price Discounts

Abstract: Suppliers offering temporary price reductions may impose restrictions on special order sizes at die temporarily-reduced price Buyers may be restricted to purchase a compulsory minimum order size or select from a limited number of available order quantities at the reduced price This paper derives optimal ordering rules in response to supplier restrictions on special order sizes that accompany temporary price reductions Handled by the Department of Inventory

Sutton's Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration@@@Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration.

Abstract: The third area is critical for policy. This has kept our attention focused on the other two areas. Not until we understand the causes and consequences of concentrated industry structure can we comment on the relevant welfare economics. The positive economics of entry, exit, and the persistence of dominant firms and oligopolies are thus a core research topic. The positive questions are very difficult, like many posed by the world and not by logic. Traditional empirical efforts to distinguish among competing hypotheses have made little progress. This is due in no small part to the complexity of the question. The two main efficiency defenses of concentrated industry structure are scale economies and firm heterogeneity. Traditional methods use proxies for barriers to entry that could equally plausibly be proxies for the efficiencies. Recent theoretical work on entry and entry barriers has been very successful in teaching us about the importance of strategy, irreversibility, and information. But it has not emphasized links to observables. The observable differences between a theory predicting nearly efficient outcomes and a related theory predicting harmful barriers to entry can be very subtle. To use theory in a direct way, it seems, we must draw dozens

Price Adjustment in an Automobile Insurance Market: A Test of the Sheshinski-Weiss Model

Abstract: Nominal price rigidity is explained in the Sheshinski-Weiss (SW) model by costly price adjustment. The predictions of the SW model, which describe a firm's optimal forward-looking price adjustment strategy, were derived and tested using microdata on the timing and the magnitude of premium changes by sixty-nine firms in the Alberta automobile insurance market over the period 1974-82. The model was tested by estimating the structural equations of the model, probit equations for premium changes, and reduced-form equations for the firm's new premium and its old premium. The overall conclusion is that the SW model does not explain the price adjustments observed in the Alberta automobile insurance market.

Price Dispersion In U.S. Manufacturing: Implications For The Aggregation Of Products And Firms

Abstract: This paper addresses the question of whether products in the U.S. Manufacturing sector sell at a single (common) price, or whether prices vary across producers. Price dispersion is interesting for at least two reasons. First, if output prices vary across producers, standard methods of using industry price deflators lead to errors in measuring real output at the industry, firm, and establishment level which may bias estimates of the production function and productivity growth. Second, price dispersion suggests product heterogeneity which, if consumers do not have identical preferences, could lead to market segmentation and price in excess of marginal cost, thus making the current (competitive) characterization of the Manufacturing sector inappropriate and invalidating many empirical studies. In the course of examining these issues, the paper develops a robust measure of price dispersion as well as new quantitative methods for testing whether observed price differences are the result of differences in product quality. Our results indicate that price dispersion is widespread throughout manufacturing and that for at least one industry, Hydraulic Cement, it is not the result of differences in product quality.

A model of latent symmetry in cross price elasticities

Abstract: This paper develops the Latent Symmetric Elasticity Structure (LSES), a market share price elasticity model which allows elasticities to be decomposed into two components: a symmetric substitution index revealing the strength of competition between brand pairs, and a brand-specific coefficient revealing the overall impact of a brand on its competitors. An application of the model to unconstrained cross price elasticities shows that brand-price competition in one market is well-represented by a LSES model in which brand substitutability and elasticity asymmetry are related to average price level.

Signalling Strength: Limit Pricing and Predatory Pricing

Abstract: This article merges two areas of strategic pricing theory. A dynamic signalling game with two-sided uncertainty is presented in which an incumbent is confronted with potential entry and chooses between limit pricing and predatory pricing as a means of achieving or maintaining monopoly profit. Initial distributions across player types are pivotal to this decision. Results show that when the incumbent is likely to be strong relative to the entrant, predatory pricing is chosen. When the incumbent is likely to be weak relative to the entrant, limit pricing is chosen. For intermediate cases a strong incumbent may choose a combination of these two signalling strategies.

Basing Point Pricing - Competition Versus Collusion

Abstract: We consider the implications of game-theoretic models for the competitive or collusive nature of basing point pricing (BPP). In one-shot games, equilibrium price schedules do not generally conform to BPP with unrestricted price competition. Nevertheless BPP can emerge in dynamic contexts. Define modified FOB price policy as using FOB in one's natural market and matching the rival's delivered price whenever profitable. A configuration where both firms do this is a subgame perfect equilibrium of a two-stage game where firms choose first price policies and then compete in the marketplace. Further,with repeated competition BPP can be used as punishment device.

Some evidence on lump sum versus convex costs of changing prices

Abstract: 2 Two models in which price stickiness results from price adjustment costs are tested. One, an (s,S) pricing model, assumes lump-sum adjustment costs and predicts firms will make relatively large, infrequent price changes. The other assumes convex adjustment costs and predicts frequent, partial price adjustments. Survey data of firms'price behavior reveal patterns consistent with the (s,S) model. However, many of the patterns are also consistent with partial-adjustment rules, although the high percentage of firms which fix prices for a quarter or more casts doubt on the plausibility of the partialadjustment hypothesis. I. INTRODUCTION In "new" Keynesian economics "price stickiness" arises not because of wage rigidity so much as because either the gains to individual firms from changing prices are negligible or the costs of doing so deter full and immediate price changes. As a result, nominal shocks which affect demand for the firm's product, as well as real shocks, give rise to changes in output. The nature and the timing of the effects of demand changes, such as those initiated by monetary policy, thus depend on how individual firms respond to the signals they receive. Sticky-price models based on costs of price adjustment take at least two different forms. One assumes a lump-sum cost to changing prices, which leads to predictions that firms generally keep prices fixed and make infrequent, relatively large price changes. The other assumes convex adjustment costs and leads to the prediction that firms make relatively small and frequent partial adjustments toward a target level. Evidence drawn from a series of surveys conducted by the National Federation of Independent Business will be used to test the predictions from these two types of models. While the data do not allow a definitive test between the two models, the available evidence supports the model with lump-sum costs of changing prices with the important proviso that there be substantial heterogeneity in the relative costs to firms of making price changes so that the frequency and size of changes vary considerably across firms. II. (s,S) RULES WITH LUMP-SUM COSTS OF PRICE CHANGES How frequently should a firm change its price? When a change takes place, how large should it be? Sheshinski and Weiss [1977] and Barro [1972] provided the first answers to these questions. In their models an individual firm incurs a lump-sum cost when changing its nominal price, and the firm's profits depend on its real price, where real price is defined as the firm's nominal price divided by an index of the prices of all other firms in the economy. Sheshinski and Weiss assume that the firm tries to maximize the present value of its real profits. Their solution amounts to what is known in the optimal inventory literature as an (s,S) rule, in which S-s units are ordered when stocks run down to s. As applied to a pricing rule, when prices rise elsewhere in the economy, the firm's real price falls to a lower bound s, at which point the firm raises its nominal price so that its real price jumps to S. They prove that a more rapid general inflation rate calls for a lower s and higher S. Furthermore, subject to a monotonicity condition, a higher general inflation rate calls for a shorter time between price changes. After showing a number of numerical examples, Sheshinski and Weiss report "that numerical experiments with a quadratic profit function ... give high intervals between price changes (1-2 years) even with very low adjustment costs" [1977, 300]. When the profit function is flat in the neighborhood of the profit-maximizing real price, there is little benefit from changing price. A similar argument appears in the "menu cost" explanation for real effects of nominal disturbances. In the absence of private incentives for individual price changes, there may be real aggregate effects of nominal disturbances. For example, see Mankiw [1985], Akerlof and Yellen [1985], Kuran [1986], Blanchard and Kiyotaki [1987]. …

Chapter 10 Strategic models of entry deterrence

Abstract: Publisher Summary This chapter discusses the strategic models of entry deterrence that the models fall into three categories: (1) Preemption–these models explain how a firm claims and preserves a monopoly position. The incumbent obtains a dominant position by arriving first in a natural monopoly, or more generally, by early investments in research and product design, or durable equipment and other cost reduction. The hallmark is commitment, in the form of (usually costly) actions that irreversibly strengthen the incumbent's options to exclude competitors. (2) Signaling–these models explain how an incumbent firm reliably conveys information that discourages unprofitable entry or survival of competitors. They indicate that an incumbent's behavior can be affected by private information about costs or demand either prior to entry (limit pricing) or afterwards (attrition). The hallmark is credible communication, in the form of others' inferences from observations of costly actions. (3) Predation– hese models explain how an incumbent firm profits from battling a current entrant to deter subsequent potential entrants. In these models, a predatory price war advertises that later entrants might also meet aggressive responses; its cost is an investment whose payoff is intimidation of subsequent entrants. The hallmark is reputation: the incumbent battles to maintain other's perception of its readiness to fight entry. Most models of preemption do not involve private information; they focus exclusively on means of commitment. Signaling and predation models usually require private information, but the effects are opposite. Signaling models typically produce separating equilibria in which observations of the incumbent's actions allow immediate inferences by entrants; in contrast, predation models produce pooling equilibria (or separating equilibria that unravel slowly) in which inferences by entrants are prevented or delayed.

Microeconomic Rigidities and Aggregate Price Dynamics

Abstract: This paper is an attempt to enrich the characterization of the sluggish behavior of the aggregate price level. Our contribution to this vast literature is to explicitly consider microeconomic heterogeneity and its interaction with nonlinear microeconomic price adjustment policies. The model we propose outperforms the constant-probability-of-adjustment/partial- adjustment model in describing the path of postwar U.S. inflation. Using only aggregate data, we infer that the probability that a firm adjusts its price depends on the sign and the magnitude of the deviation of the price from its target level. At the aggregate level we find that the aggregate price responds less to negative shocks than to positive shocks, that the size of this asymmetry increases with the size of the shock, and that the number of firms changing their prices - and therefore the flexibility of the price level to aggregate shocks - varies endogenously over time in response to changes in economic conditions.

Price Discrimination with Correlated Demands

Abstract: In this paper we analyze customer-class price discrimination in the face of uncertain demands. More precisely, we explore the pricing decision of a multiproduct monopoly facing random, correlated demands. We consider only a uniform price for each customer class; multi-part pricing is not investigated. We are interested in the extent to which uniform customer-class prices can exploit variations in demand characteristics.

A Modelof Competitive Limit Pricing

Abstract: This paper offers a new theory of limit pricing. Incumbents from different markets or regions “compete” against one another, with each attempting to price in a manner that deflects entry into the others' markets. An entrant is imperfectly informed as to the incumbents' respective investments in cost reduction and seeks to enter markets in which incumbents have high costs. In a focal equilibrium, the entrant uses a simple “comparison strategy,” in which it enters only the highest-priced markets, and incumbents engage in limit-pricing behavior. The influence on pricing of the number of markets and the scope of entry is also reported. Throughout, the central feature of the analysis is that an incumbent's price affects its investment incentives, with lower prices being complementary to greater investment.