Showing papers on "Limit price published in 1999"

Equilibrium price dispersion under demand uncertainty: the roles of costly capacity and market structure

Abstract: When capacity is costly and prices are set in advance, firms facing uncertain demand will sell output at multiple prices and limit the quantity available at each price. I show that the optimal price strategy of a monopolist and the unique pure-strategy Nash equilibria of oligopolists both exhibit intrafirm price dispersion. Moreover, as the market becomes more competitive, prices become more dispersed, a pattern documented in the airline industry. While generating similar predictions, the model differs from the revenue management literature because it disregards market segmentation and fare restrictions that screen customers.

Factors influencing the price premiums that consumers pay for national brands over store brands

Abstract: Identifies some managerially relevant factors that influence the size of the price premium that consumers will pay for national brands over store brands in grocery products. We define price premium as the maximum price consumers will pay for a national brand over a store brand, expressed as the proportionate price differential between a national brand and a store brand. Overall, perceived quality differential accounts for about 12 percent of the variation in price premiums across consumers and product categories and is the most important variable influencing price premiums.

Demand aggregation through online buying groups

Abstract: An online buying group (referred to herein as a “co-op”) is formed for the specific purpose of purchasing a particular product at ( 102 ) by defining a start time, end time, critical mass, any minimum number of units offered, any maximum number of units offered, starting price and product cost curve. As data is gathered from buyers, by means of their making binding purchase offers, the co-op is modified at ( 108 ) using a pricing tool, so as to take into account for this market data in the definition of the price curve. A buyer chooses a product co-op of interest at ( 114 ). The buyer is presented with the following essential co-op information: current price, closing time, next price level (as defined by a price curve visibility window and the price curve) sufficient to entice the buyer to make an offer. Once a buyer has made up his mind, the decision must be made at ( 116 ) to offer a purchase price which includes the current price, guaranteeing availability if critical mass has been achieved, or to make an offer at a lower price range that can be accepted only if the co-op price drops to that level, which may not occur. Given a decision to make an offer at such lower price, the buyer enters such maximum price at which he is willing to purchase the product at ( 118 ). Should the current price drop to the level at which the offer was made, the price contingency is removed from such offer and assuming critical mass is achieved, the offer is accepted at at the close of the co-op at ( 122 ), and processed accordingly. Inventory is allocated to fulfill the accepted offer at ( 126 ) following the closing of the co-op at ( 124 ).

Price Transmission and Asymmetric Adjustment in the U.S. Beef Sector

Abstract: The U.S. livestock sector has experienced numerous structural changes in recent years. For example, the meatpacking industry has experienced many mergers and acquisitions leading to significant increases in industry concentration. In particular, the four-firm concentration ratio for steer and heifer slaughter, a frequently cited statistic and an important indicator of industry concentration, increased from 35.7% in 1980 to 79.8% in 1997 (USDA). There have also been significant regional shifts in livestock production and changes in marketing practices, with decreased use of public markets in many areas. For some products, traditional auction markets have been largely replaced by contract production and sales. Cattle inventories have also trended downward over the last two decades. This has been accompanied by decreases in the number of producers and, in some cases, with significant increases in the scale of operations. The vertical transmission of shocks among various levels of the market is an important characteristic describing the overall operation of the market. Of course, price is the primary mechanism by which various levels of the market are linked. The extent of adjustment and speed with which shocks are transmitted among producer, wholesale, and retail market prices is an important factor reflecting the actions of market participants at alternative market levels. The nature, speed, and extent of adjustments to market shocks may also have important implications for marketing margins, spreads, and mark-up pricing practices. An extensive literature has examined mar-

Quote Disclosure and Price Discovery in Multiple-Dealer Financial Markets

Abstract: We examine the effects of price disclosure on market performance in a continuous experimental multiple-dealer market in which seven professional market makers trade a single security. The dealers trade with one another and with computerized informed and liquidity traders. Our key comparison is between fully public price queues (pretrade transparent market) and bilateral quoting (pretrade opaque). We find that opening spreads are wider and trading volume is lower in the opaque markets due to higher search costs there. More importantly, however, higher search costs also induce more aggressive pricing strategies, so that price discovery is much faster in the opaque markets. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Health plan choice

Abstract: Using a unique panel dataset of health plan choices and personal characteristics of employees at a single firm, this paper provides estimates of price elasticities for health insurance plans in a managed competition setting. Estimated price elasticities are larger in absolute value than most previous estimates and the magnitude of the price elasticity suggests that there is a place for price competition in this market. We also find evidence of transition costs in switching health plans for older and less healthy employees. Such differential responses to price may contribute to adverse selection in this market.

Asymmetric and Neighborhood Cross-Price Effects: Some Empirical Generalizations

Abstract: This paper provides some empirical generalizations regarding how the relative prices of competing brands affect the cross-price effects among them. Particular focus is on the asymmetric price effect and the neighborhood price effect. The asymmetric price effect states that a price promotion by a higher-priced brand affects the market share of a lower-priced brand more so than the reverse. The neighborhood price effect states that brands that are closer to each other in price have larger cross-price effects than brands that are priced farther apart. The main objective of this paper is to test if these two effects are generalizable across product categories, and to assess which of these two effects is stronger. While the neighborhood price effect has not been rigorously tested in past research, the asymmetric price effect has been validated by several researchers. However, these tests of asymmetric price effect have predominantly used elasticity as the measure of cross-price effect. The cross-price elasticity measures the percentage change in market share or sales of a brand for 1% change in price of a competing brand. We show that asymmetries in cross-price elasticities tend to favor the higher-priced brand simply because of scaling effects due to considering percentage changes. Furthermore, several researchers have used logit models to infer asymmetric patterns. We also show that inferring asymmetries from conventional logit models is incorrect. To account for potential scaling effects, we consider the absolute cross-price effect defined as the change in market share percentage points of a target brand when a competing brand's price changes by one percent of the product category price. The advantage of this measure is that it is dimensionless hence comparable across categories and it avoids scaling effects. We show that in the logit model with arbitrary heterogeneity in brand preferences and price sensitivities, the absolute cross-price effect is symmetric. We develop an econometric model for simultaneously estimating the asymmetric and neighborhood price effects and assess their relative strengths. We also estimate two alternate models that address the following questions: i If I were managing the ith highest priced brand, which brand do I impact the most by discounting and which brand hurts me the most through price discounts? ii Who hurts whom in National Brand vs. Store Brand competition? Based on a meta-analysis of 1,060 cross-price effects on 280 brands from 19 different grocery product categories, we provide the following empirical generalizations: 1. The asymmetric price effect holds with cross-price elasticities, but tends to disappear with absolute cross-price effects. 2. The neighborhood price effect holds with both cross-price elasticities and absolute cross-price effects, and is significantly stronger than the asymmetric price effect on both measures of cross-price effects. 3. A brand is affected the most by discounts of its immediately higher-priced brand, followed closely by discounts of its immediately lower-priced brand. 4. National brands impact store brands more so than the reverse when the cross-effect is measured in elasticities, but the asymmetric effect does not hold with absolute effects. Store brands hurt and are, in turn, hurt the most by the lower-priced national brands that are adjacent in price to the store brands. 5. Cross-price effects are greater when there are fewer competing brands in the product category, and among brands in nonfood household products than among brands in food products. The implications of these findings are discussed.

Resetting Price Controls for Privatized Utilities: A Manual for Regulators

Abstract: This manual describes the task that an economic regulator should undertake when revising the price control for a regulated company. The aim of regulation is to protect consumers, while ensuring that the company remains viable and has an incentive to operate efficiently. After an introduction in section 1, section 2 discusses the basic principle of price control regulation. Most systems of regulation include an appeal mechanism to protect the company against an excessively zealous regulator, which means that the regulator will have to make his proposals in time to allow an appeal, should the company wish to make one. Section 3 discusses the procedures the regulator should follow. Section 4 discusses the form of price control the regulator must select to implement. Section 5 offers examples of revenue requirements. The regulator should ask the company for information on its present and projected operating costs, its assets, its investment plans, and its demand forecasts. These are discussed in sections 6-8. The rate of return is critical in determining the amount of revenue needed, and ways to determine an appropriate rate of return are discussed in section 9.

Oligopoly price discrimination and resale price maintenance

Abstract: Oligopoly price discrimination in the retail market prevents a manufacturer from inducing optimal retail margins through any wholesale price. This motivates the manufacturer to impose resale price maintenance. In a model of third-degree price discrimination by rival retailers, a retail price ceiling (or floor) enables the manufacturer to restore the first best. Imposing a fixed retail price is generally not optimal because the manufacturer wants to eliminate price discrimination based on consumers’ abilities to switch retailers, not based on consumers’ valuations. Under resale price maintenance, welfare may either increase or decrease, and it may increase even when total output is reduced.

The computational effect of price endings in multi‐dimensional price advertising

Abstract: Research in marketing indicates that consumers may be sensitive to the final digits of prices. For example, despite being substantively equivalent, a price such as $199 may create more favorable price perceptions than $200. However, existing research has primarily focused on the effects of price endings in the context of uni‐dimensional prices – prices consisting of a single number. Advertised prices in the marketplace are often multi‐dimensional, consisting of numerous price dimensions. In such pricing contexts, price endings may influence consumers’ ability to conduct the arithmetic required to compute the total advertised price. Examines the effect of various price ending strategies on consumers’ computational efforts. The findings indicate that the more commonly exercised price ending strategies tend to result in prices that are the most difficult for consumers to evaluate.

Market power and price volatility in restructured markets for electricity

Abstract: The restructured market for electricity in the UK has experienced a systematic pattern of price spikes associated with the use of market power by the two dominant generators. Partly in response to this problem, the share of capacity owned by any individual generator after restructuring was limited in Victoria, Australia. As a result, a much more competitive market resulted with prices substantially lower than they were under regulation. Nevertheless, an erratic pattern of price spikes exists and the price volatility is a potential problem for customers. This paper argues that the use of a uniform price auction for electricity markets exacerbates price volatility. A discriminatory price auction is proposed as a better alternative that would reduce the responsiveness of price to errors in forecasting total load.

Bookbuilding and Strategic Allocation

Abstract: Under the bookbuilding procedure, an investment banker solicits bids for shares from institutional investors prior to pricing the issue. After collecting this demand information, the investment banker prices the issue and allocates shares to the investors. We examine the books from 39 international equity issues. For each issue we consider all institutional bids and the corresponding allocations. We infer some of the criteria the investment banker uses to allocate shares. We find that the investment banker awards more shares to bidders that provide information (such as a limit price in their bids). In addition, regular investors receive more favorable allocations--especially when the issue is heavily oversubscribed. The results support the winner's curse theories and the justifications for the use of bookbuilding.

Pricing strategy for aesthetic surgery: economic analysis of a resident clinic's change in fees.

Abstract: The laws of microeconomics explain how prices affect consumer purchasing decisions and thus overall revenues and profits. These principles can easily be applied to the behavior aesthetic plastic surgery patients. The UCLA Division of Plastic Surgery resident aesthetics clinic recently offered a radical price change for its services. The effects of this change on demand for services and revenue were tracked. Economic analysis was applied to see if this price change resulted in the maximization of total revenues, or if additional price changes could further optimize them. Economic analysis of pricing involves several steps. The first step is to assess demand. The number of procedures performed by a given practice at different price levels can be plotted to create a demand curve. From this curve, price sensitivities of consumers can be calculated (price elasticity of demand). This information can then be used to determine the pricing level that creates demand for the exact number of procedures that yield optimal revenues. In economic parlance, revenues are maximized by pricing services such that elasticity is equal to 1 (the point of unit elasticity). At the UCLA resident clinic, average total fees per procedure were reduced by 40 percent. This resulted in a 250-percent increase in procedures performed for representative 4-month periods before and after the price change. Net revenues increased by 52 percent. Economic analysis showed that the price elasticity of demand before the price change was 6.2. After the price change it was 1. We conclude that the magnitude of the price change resulted in a fee schedule that yielded the highest possible revenues from the resident clinic. These results show that changes in price do affect total revenue and that the nature of these effects can be understood, predicted, and maximized using the tools of microeconomics. (Plast. Reconstr. Surg. 103: 695, 1999.)

Asset Price Fluctuation and Price Indices

Abstract: Since the late 1980s, the Japanese has experienced tremendous rise and fall of asset prices and large fluctuations of real economic activity, while general price level has remained relatively stable Such developments raised a question of whether monetary policy should have targeted asset prices rather than conventional price indices This paper focuses on how to make use of information inherent with asset price fluctuations in the monetary policy judgement To this end, it investigates the possibility of incorporating asset price data into inflation measures by extending the conventional price index into a dynamic framework The main conclusion of this paper is as follows Although the concept of such extensions of the conventional price index is highly evaluated from theoretical viewpoints, it is difficult for monetary policy makers to expect it to be more than a supplementary indicator for monetary policy judgment This is because (1) reliability of asset price statistics is quite low, compared with the conventional price indices; and (2) asset price changes do not necessarily mean that the future price changes because there are a lot of sources for asset price fluctuation besides the private-sector expectation for inflation

Optimal Price Regulation for Natural and Legal Monopolies

Abstract: Optimal price regulation for natural and legal monopolies is an impossible task. The still difficult .task of good price regulation can be systematized by considering separately price level and price structure of the regulated firm. Various methods of price level and price structure regulation are evaluated and then considered for the regulation of electricity transmission, both in the context of an independent transmission company and of vertical integration between transmission and most of the generation capacity. The regulatory approach suggested uses price caps defined on two-part tariffs. This way, flexibility for short-term capacity utilization can be combined with incentives for investments in new transmission capacity.

Critical fluctuations of demand and supply

Abstract: In order to describe price changes in open markets we introduce a virtual balanced price which is determined by the distribution of dealers’ expectation at a time. The dealers do not know directly the virtual balanced price but they can only guess it from the time series of market prices. By this assumption we derive a set of stochastic time evolution equations composed of the market price and the virtual balanced price as an extension of Langevin type equations.

Expectation and Housing Price Dynamics Following Deregulation in Korea

Abstract: This paper offers an explanation for the existence of price control on new houses in Korea, which is deemed both inefficient and inequitable This phenomenon cannot be explained by the conventional model of rent-seeking or the capture theory of regulation Instead, it is attributable to the popular belief that the removal of the price regulation will lead to the increase in the overall housing price by increasing the demand for existing houses that are a perfect substitute for new houses However, the paper, using a stock-adjustment model of the housing market, demonstrates that the claimed outcome cannot materialize under perfect foresight or adaptive expectation The outcome is possible in the short run under a peculiar expectation scheme of a self-fulfilling nature But even in this case, the price increase will be a one-time event and in the long-run overall housing prices will fall below the level that would prevail if the price regulations were maintained

Asymmetry in Farm-Retail Price Transmission in the Northeastern Fluid Milk Market

Abstract: A hybrid approach to estimate the asymmetric price transmission between the farm gate and the retail market is proposed. The model is estimated for the fluid milk market of the Northeast U.S., that of the metropolitan area of New York City as well as that of Upstate New York. Spatially disaggregated data allows the impact of regional dairy regulation on the farm-retail price spread to be assessed, as well as the behavior of the middlemen regarding price transmission on markets with different levels of retail concentration to be estimated. Results suggest that intermediaries transmit variations in milk farm price in an asymmetric way in the short-run; that governmental intervention might force middlemen to act competitively in terms of price transmission; and that a high degree of concentration at the retail level is not synonymous with inefficient price transmission.

Swedish Export Price Determination: Pricing to Market Shares?

Abstract: The Swedish export price determination for automobiles and kraft paper to three destination countries, over the period 1980-1994, is investigated. Formal tests on an error correction model indicate results consistent with price discrimination in Swedish exports of both goods. The exporters use their market power for pricing to market, which is characterized by the concern for foreign conditions, and implies an incomplete exchange rate pass-through. However, the pricing behaviour does not seem to be determined by the development of market shares, in any cases except one. The total pass-through to the local currency price within a year, that is the effect of an exchange rate change working through all variables and all interactions in the price determination, span between -16 % and +109 %.

Dynamic Pricing Strategies for Maximizing Customer Satisfaction

Abstract: Accountants are often asked for advice on pricing products, and their input is often quite helpful and necessary. Accountants, however, are very likely to focus on costs when trying to advise management on appropriate pricing strategies. Economists might focus on rules for maximizing short-run profits, i.e., set marginal revenue equal to marginal cost. This is because economists are more interested in studying the demand-curve for a product than in focusing on the actual costs; they are concerned with using demand (marginal revenue is derived from the demand curve) to determine the optimum price. Marketing executives, on the other hand, are more likely to focus on the different consumer segments since marketers are attuned to the idea of market segmentation. Market segmentation involves dividing the market into distinct groups of customers, each with their own needs, and considering each as a possible target market. The firm will then decide which segments to target and will provide the selected target markets with different products and/or different marketing mixes. Each of these approaches are valuable in pricing.The purpose of this paper is to introduce accountants to ideas from marketing and economics that can be quite helpful in determining the ideal price to charge for a product or service.

System and method of managing competitive price information

Abstract: A system and method of managing competitive price information adjusts prices which are higher than competitive prices and displays a promotional message if prices are lower than competitive prices. The system includes a plurality of electronic price labels (22) associated with a plurality of items for displaying price information about the items, a storage medium (36) comprising competitive price data files (34) containing item identification data and a competitor price for each of the items, and a computer (12) which obtains the competitor prices from the competitive price data files (34), reads current prices of the items from a price look-up (PLU) data file (44), determines whether the current prices are greater than the competitor prices and, for each current price which is greater than the corresponding competitor price, changes the current price in the PLU data file (44) to a new price based upon predetermined rules, and sends a message to the EPL (22) associated with the item to display the new price.

Price Improvement and Price Discovery on a Primary Market

Abstract: This article analyzes the relationship between price improvement and price discovery on American Stock Exchange. The authors present empirical evidence based on October 1996 quote and transaction data on the magnitude and frequency of price improvement and on price improvement9s relationship to price discovery. Price improvement in the period was substantial, averaging 1.43 cents per share for orders delivered by the Amex9s electronic order delivery system (PER) and 6.81 cents per share for orders entered non-electronically. The empirical evidence presented suggests that buy an sell orders are selectively price-improved at the Amex, depending on current market conditions, and thus that price improvement is linked to price discovery. These findings have implications for order flow consolidation in a major market center.

Microeconomic Theories of Imperfect Competition : Old Problems and New Perspectives

Abstract: Part 1 Industry size - quantity and price competition: of the competition of producers, Augustin Cournot numbers and size in Cournot oligopoly, M. McManus entry in a Cournot market, Charles R. Frank Jr Cournot equilibrium with free entry, Willaim Novshek the pure theory of monopoly, F.Y. Edgeworth a theory of dynamic oligopoly, II - price competition, kinked demand curves, and Edgeworth cycles, Eric Maskin and Jean Tirole quantity precommitment and Bertrand competition yield Cournot outcomes, David M. Kreps and Jose A. Scheinkman on the existence of Bertrand-Edgeworth equilibria with differentiated commodities, Jean-Pascal Benassy cartel problems, D.K. Osborne a non-cooperative equilibrium for supergames, James W. Friedman a theory of oligopoly, George J. Stigler the nature and significance of price leadership, Jesse W. Markham. Part 2 Entry barriers: the importance of the condition of entry, Joe S. Bain contestable markets - an uprising in the theory of industry structure, William J. Baumol new developments on the oligopoly front, Franco Modigliani dynamic limit pricing - optimal pricing under threat of entry, Darius W. Gaskins Jr on entry preventing behaviour and limit price models of entry, J.W. Friedman the role of investment in entry-deterrence, Avinash Dixit exit barriers are entry barriers - the durability of capital as a barrier to entry, B. Curtis Eaton and Richard G. Lipsey the fat-cat effect, the puppy-dog ploy, and the lean and hungry look, Drew Fudenberg and Jean Tirole sequential location among firms with foresight, Edward C. Prescott and Michael Visscher. Part 3 Product differentiation: the product as an economic variable, Edward H. Chamberlin group equilibrium, E.H. Chamberlin monopolistic competition and optimal product diversity, Avinash K. Dixit and Joseph E. Stiglitz market imperfection and excess capacity, Nicholas Kaldor spatial Cournot oligopoly, Martin J. Beckmann stability in competition, Harold Hotelling the principle of minimum differentiation holds under sufficient heterogeneity, A. de Palma et al entry and exit in a differentiated industry, J. Jaskold Gabszewicz and J.-F. Thisse natural oligopolies, Avner Shaked and John Sutton. Part 4 Incomplete information: a model of price adjustment, Peter A. Diamond bargains and ripoffs - a model of monopolistically competitive price dispersion, Stephen Salop and Joseph Stiglitz non-cooperative collusion under imperfect price information, Edward J. Green and Robert H. Porter the chain store paradox, Reinhard Selten reputation and imperfect information, David M. Kreps and Robert Wilson limit pricing and entry under incomplete information - an equilibrium analysis, Paul Milgrom and John Roberts the strategic role of information on the demand function in an oligopolistic market, Jean-Pierre Ponssard duopoly information equilibrium - Cournot and Bertrand, Xavier Vives. (Part contents).

Uniform two‐part tariffs and below marginal cost prices: disneyland revisited

Abstract: I. INTRODUCTION Since Cournot's [1838] classic analysis of a hard-nosed sole proprietor of a spring pricing water to maximize his profit, the simple theory of monopoly has concluded that a monopolist will produce the level of output at which marginal revenue is equal to marginal cost, and sell this output at the market clearing price, (Hicks [1935]). With a negatively sloped demand curve, this results in the monopoly equilibrium price exceeding marginal cost, and in less output than would be demanded if price is equal to marginal cost. In a seminal contribution to the analysis of twopart tariffs, Oi [1971] elicited some surprise when he pointed out that a profit maximizing monopolist might, under some conditions, choose a (marginal) price that is less than the marginal cost.(1) Later work by Schmalensee [1981] described a specific set of conditions in which pricing below marginal cost would be observed. Despite these demonstrations, the subsequent literature on uniform two-part tariffs for the most part considers below marginal cost pricing a thoroughly atypical outcome.(2) However, as an empirical matter, pricing below marginal cost is easily found. Disneyland-like recreation, ski resorts, buffet service of food, and the ubiquitous presence of open bowls of peanuts in bars are but a few examples. Srinagesh [1991] has argued convincingly that "the practice of setting marginal prices below marginal cost is so common in telecommunications offerings that it can justifiably be labeled a stylized fact." This paper fills the theoretical void by answering the following questions about pricing below marginal cost, using two-part tariffs in Oi's model with demand heterogeneity. Is the set of demand and cost parameters that induce such pricing small or large? When it occurs, will the price typically be slightly or substantially less than marginal cost? How large of an effect can such pricing have on profits, and does it typically have a small or large effect? We consider the class of all linear demand models with two types of consumers and a monopolist with constant marginal costs who charges a profit-maximizing uniform two-part tariff. We first show that two conditions are necessary for below marginal cost pricing to occur: 1) The consumer demand curves intersect at a strictly positive price and quantity; 2) The marginal cost is less than the demand curve intersection price. It is shown that pricing below marginal cost arises when consumers have sufficiently different demand elasticities so that the revenue losses arising from the high usage of the elastic consumer are more than offset by revenue gains obtained from the large entrance fee charged to the inelastic consumer.3 Next, we determine how the monopolist sets prices to maximize profits, given parameter values of the model. We then describe the behavior of p*/c the ratio of the optimal (marginal) price to marginal cost, over the parameter space. This provides the basis for determining regions in the parameter space in which p* [less than] c, i.e., where p*/c [less than] 1. To indicate quantitatively the potential significance of pricing below marginal cost, we find that sampling uniformly over the parameter space satisfying the two necessary conditions induces below marginal cost pricing 40% of the time. Furthermore, conditional on price being less than marginal cost, the mean ratio of p*/c with uniform sampling is .55. What relevance do these calculations with such a simple and austere model have for understanding nonlinear pricing in the real world? In an important recent paper, Sibley and Srinagesh [1997] study nonlinear pricing in multiproduct markets. They show that a critical assumption for below marginal cost pricing to occur is a "uniform ordering of demand curves" condition which is the generic equivalent of the non-crossing of demands condition in the analysis of nonlinear pricing of a single product. They demonstrate that violation of the uniform ordering condition is necessary for below marginal cost pricing to occur (when demand cross-elasticities are zero), that such pricing easily arises when the condition is violated, and indicate how extremely restrictive the condition is. …