Showing papers on "Limit price published in 1995"

Dynamic Programming and Pricing of Contingent Claims in an Incomplete Market

Abstract: The problem of pricing contingent claims or options from the price dynamics of certain securities is well understood in the context of a complete financial market. This paper studies the same problem in an incomplete market. When the market is incomplete, prices cannot be derived from the absence of arbitrage, since it is not possible to replicate the payoff of a given contingent claim by a controlled portfolio of the basic securities. In this situation, there is a price range for the actual market price of the contingent claim. The maximum and minimum prices are studied using stochastic control methods. The main result of this work is the determination that the maximum price is the smallest price that allows the seller to hedge completely by a controlled portfolio of the basic securities. A similar result is obtained for the minimum price (which corresponds to the purchase price).

Price Level Determinacy Without Control of a Monetary Aggregate

Abstract: It is shown that the price level remains determinate even in the case of two kinds of radical money supply endogeneity -- an interest rate peg by the central bank, and a 'free banking' regime -- that are commonly supposed to imply loss of control of the price level. Price level determination under such regimes can be understood in terms of a 'fiscal theory of the price level,' according to which the equilibrium price level is that level that makes the real value of nominally denominated government liabilities equal to the present value of expected future government budget surpluses. The application of the fiscal theory of the price level to exogenous-money regimes is sketched as well.

The Impact of Reference Price Effects on the Profitability of Price Promotions

Abstract: This paper investigates the impact of reference price effects on retailer price promotions and describes why these effects can make promoting profitable. First, we analyze the profit impact of reference price effects generated by a single period of promotion. The promotion can increase profit if the gain that these effects create in the promotion period outweighs the loss they create in future periods. We then describe how retailers can estimate the optimal strategy of recurring promotions that maximizes profits from reference price effects over a time horizon. Examples of such strategies are presented for a retailer selling a national brand of peanut butter. We obtain insights into how promotion prices, timing, and profits are affected by changes in costs, interest rates, consumers' reactions to reference price effects, and error in estimates used in the model. The retailer's optimal reaction to a trade deal is also examined. This strategy involves a phase of increased promotion activity sandwiched between phases of decreased activity. We explain these results using the effects described in the single-period model.

Empirical Generalizations About the Impact of Advertising on Price Sensitivity and Price

Abstract: Consumers' sensitivities to price changes are an important input to strategic and tactical decisions. It has been argued that price sensitivities depend on factors such as advertising. Prior studies on the effect of advertising on consumer price sensitivity have found seemingly conflicting results. We analyze the characteristics of previous studies in marketing and generate a set of three empirical generalizations. These are (1) an increase in price advertising leads to higher price sensitivity among consumers, (2) the use of price advertising leads to lower prices, and (3) an increase in nonprice advertising leads to lower price sensitivity among consumers. These generalizations have important implications for managers and researchers. Managers need to coordinate their advertising and pricing decisions to attain maximum profits. For researchers, our summary and discussion of empirical results provide directions for future.

Variable margin pricing system

Abstract: A variable margin pricing system and method that generates retail prices based on customer price sensitivity Products are grouped into pools from a first pool for most price sensitive products to a last pool for least price sensitive products A logical relationship between margins and the customer price sensitivity is determined for the products Based on this logical relationship and each product's pool assignment, the system and method calculate each product's margin and corresponding retail price The method is also used to generate retail price labels having retail prices based on customer price sensitivity for the products to which the labels are to be affixed or located proximate

Product Rivalry with multiple Strategic weapons: an Analysis of price and advertising Competition

Abstract: A dynamic model of product rivalry is developed for a market in which firms choose price and advertising intensity. The model, a state-space game, is implemented using data that consist of weekly price, sales, and promotional activity for four brands of saltine crackers sold by four chains of grocery stores in a small town. A number of questions can be asked of this data. First, is advertising predatory (merely changing market shares) or cooperative (shifting out market demand)? Second, are price and advertising own and cross-strategic complements or substitutes? And finally, do investments in stocks of goodwill and in price reductions make firms tough and aggressive or soft and accommodating?

A meta-analysis of national brand and store brand cross-promotional price elasticities

Abstract: This paper investigates whether price discounts by national brands influence private-label sales and vice versa through meta-analysis of 261 cross-price elasticity estimates from sixteen product-chains. On average, price reductions by national brands and private labels have more or less equal influence on each others' sales. However, there is greater variation in the effect of private-label price cuts across national brands. National brands with large market shares decrease private-label sales through price cuts but are seldom affected by private-label discounts. National brands with lower relative price have greater influence on private-label sales and are also affected more by private-label price cuts.

Competition in European Aviation: Pricing Policy and Market Structure

Abstract: The purpose of this paper is to analyze the impact of liberal bilateral agreements on some European air routes in terms of price competition and market structure. The author proposes a model that explains firms' behavior and shows that, after the liberalization, firms exploit their cost advantages and differentiate their products more but market structure still depends on access to airport facilities and other ancillary services controlled by the flag carriers. These results differ from American evidence in that the author finds that the effect of airport presence on prices through lower costs more than offsets the effect through higher perceived quality. Copyright 1995 by Blackwell Publishing Ltd.

Models of Competitive Price Promotions: Some Empirical Evidence from the Coffee and Saltine Crackers Markets

Abstract: I present tests of a competitive rationale for price promotions. In a model with a population of informed and uninformed customers, price competition yields a static equilibrium in which each seller draws a price from a specified density function. Price data on coffee and saltine crackers products are used to test whether the sample of prices on each product could have possibly come from the theoretically specified density function. The results suggest that some markets are indeed consistent with the marginal distributions of prices predicted by the model. Furthermore, in the process of testing this rationale for price promotions, estimates are obtained for the marginal cost of each product, the number of competing goods, and the percentage of informed consumers. The resulting excess variability of these estimates across competing brands can also raise questions with respect to the empirical validity of the model.

Percentage discounts, initial price, and bargain hunting: A heuristic-systematic approach to price search behavior.

Abstract: Consumer decisions concerning price search were investigated using the heuristic-systematic model of social judgment (S. Chaiken, A. Liberman, & A. H. Eagly, 1989 ). Consumers used the size of the percentage discount as a heuristic cue to help decide whether a better price was likely to be available elsewhere. However, as predicted, participants relied on this cue only when the initial base price of the item was low. In contrast, search was continued despite the offer ofa large percentage discount when consumers were shopping for items that were relatively expensive. This finding was attributed to the higher potential costs associated with missing a better price when consumers were shopping for more expensive items. In general, the heuristic-systematic model proved to be a useful way to characterize price search decisions. It was also suggested that these findings might be useful in explaining some conflicting results in the price search literature. Implications for behavioral price theories are also discussed.

How Low Is a Guaranteed-Lowest-Price?

Abstract: A game based on the Bertrand duopoly model is constructed to study the effects of price guarantee policies. Before it chooses a list price, a firm can make a binding commitment to match or beat its competitor's price. The effectiveness of these price guarantee policies in facilitating price collusion depends on the solution concept used. Furthermore, there exists an equilibrium in which neither firm offers any price guarantees and each firm sets price equal to marginal cost.

An Integrated Model of Market and Limit Orders

Abstract: We develop an integrated model in which a risk neutral informed trader optimally chooses any combination of: a market buy, a market sell, a limit buy including the optimal limit buy price, and a limit sell including the optimal limit sell price. We allow orders to cross with one another without involving the market maker. This generates transactions inside the bid-ask spread, corresponding to what is observed in practice. Using minimal distributional assumptions, we are able to characterize the informed trader's optimal strategy. We find that he sometimes chooses to submit market orders when the terminal risky asset value is inside the bid-ask spread. This results from the fact that a market buy submitted by the informed trader sometimes executes at a price below the ask by crossing with a limit sell submitted by an uninformed trader and it never executes above the ask in our single period model. Thus, the expected execution price of the informed trader's market buy is below the ask. Hence, there are some terminal asset values, above the expected execution price and below the ask, for which it is optimal for the informed trader to submit a market buy. In addition, with a richer menu of strategies to choose from, the informed trader is able to exploit mutually beneficial interactions between opposite order types. For example, any time the terminal asset value is above the bid, a combined market buy-limit sell is more profitable than a market buy only. Sometimes the two orders will cross against one another and the informed trader will end up with a zero net trade. This is beneficial because the combination eliminates states in which the same market buy submitted in isolation would have executed at a loss. In this sense, the limit sell acts as a "safety-net" for the accompanying market buy--an intuition that has not been captured in the extant theoretical microstructure literature. Adding specific distributional assumptions, we obtain an analytic solution and explore the comparative statics of the informed trader's limit price strategy.

Tacit Collusion Under regulation in the Pricing of Interstate Long‐Distance Telephone Services

Abstract: Analysis of seven wholesale and retail markets for long-distance telephone services since the AT & T divestiture indicates that service provider concentration declined in the later 1980s and then stabilized in the 2990–1993 period. In addition to this stability in market shares, a number of other conditions established since 1990 have been conducive to the development of market sharing rather than significant price competition. The most important of these conditions has been the tarifing process of the Federal Communications Commission by which MCI and Sprint replicate ATGT's price announcements. As market shares stabilized and became more equal, and as regulation formalized the price-setting process, the price-cost margins of the three large carriers increased and became more nearly identical. These results are consistent not with price competition but rather with emerging tacit collusion among AT&T, MCI, and Sprint.

Market conduct under government price intervention in the u.s. dairy industry

Abstract: The degree of market power exercised by fliud and manufactured processors in the U.S. dairy industry is estimated. Appelbaum's quantity-setting conjectural variation approach is cast into a switching regime framework to account for the two market regimes created by the existence of the dairy price support program: (a) government supported regime (market price is at the support price) and (b) market equilibrium regime (market price is above the support price). The model is also used to test whether government price intervention has a pro-competitive or anti-competitive influence on market conduct.

Trading securities using trailing stops

Abstract: In financial markets traders often protect their position from a significant decline by using a trailing stop. Assume the trader is long the market owns the security. A trailing stop is an order to sell the security at the market, if the price of the security drops to the stop price. The stop price is always less than the market price when the stop is entered. As the price fluctuates, the stop is raised to remain a fixed distance from the maximum price at which the security trades. In this paper we consider two models for the price process: a discrete time random walk and continuous time Brownian motion, both with positive drift. For these price processes we compute the distribution, mean, and variance of the gain to the trader as well as the duration of the trade when a trailing stop strategy is used. Also discussed is the question of optimizing the distance from the current price to the stop.

Optimal regulatory lag under price cap regulation

Abstract: We present an model of monopoly regulation in which the probability of cost being low rather than high depends on the firm's effort. The regulator chooses price and regulatory lag (i.e., the length of time until the next price review) to maximize welfare subject to an expected break-even constraint for the firm. Between reviews the firm has a finite horizon cost minimization problem. We characterize its solution and the resulting dilemmas for the regulator. Starting from a high cost state, longer lag postpones the date at which price might be reduced, but lowers price in the interim and improves the chance that cost will be low at the next review. These pros and cons are reversed starting from a low cost state. With inelastic demand infinite lags are optimal. If costs are unresponsive to efforts, then minimal lags are best. Numerical simulations indicate the importance of the demand elasticity and effort responsiveness more generally. Finally, the desirability of non-constant prices between reviews is analyzed.

An analysis of asymmetric demand response to price changes: The case of local telephone calls

Abstract: Asymmetric demand responses to price changes are not an observable implication of classical demand theory, which predicts that consumers will react to a small price increase in much the same way as they do to a small price decrease. Yet applied researchers have long speculated that consumers are more sensitive to price increases than they are to price decreases. In addition, recent empirical studies generally support the theory of asymmetric demand responses. We construct a dynamic model based on data gathered from monthly telephone bills for 128 New York Telephone customers over a five-year period. Our results support the conclusion that customers react more quickly and strongly when prices go up than they do when prices go down.

Experimental Examination of a Thin Market: Price Behavior in a Declining Terminal Market Revisited

Abstract: Perceived characteristics of thin markets are described and approaches to furthering their study are suggested. Design features of a laboratory thin market, patterned after a typical livestock marketmg situation, are described. Price bias and variation from a “thick” private negotiation market with 22 traders is compared to that from a “thin” auction market with 8 traders. No systematic price bias was found m any of the markets. Price variation was actually lower in the thin auction market.

Farm-Level Impacts of Revenue Assurance

Abstract: With the onset of the 1995 "Farm Bill" debate, the issue of government intervention and its appropriate levels will most assuredly be debated. Due to the government's historically strong presence in agriculture, it is probable that the government will stay involved. The debate will, therefore, focus on how government policy can most efficiently assist the agricultural sector. While several problems can be identified within the agricultural policy arena, the inherent instability of farm prices and income have been key in justifying government involvement. Stability is significant in reducing economic stress on farm families and minimizing faulty production and investment decisions. Instability in agriculture is caused by a variety of factors. Weather as well as the existence of disease, insects, and other pests increase yield variability and risk to producers. These factors not only lead to variations in individual producer yields, but also affect national crop production and prices. Producer price risk is further increased by the inelastic demand for agricultural products. The combination of yield and price variability results in a high degree of income risk for farmers. The United States has a 60-year tradition of government intervention in stabilizing farm prices and incomes. Supporting farm prices and income became a farm policy goal during the depression conditions of the 1930's and continues to be a priority. The role of government policy in reducing instability is a significant issue for discussion. Government programs that both limit price and income variability and still allow the market to function by sending economic signals to both producers and consumers are difficult to design (Tweeten; Knutson, Penn, and Boehm). The problem of unstable farm prices, yields, and income and the corresponding optimal level of policy intervention are further complicated by government costs. While the relative cost of agricultural outlays as a percentage of the total federal budget was lower in 1993 at 1.5 percent ($20.4 billion) than its former high of 3.7 percent in 1963 and 1964 ($4 billion), agriculture is being forced to succumb o budgetary pressures. Therefore, the problem becomes one of trying to stabilize and support producer incomes and prices at lower government costs. Tweeten contended that uncertainty and instability constitute a potentially large social cost to society. The payoff is great from carefully formulated public policy that reduces instability and provides benefits to producers and consumers in excess of costs. The difficulty lies in determining the appropriate policies and economic levels to provide such results. Therefore, it is necessary to study the policy alternatives and evaluate their stabilizing ability and associated level of government costs. The purpose of this research is to compare the current program to two alternative revenue assurance programs. A simulation model is developed to generate probability distributions of representative farms' gross receipts and government costs. The level of revenue support and the stability of producer revenues and government outlays to individual producers will be compared for the three alternative policies. This comparison shows alternative consequences that legislators must weigh in determining the best policy option for agricultural producers.

Existence of a nonnegative equilibrium price vector in the mean‐variance capital market

Abstract: We derive a necessary and sufficient condition for the existence of a nonnegative equilibrium price vector under which the total demand and supply of each asset balances in the standard mean-variance capital market. Also, we give an explicit formula for such a price vector. This formula shows that the price of assets is an increasing function of p, the weighted average of the requested rate of return of individual investors, which tends to infinity as p approaches the expected rate of return on the market portfolio. Further, we construct a macroeconomic index which gives information about the soundness of the capital market.

Target Pricing—A Challenge for Purchasing

Abstract: INTRODUCTION - A NEW APPROACH TO PRICING Long known for their uncomplicated approaches to business situations, the Japanese have developed a strategy for price determination that could have significant ramifications in the area of pricing. Artistic in its simplicity and uncomplicated in structure, it provides the buyer with a challenge in obtaining a price reduction, and at the same time tying that reduction into the overall pricing strategy of his or her firm. In turn, the supplier is placed in a position of justifying the price in a way that maintains product integrity while reducing waste in the product and the processes that produced it. The method, known as target pricing, illustrates the concept that price reduction is an integrated effort. It is not only a design engineering effort or a manufacturing effort, but also a purchasing effort. Coordinated activities, all focused on the same target, bring about the desired price reduction. Target pricing itself is simple. In determining the target price, marketing computes the price it believes is necessary to achieve the desired share of market. That price becomes the target. Once the target price is set, the normal operating profit for the item is subtracted from the target price. This remainder becomes the target cost. The organization now focuses on reaching that target cost. Each functional area is responsible for a proportional segment of the cost reduction. This means company-wide cost reduction in all areas of the buyer's firm. It translates to: 1. Design to cost, on the part of design engineering 2. Manufacture to cost, on the part of production 3. Purchase to cost, on the part of purchasing The targets given each of these areas are relative to the price reduction that marketing wishes to achieve for the product. If the purchased material cost component is 40 percent of the price of the current model and a 10 percent price reduction is ordered, then purchasing has the target of reducing the purchased material cost component to 36 percent. Any reduction in excess of the four percentage points simply adds to profit. The greater the spread between cost and price, the greater is the opportunity to use price as a competitive weapon. There are sizable ancillary benefits that flow from adopting this approach. They include: * Clear targets for the size of price reductions needed from a supplier * The ability to assess the reduction's contribution to the overall pricing goal of the company * The ability to compute and document purchasing's contribution on a product by product basis Target pricing also creates a unique operating environment for both the buyer and the supplier. It provides an ideal opportunity to quantify cost savings by the application of such programs as early supplier involvement (ESI), quality function deployment (QFD), and value analysis (VA). Instead of being conceptual and abstract, interaction with suppliers and key company personnel takes on concrete meaning when there is an actual target price to achieve. This is not theory, but the practical application of a simple concept with far-reaching strategic ramifications for both the buyer and the supplier.[1] TARGET PRICING'S OPERATING ENVIRONMENT IN JAPAN Target pricing was developed in Japan, where securing market share has been a higher order priority than short-term product profits.[2] In the long term, enhanced market share will lead to long-term profits. After reaching the goal of market share, and perhaps leadership in the market, the price may be increased to raise the return on investment to the desired level. Constant improvement (Kaizen) activities will also result in cost reduction. Those suppliers who are contributors via cost reduction, and partners in the growth of the customer company, can look forward to increased growth as the market share target is reached. This may not evolve into a single sourcing situation, however, because many Japanese firms also "hedge their bets" with dual sourcing and information sharing between the suppliers. …

Impact of organizational structure on oligopolistic pricing

Abstract: The main point of this paper is to suggest that to maintain price discipline, certain organizational and historical features of an industry's information set need to be maintained. In particular, the place of the pricing decision in the organizational structure of firms is a critical determinant of the equilibrium price level in oligopolistic industries offering products that are commodities. The model identifies the dynamics of oligopolistic pricing, with price discipline breaking down as a result of intensified non-price competition and decentralization of the pricing decision. Examples from the steel, nuclear turbine, airline and the telecommunication industries provide some empirical support for the model. The analysis integrates industrial organization theory and the behavioral theory of the firm. “In fact, the one thing that his decentralization in early 1988 had accomplished was that it gave the sales force more freedom to interpret orders such as Akers's 1989 edict that losing market share would no longer be tolerated. Salesmen now had much of the control over pricing that had previously been reserved for senior management, and they realized, even if Akers didn't, that competitors' products were now so similar to IBM's that the only weapon IBM could use to stop market-share losses was lower prices. The salesmen used their weapon. They began a price war that gave customers discounts as high as 50 percent and that eventually rendered list prices meaningless. Buying a mainframe started to include as much wheeling and dealing as buying a used car.” In Paul Carrll's, ‘Big Blues: The Unmaking of IBM’, page 221.

Price Cap Regulation: Problems and Solutions

Abstract: The problems of price cap regulation include: the transformation from rate-of-return regulation, the adoption of a price cap formula, cross-subsidization, and the relationship between regulation and competition. The experience of price cap regulation reveals that it does not protect monopoly customers, and it allows utilities to engage in cross-subsidization. These results imply that the regulator must periodically review price cap results to realign prices with the cost of service and to ensure that a level playing field that would nurture competition develops in every market.