Showing papers on "Limit price published in 1996"

Why Do Security Prices Change? A Transaction-Level Analysis of Nyse Stocks

Abstract: This paper develops a structural model of intraday price formation that embodies both information shocks and microstructure effects in an internally consistent, unified setting. The model allows us to better understand the observed intra-day patterns in bid-ask spreads, price volatility, transaction costs, as well as the autocorrelations of transaction returns and quote revisions. For example, the model simultaneously sheds light on why, over the day, (i) the variance of transaction price changes is U-shaped while the variance of ask price changes is declining, (ii) the bid-ask spread is U-shaped although information asymmetry and uncertainty over fundamentals is decreasing, and (iii) the autocorrelations of transaction price changes are large and negative, yet the autocorrelations of ask price changes are small and negative. In addition, the model s parameters also provide a natural metric of price discovery and effective trading costs, which may prove useful in future studies.

International price discrimination in the European car market

Abstract: Why are car prices so different across European countries? I construct and estimate an oligopoly model to analyze whether international price discrimination can explain the puzzle. Three sources of international price discrimination are considered: price elasticities, import quota constraints, and collusion. The data reveal that international price discrimination accounts for an important part of the observed price differences. Low price elasticities (or domestic market power) are present in France, Germany, the United Kingdom, and especially Italy. Binding import quota constraints on Japanese cars exist in France and Italy. The possibility of collusion cannot be rejected in Germany and the United Kingdom.

Asymmetric Reference Price Effects and Dynamic Pricing Policies

Abstract: We consider a group of frequently purchased consumer brands which are partial substitutes and examine two situations; the first where the group of brands is managed by a retailer, and second where the brands compete in an oligopoly. We assume that demand is a function of actual prices and reference prices, and develop optimal dynamic pricing policies for each situation. In addition to researchers studying pricing strategy, our results may interest retailers choosing between hi-lo pricing and an everyday low price, and manufacturers assessing whether to follow Procter & Gamble's lead and replace a policy of funding consumer price reductions through trade deals with a constant wholesale price. A reference price is an anchoring level formed by customers based on the pricing environment. The literature suggests that demand for a brand depends not only on the brand price, but also whether the brand price is greater than the reference price a perceived loss or is less than it a perceived gain. The responses to gains and losses are asymmetric. Broadly speaking, we find that when enough consumers weigh gains more than losses, the optimal pricing policy is cyclical. Likewise, when they weigh losses more than gains, a constant price is optimal. Thus, we provide a rationale for dynamic pricing which is quite distinct from the three explanations previously offered: 1 decreasing unit variable costs due to learning effects, 2 the transfer of inventory to consumers who face lower inventory holding costs than do retailers, and 3 competitive effects. Our explanations apply even when the other explanations do not, i.e., in mature product categories where learning effects are minimal, when retailer inventories are minimized through the use of just-in-time policies and when competitive effects do not exist, as in a monopoly. Greenleaf 1995 has shown numerically that in the presence of reference price effects, the optimal pricing policy for a monopolist can be cyclical. We first analytically extend Greenleaf's result to a monopolist with a constant cost of goods, facing a homogeneous market where all customers either weigh gains more than losses or vice versa. Using this building block we examine a monopolist retailer managing multiple brands. We assume that demand is a linear function of prices of multiple brands, and together with an expression which reflects the reference price effect. Further, we assume that the retailer maximizes average profit per period. Next, we analyze a duopoly and extend the results to an oligopoly. We assume that the manufacturers are able to set the retail prices, as in an integrated channel. Here, we retain the same demand function as for the retailer and derive Markov Perfect Nash equilibria. We use two alternative processes of reference price formation: the exponential smoothed ES past price process which is frequently used in the literature, and for the multi-brand situations, the recently proposed reference brand RB process Hardie, Johnson, and Fader 1993. In the latter, the reference price is the current price of the last brand bought---the reference brand. We adapt the individual level RB formulation in Hardie et al., to an aggregate demand specification. For the ES process, we obtain most results analytically; for the RB process we use simulation. Finally, we extend our results to a population with two customer segments: Segment 1 which weighs gains more than losses, and Segment 2 which does the opposite, i.e., is loss averse. When the market consists exclusively of Segment 1 customers and ES is the reference price process, we find that prices are cyclical in all cases analyzed, i.e., for a monopoly, a monopolist retailer managing multiple brands, a duopoly, and an oligopoly. If the RB formulation is the underlying process, a monopolist retailer managing two brands uses cyclical prices, but in a duopoly, the equilibrium solution is for the brands to maintain constant prices. When all customers belong to Segment 2 i.e., they are loss averse constant prices are optimal in all cases for both reference price formulations. When the population consists of both Segment 1 and Segment 2 and the ES process applies, we develop a sufficient condition for cyclical pricing policies to be optimal. The condition is expressed in terms of the proportion of the two segment sizes, the absolute difference between the gain and loss parameters of each segment, and their respective exponential smoothing constants. Interestingly, for reasonable values of the latter two factors, cyclical policies are optimal even when the proportion of Segment 1 is quite small. Similar magnitudes are obtained numerically for the RB case.

Bertrand-Edgeworth duopoly with unit cost asymmetry

Abstract: This paper characterizes the set of Nash equilibria in a price setting duopoly in which firms have limited capacity, and in which unit costs of production up to capacity may differ. Assuming concave revenue and efficient rationing, we show that the case of different unit costs involves a tractable generalization of the methods used to analyze the case of identical costs. However, the supports of the two firms' equilibrium price distributions need no longer be connected and need not coincide. In addition, the supports of the equilibrium price distributions need no longer be continuous in the underlying parameters of the model. As an application of our characterization, we examine the Kreps-Scheinkman model of capacity choice followed by Bertrand-Edgeworth price competition and show that, unlike in the case of identical costs, Cournot equilibrium capacity levels need not arise as subgame-perfect equilibria. The low-cost firm has greater incentive to price its rival out of the market than exists under Cournot behavior.

Theory and Methodology Joint price and lot size determination under conditions of permissible delay in payments and quantity discounts for freight cost

Abstract: This paper deals with the problem of determining the retailer's optimal price and lot size simultaneously under conditions of permissible delay in payments. It is assumed that the ordering cost consists of a fixed set-up cost and a freight cost, where the freight cost has a quantity discount offered due to the economies of scale. The constant price elasticity demand function is adopted, which is a decreasing function of retail price. Investigation of the properties of an optimal solution allows us to develop an algorithm whose validity is illustrated through an example problem.

A Dynamic Model of Reference Price and Expected Quality

Abstract: A number of recent papers have developed normative implications of the concept of reference price. In this paper, we extend that literature to incorporate the relationship between expected quality and reference price. We consider the case of a monopolist who makes time-varying decisions regarding price and product quality. Our results suggest that when the effect of a loss (price greater than reference price and product quality less than expected quality) on demand is greater than or equal to that of a corresponding gain, it is optimal for a monopolist to have constant price and product quality levels. When the effect of a gain on demand is greater than that of a corresponding loss, however, we find that it is optimal to maintain cyclical pricing and product quality policies.

Electronic security/stock trading system with voice synthesis response for indication of transaction status

Abstract: An electronic dealing system which electronically performs matching processing between the information on transaction orders placed by order side customers and information on transaction orders placed by hit side customers so as to establish transactions, which system sets a margin relative to a last trade price, calculates a decision price from the last trade price and the set margin when the last trade price has been determined, detects if a situation has occurred which is disadvantageous to the customer under current market conditions with respect to the price of the offered order by judging the relative size of the price of the order placed by the order side customer and the calculated decision price, and outputs an alarm when it detects the occurrence of a disadvantageous situation, whereby the load on the customer is lightened and the customer can trade with more certainty.

Asymmetric Price Relationships in the U.S. Broiler Industry

Abstract: This study presents a testing methodology to analyze potential price asymmetries among the farm, wholesale, and retail levels of the U.S. broiler industry. Lag length, direction of causality, and asymmetric relationships are empirically determined. Results suggest that concentration and power of the integrators in the industry have allowed the wholesale price to become the center, causal price in the market. Asymmetric price transmissions, however, are limited. While downward movements in the wholesale price are passed on more fully to growers than increases in the wholesale price, only consumers in the North Central region of the U.S. share a larger portion of wholesalers’ price increases than price decreases.

Product Variety and Welfare under Tough and Soft Pricing Regimes

Abstract: We re-examine the economic justification for the regulation of firms' price policies. Existing analysis of the relative benefits of alternative pricing policies, by treating market structure as exogenous, loses an important trade-off. Price deregulation leading to, for example, discriminatory pricing, on the one hand, enhances competition between incumbents but, on the other, acts as a strong deterrent against entry. We illustrate this trade-off by analysing the familiar address model of product differentiation and show that product variety is determined by the degree of spatial contestability of the market (the ability of entrants to make binding location commitments) and by whether firms are free to price discriminate. Copyright 1996 by Royal Economic Society.

The Costs and Benefits of Price Stability: An Assessment of Howitt's Rule

Abstract: The central banks of New Zealand, Canada, and the United Kingdom have recently decided to make price stability the overriding goal of monetary policy. Similar proposals in the United States have received a lukewarm reception. Although some opponents have argued that moderate inflation is beneficial, many concede its effect on economic welfare is detrimental.1 Instead, they argue that a price stability policy is suboptimal because, once inflation is under way, it is better to tolerate some moderate inflation than to bear the cost necessary to achieve price stability. Howitt’s Rule is the clearest statement of the proposition that the benefits resulting from reducing inflation must be weighed against the cost of reducing it.2 (See the shaded insert, “Howitt’s Rule.”) Assuming inflation affects both the level and growth rate of output, I state Howitt’s Rule and explain how it argues for a continued policy of moderate inflation. Next, I analyze alternative estimates of the costs of achieving price stability and compare these costs with estimates of the gain from achieving price stability when inflation reduces the level or growth rate of output. Finally, I briefly review the crosssection and time-series evidence on the effects of inflation on output growth. In the final section I offer a summary and some concluding observations. THE COST-BENEFIT INFLATION TRADE-OFF: HOWITT’S RULE Howitt (1990) argues that, although inflation is costly, once it is under way, society is better off to tolerate a little inflation than to bear the cost necessary to achieve price stability. Howitt (1990, p. 103 ) notes, “There are a host of reasons why the best average rate of inflation, ignoring costs of getting there, is zero . . .” (italics added). Arguing that the cost of achieving zero inflation may be substantial, however, Howitt suggests his rule can be used to determine the “optimal” inflation rate. Howitt argues that the transitions cost “will not be negligible, so that it will be optimal to stop disinflation, even when the gain from further reduction is still positive.” Therefore, Howitt (1990, p. 104) concludes, “The optimal target is probably somewhere above zero” (italics added). The cost-benefit trade-off Howitt alludes to is represented in Figure 1 (under the assumption that inflation reduces the level of output). At time t0 policymakers decide to pursue a policy that will reduce the steady-state inflation rate from its current level to a lower level, Daniel L. Thornton is an assistant vice president at the Federal Reserve Bank of St. Louis. Jonathan Ahlbrecht provided research assistance.

The law of one price in a network: arbitrage and price dynamics in natural gas city gate markets*

Abstract: . In this paper we develop a model of the law of one price in a network where many markets are linked with a structure of paths. We show that arbitrage-free prices depend on the structure of the network and so do price dynamics. Our estimates indicate that local bypass and open access pipeline transportation were instrumental in opening arbitrage paths to natural gas city markets and causing their prices to converge. Spot markets in the city gates, pipeline hubs, and production fields, that are scattered over distant points in the vast pipeline network in the United States, now form a single market.

Signalling product quality: When is price relevant?

Abstract: Price has long been regarded as performing a dual role in the demand for products with unknown quality. It represents the opportunity cost of the product and is one of several signals which indicate quality. We argue that when quality signals are stochastic not all of them will be used. In particular, there will be a critical price above (below) which price is used (not used) to signal quality. At this price an individual's demand curve will be characterised by a ‘reverse kink’. This helps explain recent results from demand analysis, including those reported by Abbe-Decarroux in this journal.

Aggregate price adjustment: the Fischerian alternative

Abstract: I consider an economy in which a fraction of contracts is renegotiated each period. In the spirit of Fischer (1977) and in contrast to Taylor (1979, 1980), Calvo (1983), and Fuhrer and Moore (1992, 1995a,b), contracts specify a price path rather thana fixed price level. The aggregate price adjustment rule derived from these assumptions is an expectations-augmented Phillips curve with a built in "speed" or "Lipsey Loop" effect. The rule is consistent with the natural rate hypothesis and implies that disinflations are unambiguously contractionary. When supplemented with a specification of aggregate demand, the model can be used to find the money-supply path required to achieve a given desired path of the aggregate price level. Alternatively, the model can be used to find the aggregate-price-Ievel path implied by a given monetary policy. Policy-induced recessions can be quite persistent even when contracts are renegotiated frequently. For realistic parameter values, the model generates a liquidity effect: disinflations are initially accompanied by a rising short-term interest rate and a declining money supply. Introduction Calvo (1983) presents an elegant reformulation of the Taylor (1979, 1980) model of overlapping contracts. Like Taylor, Calvo assumes that each firm's price is fixed over the life of its contract, and that the contract price is a function of the expected future aggregate price level and expected future excess demand. Realism is added by dropping the assumption that contracts are all of the same length, in favor of an exponential distribution of expiration dates. An attractive feature of the Calvo model is that by varying the mean rate at which contracts come up for renewal one can easily move from an economy in which the price level is almost completely rigid to an economy in which the price level is almost completely flexible.' Although the assumptions that underlie it are plausible and its simplicity is appealing, Calvo's price adjustment model has two undesirable properties. First, the model implies that policy makers can keep output permanently above its market-dearing level--an implication inconsistent with the natural-rate hypothesis. Second, the model implies that even sudden, surprise disinflations can be achieved at zero cost in terms of foregone output. Indeed, disinflation may be accompanied by a boom (Phelps 1978, Ball 1991). To many, this implication seems unrealistic. Recent attempts to develop a more satisfactory model of aggregate price adjustment have resolved one or the other--but not both--of the problems affecting the Calvo model. McCallum (1980, 1994) has championed a price adjustment rule that allows perfect flexibility of the inflation rate while prohibiting jumps in the price level.' The McCallum rule is consistent with the natural-rate hypothesis, but remains subject to the criticism that it allows immediate, zero-cost reductions in inflation. Fuhrer and Moore (1992, 1995a,b) develop a variant of the Calvo model in which the change in the 1 For interesting applications, see Yun (1994) and Kimball (1995). Woodford (1995, pp. 1281-4) discusses the advantages of this general approach. A more complicated alternative approach is to split the economy into flexible price and sticky price sectors, and then analyze how the economy's performance depends on the size of the sticky-price sector relative to the flexible-price sector (Ohanian, Stockman, and Kilian 1995). , The rule was initially proposed by Grossman (1974). Also see Barro and Grossman (1976), Mussa (1981a,b) and--for a critique of Mussa's analysis--Rotemberg (1983). new-contract price depends upon expected future aggregate price inflation. Disinflations are always costly in the Fuhrer-Moore model. More generally, the model does a good job of matching the short-run dynamics of real-world inflation and output. However, like the Calvo model, the Fuhrer-Moore model is inconsistent with the long-run neutrality of money. Moreover, the intuition underlying the Fuhrer-Moore model is fuzzy, at best. In the model presented here, inflation is more flexible than in the Calvo and Fuhrer-Moore models, but not as flexible as in the McCallum model. Like Calvo and Fuhrer-Moore, I assume overlapping contracts, with an exponential distribution of contract lengths. However, much as in Fischer (1977), each contract specifies a path of prices rather than a fIXed price leveL' The result is an aggregate price adjustment equation that looks like an expectations-augmented Phillips curve with a built in "speed" or ';Lipsey Loop" effect.' The long-run Phillips curve is vertical: monetary policy cannot keep output permanently above its market-cleating level. .Moreover--because the . expectations that are relevant to aggregate price adjustment respond sluggishly to new information--disinflations that are not fully anticipated are inevitably associated with recessions. Two main criticisms have been directed at Fischer contracts.' The first criticism is that Fischer-style price-setting is· seldom obserVed in practice, except in multi-year union labor contracts. However, it may be that many firms without formal Fischercstyle contracts follow procedures that have much the same effect. For example, it is common for non-unionized firms to conduct pay surveys every few years, to gauge whether and to , Yun (1994) also looks at Fischer-style contracts. However, he assumes the contract :.. renegotiationsare distributed uniformly over a finite interval rather than exponentially. Yun focusses most of his attention on the Calvo model. The McCallum model is not included in his analysis. , This effect is the tendency for inflation to be higher in periods during which output is growing rapidly relative to capacity than in periods during which output is growing slowly, taking inflation expectations and the level of output-market slack as given. The speed effect was noted by Phillips (1958) in his original analysis of the relationship between unemployment and the growth rate of wages. Lipsey (1960) proposed an explanation for the speed effect. However, Smyth (1979) casts doubt on lipsey's story. 5 See, for example, Woodford (1995). what extent their wages are out of line with the wages offered by competitors. Between surveys, firms' wages are not typically constant. Insofar each firm's wage path depends primarily upon information available at the time of its most recent pay survey, the Fischer model may accurately describe aggregate wage dynamics. More generally, the frequency with which firms change their prices is likely to exceed the frequency with which firms reevaluate the competitiveness of those prices whenever the direct costs of price changes (so-called "menu costs") are small relative to the costs of renegotiating contracts or gathering information on market conditions. The second main criticism of Fischer contracts is that they imply too brief an output response to monetary shocks. This criticism takes it for granted that firms whose price contracts are up for renegotiation will move directly to the expected marketclearing price path. There are good reasons to believe that firms will, instead, typically move to a price path that is intermediate between the expected market-clearing and expected average price paths. When Fischer's contracting model is generalized to allow for this possibility, the economy's adjustment to shocks can be considerably delayed. The paper begins with a review of the Calvo, McCallum, and Fuhrer-Moore priceadjustment models. Next, I discuss the aggregate price dynamics of an economy in which contracts specify a price path rather than a fixed price level. Finally, I illustrate the response of this economy to disinflationary policy using a simple model of aggregate demand. Important quantitative and qualitative differences in the behavior of output, interest rates, and the demand for money are observed, depending upon the sensitivity of the contract price to output market disequilibrium and the elasticity of intertemporal substitution. Simulations show that monetary-policy-induced fluctuations in output can be quite persistent even when contracts are renegotiated frequently. For realistic parameter values, disinflations are initially accompanied by rising interest rates and a declining money supply.

Getting to a competitive equilibrium

Abstract: In the previous paper Keisler (1995) we introduced a random price adjustment model for an exchange economy which is decentralized in that the trades permitted to an agent and the resulting price changes depend only on the commodity vector currently held by that agent, and not on the whole economy. Our model is an exchange economy with a finite set of commodities, a market maker who adjusts prices, a large finite set of agents who trade only with the market maker, and a parameter A ∈ (0,1) which determines the rate of price adjustment. Each agent has an initial endowment and a preference relation. At each discrete time, one agent is chosen at random and makes the trade which maximizes his preferences subject to the budget constraint at the current price vector. Then the market maker adjusts the price vector according to the following rule: if x is the change in the commodity vector of the agent who just traded, p is the old price, and α is the number of agents, then the new price is p + (α -λ )x. Thus both the price vector and the commodity allocation change randomly with time. We obtain asymptotic results as the number of agents goes to infinity, subject to stability assumptions on the price paths. It was shown in the earlier paper that with probability arbitrarily close to one the price path in our model will approximate the price path of the corresponding tâtonnement process on a rapid time scale, and will then remain close to a limit price. In this paper we show that, with probability arbitrarily close to one, the economy will approach a competitive equilibrium, and the process will be feasible in the sense that the market maker's inventory is approximately constant over time. Our main assumption is that the price adjustment rule is stable throughout the trading process. This is stronger than the classical tâtonnement assumption that the price adjustment rule is stable at the initial endowment. We show that many classical examples of exchange economies satisfy our assumptions, and then give an example where stability at the initial endowment holds but the stronger stability assumption needed for our results fails.

Industrial Economics: Theory, Applications, and Policy

Abstract: Part 1 Theory: firms, entrepreneurs and decision-making determinants of industrial structure oligipoly theory and games structure and profitability entry barriers and limit pricing. Part 2 Applications: advertising welfare losses of oligopoly and monopoly mergers innovation international trade, technology and the multinational enterprise. Part 3 Policy: competition policy privatization industrial policy.

Arbitrage pricing with incomplete markets

Abstract: This paper presents a new arbitrage-free approach to the pricing of derivatives, when the price process of the underlying security does not conform to the standard assumptions. In comparision to the Black-Scholes price process we relax the requirements of i) continuity; ii) constant volatility; and iii) infinite trading possibilities. We retain the assumption that the average volatility of price changes over the option's life is known, and we require that price jumps not be greater than some specified size. With only these assumptions we show that the no-arbitrage bound on a European call option's value approaches the Black-Scholes price as the maximum jump size approaches zero. We present a simple numerical method for the calculation of option pricing bounds for any specified maximum jump size, and discuss implications of our model for hedging, and the estimation of volatility.

Mill and uniform pricing a comparison

Abstract: . In this paper we examine profit, price, output and welfare under mill and uniform pricing in a monopolistic spatial market with nonlinear demand, a general consumer distribution function, and a general transportation cost function. We show that if demand is convex (concave) then the optimal uniform price minus the average unit transportation cost is lower (higher) than the optimal mill price, output under uniform pricing is lower (higher) than output under mill pricing, and welfare under uniform pricing is lower (higher) than welfare under mill pricing, provided other respective conditions are satisfied.

Search Intensity in Oligopoly

Abstract: A simultaneous price-setting oligopoly game characterized by the existence of buyers with differing price information is presented. The information structure of the game is more general than previously considered, thereby permitting a richer analysis. In addition to identifying the general conditions that lead to equilibrium with price dispersion, the author provides a revealing reinterpretation of models characterized by simpler information structures. An important finding of the paper is that additional price information in the market impacts prices differently. Only if the poorly informed buyers are reached can we expect average prices to decrease. Copyright 1996 by Blackwell Publishing Ltd.

Oil price, mean reversion and zone readjustments

Abstract: Observing OPEC`s short-term price-output ceiling behavior during the late 1980s and 1990s, one can conclude that it attempts to stabilize the market price within a range of its announced target price by controlling the output ceiling. If the price moves within four to five dollars below the target price, it usually reduces the output ceiling and assigns new quotas to its member countries to keep the price close to the target price. In reality, OPEC established a band for the market price positioned round the target price by basically choosing suitable upper and lower limits for the output or, at least in soft markets, it places tolerance zone below the target price in order to restrict the discrepancy between the market price and the target price. The lower limit is particularly needed because it sets a price floor and ensures that the market price stays above the significantly lower marginal cost of oil production. If the limits of these zones are backed by a perfectly credible intervention policy, they can generate an expectations process that should turn the market prices around even before any intervention takes place. While OPEC in some sense observes the target zones for its prices, thosemore » zones are neither well defined nor vigorously defended. It can not always or may not be willing to maintain the price within the limits of the desired zone by cutting the output ceiling; it must sometimes readjust the target price and output ceiling, and thus create a new target zone to reflect the market`s new fundamentals. This is particularly true now because OPEC is losing market share to the other oil producers and is contemplating to shift the current band. Actual readjustments in the target price can be so large, as in 1980 and 1985, that the newmarket price must jump as well. They can occur when both the market price is near the limits of the band as well as when it is inside the band but still further away from those limits.« less

Stackelberg and Cournot competition under equilibrium limit pricing

Abstract: Proposes a model which shows that Stackelberg competition is not necessarily welfare‐ enhancing compared with Cournot competition. Shows that, although in a simple duopoly model prices in a Stackelberg equilibrium are lower than in a Cournot equilibrium, this is not necessarily true in an entry‐deterrence framework, where post‐entry competition is Stackelberg rather than Cournot. Derives conditions under which in this framework Stackelberg competition leads to lower expected welfare, in the case where demand is linear.