Showing papers on "Limit price published in 1998"

Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment

Abstract: Price discrimination by imperfectly competitive firms may intensify competition, leading to lower prices for all consumers; the tradeoff of consumer groups' welfare that is characteristic of monopolistic discrimination need not arise. This escalation of competition may make firms worse off, and as a result firms may wish to avoid the discriminatory outcome. Under conditions similar to those in which unambiguous price and welfare effects may arise, unilateral commitments not to price discriminate - including the adoption of everyday low pricing or no-haggle policies - may raise firm profits by softening price competition.

Rational shopping behavior and the option value of variable pricing

Abstract: When a product's price fluctuates at a store, how should rational, cost-minimizing shoppers shop for it? Specifically, how frequently should they visit the store, and how much of the product should they buy when they get there? Would this rational shopping behavior differ across Every Day Low Price (EDLP) and Promotional Pricing (HILO) stores? If shoppers are rational, which retail price format is more profitable, EDLP or HILO? To answer these questions, we develop a normative model that shows how rational customers should shop when the price of the product is random. We derive a closed-form expression for the optimal purchasing policy and show that the optimal quantity to purchase under a given price scenario is linearly decreasing in the difference between the price under that scenario and the average price. This purchase flexibility due to price variability has a direct impact on shopping frequency. Indeed, the benefit of this purchase flexibility can be captured via an "option value" that implicitly reduces the fixed cost associated with each shopping trip. Consequently, rational shoppers should shop more often and buy fewer units per trip when they face higher price variability. Our results suggest that if two stores charge the same average price for a product, rational shoppers incur a lower level of expenditure at the store with a higher price variability. Since stores with different price variabilities coexist in practice, we expect stores with higher price variability to charge a higher average price. Thus, given two stores, a higher relative mean price for a given item should be indicative of higher price variability, and vice versa. These model implications are tested using multicategory scanner panel data from 513 households and pricing data for three stores (two EDLP stores and one HILO store) and 33 product categories over a two-year period. We find strong empirical support for the model implications.

Processing Technology, Market Power and Price Transmission

Abstract: This paper focuses on the extent to which price changes occurring at the farm-level are transmitted to the retail sector. A price transmission elasticity is derived which is shown to depend on the degree of market power in the food industry and the nature of the food industry's processing technology. The offsetting role of the processing technology and market power in determining the extent of price transmission are highlighted. A case-study reports values for the price transmission elasticity for the US beef and pork sectors.

Price adjustment at multiproduct retailers

Abstract: We empirically study the price adjustment process at multiproduct retail stores. We use a unique store level data set for five large supermarket and one drugstore chains in the USA, to document the exact process required to change prices. Our data set allows us to study this process in great detail, describing the exact procedure, stages, and steps undertaken during the price change process. We also discuss various aspects of the microeconomic environment in which the price adjustment decisions are made, factors affecting the price adjustment decisions, and firm-level implications of price adjustment decisions. Specifically, we examine the effects of the complexity of the price change process on the stores’ pricing strategy. We also study how the steps involved in the price change process, combined with the laws governing the retail price setting and adjustment, along with the competitive market structure of the retail grocery industry, influence the frequency of price changes. We also examine how the mistakes that occur in the price change process influence the actions taken by these multiproduct retailers. In particular, we study how these mistakes can make the stores vulnerable to civil law suits and penalties, and also damage their reputation. We also show how the mistakes can lead to stockouts or unwanted inventory accumulations. Finally, we discuss how retail stores try to minimize these negative effects of the price change mistakes. © 1998 John Wiley & Sons, Ltd.

Money and Price Dispersion

Abstract: We relax restrictions on the storage technology in a prototypical monetary search model to study price dispersion. When multiple units of currency can be stored, buyers and sellers enter matches with potentially different willingness to buy or sell. Across the distribution of possible bilateral matches, prices will generally differ even though agents have identical preferences and technologies. We provide existence conditions for a particularly simple equilibrium pattern of exchange and prices. We prove that in the limiting case where search frictions are eliminated, equilibrium prices are uniform. We also prove that a higher initial money stock raises the average price level and increases price dispersion in certain regions of the parameter space. Numerical examples are also provided.

Is Airline Price Dispersion the Result of Careful Planning or Competitive Forces

Abstract: We develop a model of price dispersion to distinguish the impact of price discrimination from that of peak load pricing schemes or atypical competition resulting from the financial difficulties of the early 1990s By utilizing three alternative measures of dispersion and appealing to economic theory for our specification, we find robust results suggesting an estrangement between price dis- persion and price discrimination While some discrimination continues to persist at monopolized endpoints, most dispersion is associated with fare wars and peak load pricing schemes

Third-Degree Price Discrimination With Interdependent Demands

Abstract: This paper analyzes the price, output, and welfare effects of third-degree price discrimination for a monopolist who sells in two interdependent markets. The case where the two goods sold by the monopolist are complements is analyzed as well as the more typical case where the two goods are substitutes. The economic effects of price discrimination are shown to depend on the type and strength of demand interdependence, the curvature of the demands and the slope of marginal cost. The circumstances under which price discrimination causes both market prices to either rise or fall are also analyzed.

Experimental simulation of public information impacts on price discovery and marketing efficiency in the fed cattle market

Abstract: Federal budgetary pressures raise questions regarding the importance of public market information. This study assesses the impact of price discovery and production efficiency of reducing public price and quantity information. The amount and type of information provided to Fed Cattle Market Simulator (FCMS) participants was varied by periodically withholding current and weekly summary information according to a predetermined experimental design. Results show that reducing information increased price variance and decreased marketing efficiency; that is, more cattle were delivered at weights deviating from 1,150 pounds- the least-cost marketing weight in the simulator. These factors, which increase costs, make the industry less competitive.

Bid Ask Price Competition with Asymmetric Information Between Market Makers

Abstract: We consider the effect of asymmetric information on price formation process in a financial market where private information is held by a market maker. A Bayesian game is proposed in which there is price competition between two market makers with two different information partitions. At each stage players set bid and ask prices simultaneously and then trade occurs between market maker who proposes the most profitable price and liquidity traders. We characterize a set of partially revealing equilibria where the informed market maker's prices do not convey his private information. Informed player's equilibrium payoffsare proportional to prior beliefs of the market.

Price Rigidity and Asymmetric Price Adjustment in a Repeated Oligopoly

Abstract: Recent empirical studies suggest that prices in highly concentrated industries tend to be rigid and that pricing is often asymmetric with price rises occurring more frequently than price reductions (Domberger [1987]). Existing explanations of price rigidity and asymmetric pricing assume that firms incur "menu costs" when they adjust their prices. There is, however, little empirical evidence to substantiate this assumption. This paper provides an alternative explanation for price rigidity as well as asymmetric price adjustment in the absence of menu costs. In an infinitely repeated duopoly with incomplete information, it is demonstrated that depending on the degree of collusion and parameters, a variety of pricing behaviour emerge in equilibrium.

Pricing to Market of German Exporters: Evidence from Panel Data

Abstract: This paper investigates pricediscrimination of German exporters across differentforeign markets. We examine the degree of pass-throughof exchange rate fluctuations in the pricing of 70export items. The model is estimated using panel dataon export unit values. Parameter estimation relies onGMM first difference, fixed effects, LAD, OLS firstdifference, and the random coefficients model. Themain results for 70 manufactured goods and 15destination countries between 1990–1994 are: Thedegree of pricing to market differs among destinationsand products. Highest pricing to market is observedfor U.S., Japan, Italy and Spain. Pricing to market ismore prevalent in exports of chemicals and fertilisersthan in machinery products.

Setting the X Factor in Price Cap Regulation Plans

Abstract: Despite the popularity of price cap regulation in practice, the economic literature provides relatively little guidance on how to determine the X factor, which is the rate at which inflation -adjusted output prices must fall under price cap plans We review the standard principles that inform the choice of the X factor, and then consider important extensions We analyze appropriate modifications of the X factor: (1) when only a subset of the firm's products are subject to price cap regulation, and when product-specific costs and productivity cannot be measured; (2) when the pricing decisions of the regulated firm affect the economy-wide inflation rate; and (3) in the presence of structural changes in the industry, such as a strengthening of competitive forces

Endogenous price leadership

Abstract: We consider a linear price setting duopoly game with differentiated products and determine endogenously which of the players will lead and which will follow. While the follower role is most attractive for each firm, we show that waiting is more risky for the low cost firm so that, consequently, risk dominance considerations, as in Harsanyi and Selten (1988), allow the conclusion that only the high cost firm will choose to wait. Hence, the low cost firm will emerge as the endogenous price leader.

Alternative Verfahren zur Bestimmung innerbetrieblicher Verrechnungspreise

Abstract: This paper compares the relative performance of alternative transfer pricing schemes. In our model, the transfer pricing method determines the quantity of an intermediate good to be traded. In addition, the transfer price generates incentives for the divisions to undertake specific investments in order to lower production costs or to raise revenues for the final product. If the transfer price is determined through negotiation between the profit center managers, both divisions tend to underinvest. However, for the case of linear cost functions and linear marginal revenue curves, we find that negotiated transfer pricing generally achieves higher expected firm profits than a scheme which bases the transfer price upon a standard costs quote issued by the selling division.

The retail revolution and food-price mismeasurement

Abstract: If a product sells for $3 this week at the local supermarket and $2 next week, what is the "real" price? What if that same product has a different price at a different store? Thanks to scanner technology, food prices differ a lot these days because they can be changed quickly and easily. How do our official statistics take these price movements into account? Not too well, according to Leonard Nakamura. In this article, he describes the retail revolution of recent years and how it has led to mismeasurement of food prices

Monopolistic price setting and supply rigidities in a disequilibrium framework

Abstract: A model of the firm with a delayed adjustment of prices and employment is analyzed. Prices and employment are determined under uncertainty about the location of the demand curve. Three models are distinguished: price setting with predetermined supply, employment determination with pre-determined prices, and a simultaneous price and employment determination. It is shown that many of the results of the deterministic case can be transfered to the stochastic set-up. The deterministic model is included as a special case. However, the model allows for supply rigidities and labour hoarding and permits the analysis of price adjustment.

Why Your Price Band Is Wider Than It Should Be

Abstract: Too many ad hoc pricing decisions Key determinants: consumption expandability and brand equity Consider competitors and channels last Packaged goods companies have long recognized that pricing is a key lever in managing brands for profitability. Even so, pricing is so underleveraged in practice that improving price management can raise margins by as much as 5 percent. Companies seeking to capture this potential must not only make efforts to understand the behavior of consumers but also find ways to apply this understanding to the thousands of front-line pricing decisions they make every year. This opportunity exists because of a widespread assumption that marketing departments set prices and make them effective. Yet any consumer's shopping experience will demonstrate that this is a misconception. Not long ago, an acquaintance bought a box of cereal for $3.79. He was unhappy because he had paid $2.49 for the same brand in the same supermarket just two weeks earlier, when he had also used a 75[cents] coupon to pay a net price of $1.74. To add insult to injury, he knew that a nearby supermarket always sold this brand for $2.99. These variations in price confused him. In fact, they are entirely normal, and centralized pricing decisions are responsible for very few of them. In category after category, the end prices consumers pay for the same goods vary widely. Some variations result from promotions by manufacturers, such as temporary price cuts, circular ads, coupon ads, end-of-aisle displays, pre-price packs, and bonus packs. Within a channel, prices vary as a result of retailers' pricing and promotion strategies, such as EDLP or hi-lo,(*) double-couponing (the process by which a retailer offers to double the face value of a manufacturer's coupon for shoppers in its stores), and loyalty cards. In addition, prices vary from channel to channel because of different value propositions: convenience at a higher price or less variety and service at a lower price, for instance. These variations apart, consumers themselves adjust pricing by responding to consumer promotions, notably free-standing inserts, checkout coupons, and on-pack coupons. We call this range of prices for an SKU (stock-keeping unit) within a market the consumer price band [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. At most packaged goods companies, the complex decisions about list prices, trade promotions, and consumer promotions that drive the consumer price band are made by several different internal organizations, each inspired by its own goals or definitions of success. Prices controlled centrally by senior management reflect a company's revenue and profit aspirations, the level of inflation, and competitive pressures. Trade promotion budgets are determined at the account level by salesforces, and often come into play to meet short-term volume targets. Consumer promotions, on the other hand, are controlled centrally by brand managers, and are frequently based on competitive dynamics. All these separate pricing decisions usually create a wide price band. Yet companies are seldom aware of this state of affairs. Ask most managers why their companies set prices at a given level, and they will tell you that this is the highest price consumers are willing to pay. But if that is so, why do list prices keep rising while a substantial portion of the increases go to finance trade and consumer promotion budgets? In any case, few companies can tell how much product they sell at full price to end consumers. Ask the same managers who actually makes their companies' price decisions, and the response is likely to be the "brand people" at HQ, who are specialists with the necessary tools for the job. Both impressions are false. Roughly 12 percent of sales come under trade promotion budgets, more than half of which (and growing) are controlled in the field. Frontline salespeople therefore direct a good deal of the tactical pricing for any brand. …

Domestic price, (expected) foreign price, and travel spending by Canadians in the United States

Abstract: In this paper we develop and test a model to explain travel expenditures in the United States by Canadians. The model examines a consumer's choice problem where in- come is allocated between domestic and foreign consumption. Consumers do not know the foreign price level and base their spending in part on expected foreign price. In addition to expected foreign price, domestic price, exchange rates, income, and foreign price uncertainty influence travel spending. Empirically, each determinant is statistically significant. The con- tribution of each determinant, however, is not the same: Canadian prices and the exchange rate are the primary factors influencing Canadian travel spending. JEL Classification: FiO Prix interieur, prix etranger (anticipe), et de,penses de voyage des Canadiens aux Etats- Unis. Ce memoire d6veloppe et calibre un modele pour expliquer les d6penses de voyage des Canadiens aux Etats-Unis. Le modele examine le probleme du choix du consommateur

Development of a market benchmark price for agmas performance evaluations

Abstract: The purpose of this research report is to identify the appropriate market benchmark price to use to evaluate the pricing performance of market advisory services that are included in the annual AgMAS pricing performance evaluations. Five desirable properties of market benchmark prices are identified. Three potential specifications of the market benchmark price are considered: the average price received by Illinois farmers, the harvest cash price, and the average cash price over a two-year crop marketing window. The average cash price meets all of the desired properties, except that it would not be easily implementable by producers. It can be shown, though, that the price realized via a more manageable strategy of "spreading" sales during the marketing window very closely approximates the average cash price. Therefore, it is determined that the average cash price meets all five selection criteria, and is the most appropriate market benchmark to be used in evaluating the pricing performance of market advisory services.

Investment under Demand Uncertainty, Ex-Ante Pricing, and Oligopoly

Abstract: This paper considers the capacity choice of duopolists who set price ex-ante under demand uncertainty with risk-neutrality. The duopolists compete for market shares on the basis of availability of supply, rather than by price competition. Collusive pricing coexists with Cournot–Nash capacity choice. A formal model is presented, where the market share of each firm may deviate from the certainty share due to rationing. With shares reflecting different costs, capacity utilisation for the lower cost firm is expected to be substantially lower. The implications for the price-cost margin and capacity formation are also explored.