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Showing papers on "Limit price published in 2005"


Journal ArticleDOI
TL;DR: In this article, the authors survey the literature analyzing the price formation and trading process, and the consequences of market organization for price discovery and welfare, and offer a synthesis of the theoretical microfoundations and empirical approaches.

517 citations


Journal ArticleDOI
TL;DR: This paper examined competitive price discrimination with horizontal and vertical taste differences and concluded that add-on practices can raise equilibrium profits by creating an adverse selection problem that makes price-cutting unappealing.
Abstract: This paper examines competitive price discrimination with horizontal and vertical taste differences. Consumers with higher valuations for quality are assumed to have stronger brand preferences. Two models are considered: a standard competitive price discrimination model in which consumers observe all prices; and an "add-on pricing" game in which add-on prices are naturally unobserved and firms may advertise a base good at a low price in hopes of selling add-ons at high unadvertised prices. In the standard game price discrimination is self-reinforcing: the model sometimes has both equilibria in which the firms practice price discrimination and equilibria in which they do not. The analysis of the add-on pricing game focuses on the Chicago-school argument that profits earned on add-ons will be competed away via lower prices for advertised goods. A conclusion is that add-on practices can raise equilibrium profits by creating an adverse selection problem that makes price-cutting unappealing. Although profitable when jointly adopted, using add-on pricing is not individually rational in a simple extension with endogenous advertising practices and costless advertising. Several models that could account for add-on pricing are discussed.

400 citations


Journal ArticleDOI
TL;DR: In this paper, the authors considered the price competition between e-tail and retail distribution channels under two market game settings: the Bertrand and the Stackelberg price competition models.
Abstract: In addition to regular retail distribution channels, a firm nowadays can avail themselves of such information technology (IT) as the Internet to distribute products directly “on line” (referred to as an “e-tail” distribution channel). The mix of retailing with e-tailing has added a new dimension of competition to the firm's distribution channels. The central issue of this competition is the competitive pricing policies between retail and e-tail distribution channels. In this paper, we consider the price competition between these two channels under two market game settings: the Bertrand and the Stackelberg price competition models. In the Bertrand competition, the manufacturer and retailer simultaneously select e-tail and retail price, respectively, while in Stackelberg competition, the manufacturer as a leader selects the e-tail price, then the retailer selects retail price. We obtain both the Bertrand and Stackelberg equilibrium pricing policies, and compare the profit gains under these two competitions. Based on our results, we propose an appropriate strategy for the manufacturer to adopt when adding an e-tail channel. We also show that an optimal wholesale price exists under a different market structure that could be used to encourage the retailer to accommodate the additional e-tail channel.

367 citations


Journal ArticleDOI
TL;DR: In this paper, a baseline two-country model of real and monetary transmission in the presence of optimal international price discrimination by firms is built, where profit maximizing monopolistic firms drive a wedge between prices across countries, optimally dampening the response of import and consumer prices to exchange-rate movements.

326 citations


Journal ArticleDOI
TL;DR: In this paper, the authors proposed a model that lets consumers react negatively only when they become convinced that prices are unfair, which can explain price rigidity, though its implications are not identical to those of existing models of costly price adjustment.

234 citations


Journal ArticleDOI
TL;DR: In this article, the authors argue that most of the existing literature is based on implausible models of inflation-output dynamics, and suggest that this problem may be solved with some recent behavioral models, which assume that price setters are slow to incorporate macroeconomic information into the prices they set.

201 citations


Journal ArticleDOI
TL;DR: In this paper, a simultaneous equation model with endogenous switching was developed to evaluate the effects of price knowledge and other sources of heterogeneity in utility demand modeling and demand management policy, showing that informed households were more responsive to average and marginal price signals, but this was due to heterogeneity rather than price knowledge.
Abstract: A household’s decision to acquire price knowledge is endogenous in the demand for utility services and may affect elasticities and consumption levels. A simultaneous equation model with endogenous switching is developed to evaluate the effects of price knowledge and other sources of heterogeneity. Results indicate informed households were more responsive to average and marginal price signals. Informed households also use less water, but this is due to heterogeneity rather than price knowledge. Controlling for heterogeneity, price knowledge actually increases monthly water usage. The implications of accounting for differences in price knowledge in utility demand modeling and demand management policy are discussed.

182 citations


Journal ArticleDOI
TL;DR: In this paper, the authors study the Island ECN orderbook and find a strong anticorrelation between price changes and order flow, which strongly reduces the virtual price impact and provides for an explanation of the empirical price impact function.
Abstract: Buying and selling stocks causes price changes, which are described by the price impact function. To explain the shape of this function, we study the Island ECN orderbook. In addition to transaction data, the orderbook contains information about potential supply and demand for a stock. The virtual price impact calculated from this information is four times stronger than the actual one and explains it only partially. However, we find a strong anticorrelation between price changes and order flow, which strongly reduces the virtual price impact and provides for an explanation of the empirical price impact function.

178 citations


Journal ArticleDOI
TL;DR: In this paper, the authors present the results of a survey on price-setting behavior conducted on a large random sample of Swedish firms and point out the importance of the long-term relations with customers for the rigidity of prices.
Abstract: This paper presents the results of a survey on price-setting behavior conducted on a large random sample of Swedish firms. The median firm adjusts the price once a year. State- and time-dependent price setting are about equally important. The four highest-ranked explanations for price rigidity in this study (implicit contracts, sluggish costs, explicit contracts, and the kinked demand curve) have close correspondents among the top five places in two similar large-scale surveys carried out in the UK and the U.S. The results point to the importance of the long-term relations with customers for the rigidity of prices (the estimated share of sales that go to regular customers is more than 80%).

170 citations


Journal ArticleDOI
TL;DR: The authors analyzes optimal monetary policy in a sticky price model with Calvo-type staggered price-setting and shows that the complete stabilization of the price level is optimal in the absence of initial price dispersion, while optimal inflation targets respond to changes in the level of relative price distortion.
Abstract: This paper analyzes optimal monetary policy in a sticky price model with Calvo-type staggered price-setting. In the paper, the optimal monetary policy maximizes the expected utility of a representative household without having to rely on a set of linearly approximated equilibrium conditions, given the distortions associated with the staggered price-setting. It shows that the complete stabilization of the price level is optimal in the absence of initial price dispersion, while optimal inflation targets respond to changes in the level of relative price distortion in the presence of initial price dispersion.

155 citations


Journal ArticleDOI
TL;DR: The authors showed empirically using a panel of OECD countries for oil and energy demand that symmetric price responses cannot be rejected after explicitly controlling for energy saving technical change within a fixed effects model.
Abstract: It has become fashionable to believe that energy and oil demand respond asymmetrically to price increases and decreases. Unfortunately, the asymmetric price model utilized by Gately and others has the unintended by-product of producing intercept shifts in the demand function purely in response to price volatility. Thus what is in fact energy saving technical change is attributed to price asymmetry. The two become observationally equivalent. Furthermore, the asymmetric price model has the peculiarity of being dependent on the starting point of the data period so that parameter estimates are not robust across different sample periods. We demonstrate empirically using a panel of OECD countries for oil and energy demand that symmetric price responses cannot be rejected after explicitly controlling for energy saving technical change within a fixed effects model.

Posted ContentDOI
TL;DR: In this article, the average frequencies of price changes and durations of price spells are estimated to characterize price setting in Austria, based on individual price records collected for the computation of the Austrian CPI.
Abstract: Based on individual price records collected for the computation of the Austrian CPI, average frequencies of price changes and durations of price spells are estimated to characterize price setting in Austria. Depending on the estimation method, prices are unchanged for 10 to 14 months on average. We find strong heterogeneity across sectors and products. Price increases occur only slightly more often than price decreases. The typical size of a price increase (decrease) is 11 (15) percent. The aggregate hazard function of prices is decreasing with time. Besides heterogeneity across products and price setters, this is due to oversampling of products with a high frequency of price changes. Accounting for unobserved heterogeneity in estimating the probability of a price change with a fixed-effects logit model, we find a positive effect of the duration of a price spell. During the Euro cash changeover the probability of price changes was higher.

Posted Content
TL;DR: In this paper, the authors report the results of a survey carried out by the Banco de Espana on a sample of around 2000 Spanish firms to deepen the understanding of firms' price setting behavior.
Abstract: This paper reports the results of a survey carried out by the Banco de Espana on a sample of around 2000 Spanish firms to deepen the understanding of firms' price setting behaviour. The main findings may be summarised as follows. Most Spanish firms are price setters that use predominantly state-dependent rules or a combination of time- and statedependent rules when reviewing their prices. Changes in costs are the main factor underlying price increases, whereas changes in market conditions (demand and competitors' prices) are the main driving forces of price decreases. The degree of price flexibility is directly related to the share of energy inputs over total costs and to the intensity of competition, whereas it is inversely linked to the labour share. The three theories of price stickiness that receive the highest empirical support are implicit contracts, coordination failure and explicit contracts.

Journal ArticleDOI
TL;DR: In this paper, the authors developed a behavioral commodity market model with consumers, producers and heterogeneous speculators to characterize the nature of commodity price fluctuations and explore the effectiveness of price stabilization schemes.

Posted Content
TL;DR: In this paper, the authors investigated the behavior of consumer prices in Italy by looking at micro data in the attempt to obtain a quantitative measure of the unconditional degree of price rigidity in the Italian economy.
Abstract: This paper investigates the behaviour of consumer prices in Italy by looking at micro data in the attempt to obtain a quantitative measure of the unconditional degree of price rigidity in the Italian economy. The analysis focuses on the monthly frequency of price changes and on the duration of price spells, also with reference to different types of products and outlets. Prices tend to remain unchanged on average for around 10 months; duration is longer for nonenergy industrial goods and services and much shorter for energy products. Price changes are more frequent upward than downward, in larger stores than in traditional ones. When the geographical location of outlets is accounted for, price changes display considerable synchronisation, in particular in the service sector.

Posted Content
TL;DR: In this paper, a simple explanation is proposed: decreasing hazards may result from aggregating heterogeneous price setters, and analytically the form of this heterogeneity effect for the most commonly used pricing rules and find that the aggregate hazard is nearly always decreasing.
Abstract: A common finding in empirical studies using micro data on consumer and producer prices is that hazard functions for price changes are decreasing. This means that a firm will have a lower probability of changing its price the longer it has kept it unchanged. This result is at odds with standard models of price setting. Here a simple explanation is proposed: decreasing hazards may result from aggregating heterogeneous price setters. We show analytically the form of this heterogeneity effect for the most commonly used pricing rules and find that the aggregate hazard is (nearly always) decreasing. Results are illustrated using Spanish producer and consumer price data. We find that a very accurate representation of individual data is obtained by considering just 4 groups of agents: one group of flexible Calvo agents, one group of intermediate Calvo agents and one group of sticky Calvo agents plus an annual Calvo process.

Journal ArticleDOI
TL;DR: In this article, the authors examined the impact of a wide price limit on price discovery processes, using data from the Kuala Lumpur Stock Exchange, and found that price limits on individual securities do not improve price discovery process but impose serious costs even when the limit band is as wide as 30%.

Posted Content
Harald Stahl1
TL;DR: In this paper, a duration model for price setting in German metal-working industries is analyzed using a monthly panel of individual price data for more than 2,000 plants covering the period from 1980 to 2001.
Abstract: Price setting in German metal-working industries is analysed using a monthly panel of individual price data for more than 2,000 plants covering the period from 1980 to 2001. Motivated by several models in the literature, a duration model is estimated. Price changes can be explained by a combination of state-dependence and time-dependence. Time-dependence clearly dominates and is strongest if a price increase follows a price increase. This occurs most likely after 1, 4, 5, 8, 9, ... quarters. This time-dependent effect is so strong and cost and price increases are so weak in the observed period that adjustment occurs before the sticky price sufficiently deviates from the flexible price, as traditional menu cost models assume. State-dependence seems to be most relevant in periods with decreasing demand. Then firms reduce prices and the time between two price cuts only rarely exceeds four months.

Posted Content
TL;DR: In this paper, the authors used micro-level price data and analyzed the behavior of consumer prices in Luxembourg and found that the median duration of consumer price is roughly 8 months, while prices of services typically change fewer than once a year.
Abstract: This paper uses micro-level price data and analyses the behaviour of consumer prices in Luxembourg. We find that the median duration of consumer prices is roughly 8 months. The median durations of energy and unprocessed food are about 1.5 and 5 months, while prices of services typically change fewer than once a year. For some product types, such as non-energy industrial goods and processed food, a relatively large share of the observed price changes is reverted afterwards. With the exception of services, individual prices do not show signs of downward rigidity. On average, price decreases are as large as price increases. Price changes are determined both by state- and time-dependent factors. Accumulated price and wage inflation, wage adjustment due to indexation, the cash changeover and a larger number of competitors increase the probability of a price change, while pricing at attractive pricing points and price regulation have the opposite effect.

Journal ArticleDOI
TL;DR: This paper exploits an exogenous change in cost-sharing within the Quebec (Canada) public Pharmacare program to estimate the price elasticity of expenditure for drugs using IV methods, adapted from an approach developed in the public finance literature used to estimate income responses to changes in tax schedules.
Abstract: The price elasticity of demand for prescription drugs is a crucial parameter of interest in designing pharmaceutical benefit plans. Estimating the elasticity using micro-data, however, is challenging because insurance coverage that includes deductibles, co-insurance provisions and maximum expenditure limits create a non-linear price schedule, making price endogenous (a function of drug consumption). In this paper we exploit an exogenous change in cost-sharing within the Quebec (Canada) public Pharmacare program to estimate the price elasticity of expenditure for drugs using IV methods. This approach corrects for the endogeneity of price and incorporates the concept of a 'rational' consumer who factors into consumption decisions the price they expect to face at the margin given their expected needs. The IV method is adapted from an approach developed in the public finance literature used to estimate income responses to changes in tax schedules. The instrument is based on the price an individual would face under the new cost-sharing policy if their consumption remained at the pre-policy level. Our preferred specification leads to expenditure elasticities that are in the low range of previous estimates (between -0.12 and -0.16). Naive OLS estimates are between 1 and 4 times these magnitudes.

Posted Content
Harald Stahl1
TL;DR: In this article, the authors present new evidence on the formation of producer prices based on a onetime survey that was conducted on a sample of 1200 German firms in manufacturing in June 2004.
Abstract: This paper presents new evidence on the formation of producer prices based on a onetime survey that was conducted on a sample of 1200 German firms in manufacturing in June 2004. Most of the firms have price-setting power and apply mark-up pricing. Indexation is negligible. Fixed nominal contracts are the most important reason for postponing a price adjustment. The second most likely reason is coordination failure, which causes more upward than downward stickiness. For every second firm both reasons are important. Firms can be assigned to four different groups according to an increasing complexity of reasons of price stickiness.

Posted Content
TL;DR: In this article, the authors analyzed the results of a survey conducted by the Banco de Portugal between May and September 2004 on a sample of 1370 Portuguese firms with the main purpose of investigating their price setting behavior.
Abstract: This paper analyses the results of a survey conducted by the Banco de Portugal between May and September 2004 on a sample of 1370 Portuguese firms with the main purpose of investigating their price setting behaviour. The evidence points to the presence of a considerable degree of price stickiness: most firms do not review or change their prices more than once a year; time lags in price reactions to cost and demand shocks were found to be significant; and slightly more than half of the firms follow time-dependent price reviewing, though only one-third stick to this practice after the occurrence of specific shocks. The degree of price stickiness seems to be higher in services than in manufacturing. The presence of implicit contracts between firms and their customers under which the former pledge to stabilise their prices as a way to increase customers’ loyalty is apparently the main reason that prevents firms from changing their prices more promptly. Other relevant sources of price stickiness were also found: coordination problems arising from the preference of firms not to change their prices unless their competitors do so, the constraint imposed by a high proportion of fixed costs, marginal costs that vary little when costs are an important determinant in firms’ pricing decisions or the presence of formal contracts that are costly to renegotiate. In contrast, alternative explanations such as the existence of menu costs, the preference of firms to quote their prices according to certain thresholds and the costs of collecting the relevant information for pricing decisions were not considered very important.

Posted Content
TL;DR: In this paper, a jump diffusion type model was proposed to recover the main characteristics of electricity spot price dynamics, including seasonality, mean reversion, and spiky behavior, and the usefulness of the approach was confirmed by out-of-sample tests.
Abstract: In this paper we propose a jump diffusion type model which recovers the main characteristics of electricity spot price dynamics, including seasonality, mean reversion, and spiky behavior. Calibration of the market price of risk allows for pricing of Asian-type options written on the spot electricity price traded at Nord Pool. The usefulness of the approach is confirmed by out-of-sample tests.

Journal ArticleDOI
TL;DR: In this paper, the authors studied price transmission and marketing margins in the transition economies of Hungarian pork market and found that producer and retail pork prices are cointegrated, the retail prices entering the cointegration space as weakly exogenous variables.
Abstract: The analysis of vertical price relationship along the supply chain from producers to consumers has become a popular tool of evaluating the efficiency and degree of competition in agrifood systems over recent decades. There is a wealth of literature on the farm-retail price spread for different commodities and countries. However, with one exception (Bojnec, 2002) none have studied price transmission and marketing margins in the transition economies. It is a common belief that because of the distorted markets inherited from the pre 1989 period, the deficiency of the price-discovery mechanisms, and unpredictable policy interventions, marketing margins are generally larger in the transition economies than in competitive markets. Using cointegration analysis, we find that producer and retail pork meat prices are cointegrated, the retail prices entering the cointegration space as weakly exogenous variables. Structural tests imposing homogeneity conditions are carried out and show a competitive pricing strategy. Price transmission modeling suggests that, despite the common belief, price transmission on the Hungarian pork meat market is symmetric. [JEL classification: Q13, D12, D4.] © 2005 Wiley Periodicals, Inc. Agribusiness 21: 273–286, 2005.

Journal ArticleDOI
TL;DR: In this article, the authors analyzed the behavior of price setters in Poland during the transition from a planned to a market economy, using a large disaggregated data set, and found that the effect of expected inflation on relative price variability is much stronger than the impact of unexpected inflation.

Patent
24 Feb 2005
TL;DR: In this paper, a computerized system and methods for conducting on-line auctions is presented, which allows bidders to view the price at which a lot is offered and make a bid when the price is acceptable to the bidder.
Abstract: The present invention provides a computerized system and methods for conducting on-line auctions. One or more concurrent auctions for one or more lots of products or services may be conducted. A dynamic pricing mechanism allows bidders to view the price at which a lot is offered and to make a bid when the price is acceptable to the bidder. In some embodiments, the results of the auction of one lot affect the starting price, reserve price and other characteristics of auctions for subsequent lots. In some embodiments, the pricing of a lot may depend more generally on the demand for similar products. Mulitple stage auctions with declining price and rising price aspects are also provided.

Journal ArticleDOI
TL;DR: In this article, a large supermarket chain in the US showed that small price increases occur more frequently than small price decreases, and that consumers may choose to ignore or not to respond to small price changes.
Abstract: Analyzing scanner price data that cover 27 product categories over an eight-year period from a large Mid-western supermarket chain, we uncover a surprising regularity in the data—small price increases occur more frequently than small price decreases. We find that this asymmetry holds for price changes of up to about 10 cents, on average. The asymmetry disappears for larger price changes. We document this finding for the entire data set, as well as for individual product categories. Further, we find that the asymmetry holds even after excluding from the data the observations pertaining to inflationary periods, and after allowing for various lengths of lagged price adjustment. The findings are insensitive also to the measure of price level used to measure inflation (the PPI or the CPI). To explain these findings, we extend the implications of the literature on rational inattention to individual price dynamics. Specifically, we argue that processing and reacting to price change information is a costly activity. An important implication of rational inattention is that consumers may rationally choose to ignore—and thus not to respond to—small price changes, creating a “range of inattention” along the demand curve. This range of consumer inattention, we argue, gives the retailers incentive for asymmetric price adjustment “in the small.” These incentives, however, disappear for large price changes, because large price changes are processed by consumers and therefore trigger their response. Thus, no asymmetry is observed “in the large.” An additional implication of rational inattention is that the extent of the asymmetry found “in the small” might vary over the business cycle: it might diminish during recessions and strengthen during expansions. We find that the data are indeed consistent with these predictions. An added contribution of the paper is that our theory may offer a possible explanation for the presence of small price changes, which has been a long-standing puzzle in the literature.

Journal ArticleDOI
TL;DR: In this paper, the authors compare the impact on retailer profitability of two price discrimination mechanisms: quantity discounts based on package size and store-level pricing or micromarketing (third-degree price discrimination).
Abstract: Retailers typically engage in some form of price discrimination to increase profitability. In this article, the authors compare the impact on retailer profitability of two price discrimination mechanisms: quantity discounts based on package size (second-degree price discrimination) and store-level pricing or micromarketing (third-degree price discrimination). Whereas the latter has been well addressed in the marketing literature, there is limited empirical research on the use of quantity discounts for price discrimination. Using store-level sales data, the authors estimate a structural demand model, accounting for parameter heterogeneity and price endogeneity. They combine the parameter estimates with a model of retailer pricing to conduct optimal pricing and profitability simulations under several scenarios, ranging from constraining the retailer not to engage in any form of price discrimination to the least restrictive scenario of setting nonlinear price schedules specific to each store. The pr...

Journal ArticleDOI
TL;DR: In this paper, the authors study the immediate price impact of a single trade executed in the Australian Stock Exchange (ASX) by ordering the top 300 stocks on the ASX in order of their free float market capitalization, and show that higher cap stocks experiencing lower price impact than lower cap stocks for the same traded volume.
Abstract: We study the immediate price impact of a single trade executed in the Australian Stock Exchange (ASX). By ordering the top 300 stocks on the ASX in order of their free float market capitalization, a clear pattern emerges, with higher cap stocks experiencing lower price impact than lower cap stocks for the same traded volume. We investigate this relationship in detail, and show that the price impact and liquidity scale as a power of the market capitalization. This relationship is used to obtain a single market impact curve which shows average price shift as a function of volume traded. We obtain similar results for every year from 2001 to 2004.

Patent
21 Jul 2005
TL;DR: In this article, a method of managing trading is provided, where a first offer for a particular instrument in a particular market is received from a first market maker at first offer price (122).
Abstract: According to one embodiment, a method of managing trading is provided. A first offer for a particular instrument in a particular market is received from a first market maker at a first offer price (122). A first bid for the same particular instrument in the same particular market is received from a second market maker at a first bid price, the first bid price being higher than or equal to the first offer price (126). As a result of the first bid price being higher than or equal to the first offer price, the first offer price is automatically increased to a price higher than the first bid price such that a trade is not executed between the first offer and the first bid (184). In some embodiments, such method may be used to protect market makers from unwanted trades caused by inherent latency in the market makers' pricing engines and/or networks.