Showing papers on "Limit price published in 2006"
TL;DR: In this paper, a non-cooperative oligopoly pricing model is used to show that firms add complexity to their price structures to preserve market power and corporate profits by bounding the financial literacy of consumers.
Abstract: There is mounting empirical evidence to suggest that the law of one price is violated in retail financial markets: there is significant price dispersion even when products are homogeneous. Also, despite the large number of firms in the market, prices remain above marginal cost and may even rise as more firms enter. In a non-cooperative oligopoly pricing model, I show that these anomalies arise when firms add complexity to their price structures. Complexity preserves market power and corporate profits by bounding the financial literacy of consumers. As consumers find it more difficult to find the best deal, more of them optimally choose to remain uninformed about industry prices, which ultimately leads to price dispersion and failure of competition. Professional advice (i.e. an advice channel) removes this advantage, unless the firms increase aggregate complexity, decrease price dispersion across the industry, or institute incentive contracts with the advice channel. Because retail markets are extremely large, such practices have important welfare implications.
359 citations
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TL;DR: In this article, the authors show that charging a high shipping cost and starting the auction at a low opening price leads to higher numbers of bidders and higher revenues when the shipping charge is not excessive.
Abstract: Many firms divide the price a consumer pays for a good into two pieces---the price for the item itself and the price for shipping and handling. With fully rational customers, the exact division between the two prices is irrelevant---only the total price matters. We test this hypothesis by selling matched pairs of CDs and Xbox games in a series of field experiments on eBay. In theory, the ending auction price should vary inversely with the shipping charge to leave the total price paid constant. Contrary to the theory, we find that charging a high shipping cost and starting the auction at a low opening price leads to higher numbers of bidders and higher revenues when the shipping charge is not excessive. We show that these results can be accounted for by boundedly rational bidding behavior such as loss-aversion with separate mental accounts for different attributes of the price or disregard for shipping costs.
257 citations
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TL;DR: In this paper, the authors investigated the pricing behavior of firms in the euro area on the basis of surveys conducted by nine Eurosystem national central banks, covering more than 11,000 firms and found that firms operate in monopolistically competitive markets, where prices are mostly set following markup rules and where price discrimination is common.
Abstract: This study investigates the pricing behavior of firms in the euro area on the basis of surveys conducted by nine Eurosystem national central banks, covering more than 11,000 firms. The results, consistent across countries, show that firms operate in monopolistically competitive markets, where prices are mostly set following markup rules and where price discrimination is common. Around one-third of firms follow mainly timedependent pricing rules, while two-thirds allow for elements of state dependence. The majority of the firms take into account both past and expected economic developments in their pricing decisions. Price reviews happen with a low frequency, of about one to three times per year in most countries, but prices are actually changed even less. Hence, price stickiness arises at both stages of the price-setting process and is mainly driven by customer relationships — explicit and implicit contracts — and coordination failure. Firms adjust prices asymmetrically in response to shocks: while cost shocks have a greater impact when prices have to be raised than when they have to be reduced, a fall in demand is more likely to induce a price change than an increase in demand
253 citations
TL;DR: In this article, the authors show that charging a high shipping cost and starting the auction at a low opening price leads to higher numbers of bidders and higher revenues when the shipping charge is not excessive.
Abstract: Many firms divide the price a consumer pays for a good into two pieces---the price for the item itself and the price for shipping and handling. With fully rational customers, the exact division between the two prices is irrelevant---only the total price matters. We test this hypothesis by selling matched pairs of CDs and Xbox games in a series of field experiments on eBay. In theory, the ending auction price should vary inversely with the shipping charge to leave the total price paid constant. Contrary to the theory, we find that charging a high shipping cost and starting the auction at a low opening price leads to higher numbers of bidders and higher revenues when the shipping charge is not excessive. We show that these results can be accounted for by boundedly rational bidding behavior such as loss-aversion with separate mental accounts for different attributes of the price or disregard for shipping costs.
236 citations
TL;DR: In this article, differences in the informational content of bills are documented for the first time on the basis of sample bills collected from 383 utilities across the USA, and a standard aggregate water demand model is augmented with qualitative variables describing differences in billing information, allowing such variables to a...
Abstract: Microeconomic theory predicts that people decrease consumption when price increases, the magnitude of the effect depending on price elasticity. The law of demand, however, implicitly assumes that consumers know prices, an assumption that is not always satisfied in markets with ex post billing. When prices are not transparent, elasticity estimates are potentially lower than their full information potential. Evidence of low price elasticity abounds in residential water demand studies, limiting the effectiveness and desirability of using price signals as a conservation tool. It is hypothesized that resident's sluggish response to price is partly due to the absence of price information on water bills. Differences in the informational content of bills are documented for the first time on the basis of sample bills collected from 383 utilities across the USA. A standard aggregate water demand model is augmented with qualitative variables describing differences in billing information, allowing such variables to a...
225 citations
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TL;DR: In this article, the authors present a method for evaluating investments in decentralized renewable power generation under price uncertainty, where the investor has a deferrable opportunity to invest in one local power generating unit, with the objective to maximize the profits from the opportunity.
Abstract: This paper presents a method for evaluating investments in decentralized renewable power generation under price un certainty. The analysis is applicable for a client with an electricity load and a renewable resource that can be utilized for power generation. The investor has a deferrable opportunity to invest in one local power generating unit, with the objective to maximize the profits from the opportunity. Renewable electricity generation can serve local load when generation and load coincide in time, and surplus power can be exported to the grid. The problem is to find the price intervals and the capacity of the generator at which to invest. Results from a case with wind power generation for an office building suggests it is optimal to wait for higher prices than the net present value break-even price under price uncertainty, and that capacity choice can depend on the current market price and the price volatility. With low price volatility there can be more than one investment price interval for different units with intermediate waiting regions between them. High price volatility increases the value of the investment opportunity, and therefore makes it more attractive to postpone investment until larger units are profitable.
214 citations
TL;DR: In this article, the authors analyse the micro data underlying the Producer Price Index (PPI) over the period February 2001 to January 2005 and find that price setting is characterised by both time and state-dependent pricing.
Abstract: This paper documents the patterns and determinants of price setting in the Belgian industry. We analyse the micro data underlying the Producer Price Index (PPI) over the period February 2001 to January 2005. On average only one out of four prices changes in a typical month, while the absolute size of a price change amounts to 6%. The frequencies of price adjustment are particularly heterogeneous across sectors, which is determined by heterogeneity in the market and cost structure. We find no signs of downward nominal rigidity. A joint analysis of sizes and frequencies of price adjustment across time shows that price setting is characterised by both time- and state-dependent pricing. About 38% of the exported goods are affected by pricing to market.
179 citations
TL;DR: In this paper, the authors discuss the value of price forecasting in the electricity market during bidding or hedging against volatility, and present some of the proposed methods for meeting these challenges.
Abstract: This paper discusses the value of price forecasting in the electricity market during bidding or hedging against volatility. When bidding in a pool system, the market participants are requested to express their bids in terms of prices and quantities. Since the bids are accepted in order of increasing price until the total demand is met, a company that is able to forecast the pool price can adjust its own price/production schedule depending on hourly pool prices and its own production costs. This paper also discusses the challenges of price forecasting and describes some of the proposed methods for meeting these challenges.
161 citations
TL;DR: In this article, the authors argue that the perceived fairness of the price increase will also depend on the alignability of the cost and price increases, such that alignable increases will be perceived as more acceptable than nonalignable increases.
Abstract: Prior research suggests that consumers are forgiving of a price increase that is commensurate with increased vendor costs. We argue that the perceived fairness of the price increase will also depend on the alignability of the cost and price increases, such that alignable increases will be perceived as more acceptable than nonalignable increases. Moreover, we predict that when a cost increase is nonalignable, consumers will be more receptive to a service price increase than a goods price increase. Evidence from a series of experiments supports both predictions.
155 citations
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TL;DR: In this article, the adjustment of retail and services prices in a period of low inflation, using a set of individual price data from the German Consumer Price Index that covers the years 1998 to 2003, was analyzed.
Abstract: We analyse the adjustment of retail and services prices in a period of low inflation, using a set of individual price data from the German Consumer Price Index that covers the years 1998 to 2003 We strong find evidence of time- and state-dependent price adjustment Most importantly, the differences in "unconditional" sectoral price flexibility are found to be linked to input price volatility
149 citations
TL;DR: In this paper, the authors draw a simple link between the choice of currency and the pricing decision of a firm that changes prices in response to all shocks and show that a firm with a price list will set the price in its own currency (and otherwise it will set price in the foreign currency).
Abstract: Firms sometimes write price lists or catalogs for their exports, so they set prices for a period of time and do not adjust prices during that interval in response to changes in their environment. The firm sets the price either in its own currency or the importer's currency. This paper draws a simple link between the choice of currency and the pricing decision of a firm that changes prices in response to all shocks. Specifically, if the latter firm's price has a lower variance in terms of its own currency than the importer's currency, then the firm with a price list will set the price in its own currency (and otherwise it will set price in the foreign currency). This relationship is established by consideration of the firm with a price list as a special case of a firm that indexes its export price to the exchange rate. (JEL: F4, F1)
Abstract: In a model of spatial competition, we analyze the equilibrium outcomes in markets where the product price is exogenous. Using an extended version of the Hotelling model, we assume that firms choose their locations and the quality of the product they supply. We derive the optimal price set by a welfarist regulator. If the regulator can commit to a price prior to the choice of locations, the optimal (second-best) price causes overinvestment in quality and an insufficient degree of horizontal differentiation (compared with the first-best solution) if the transportation cost of consumers is sufficiently high. Under partial commitment, where the regulator is not able to commit prior to location choices, the optimal price induces first-best quality, but horizontal differentiation is inefficiently high.
TL;DR: An experiment examining a simple clearinghouse model that generates price dispersion finds that an increase in the fraction of informed consumers leads to more competitive pricing for all consumers, and that when more firms enter the market, prices to informed consumers become more competitive while prices to captive customers become less competitive.
TL;DR: In this article, the authors analyse large stock price changes of more than five standard deviations for (i) TAQ data for the year 1997 and (ii) order book data from the Island ECN, and find that a low density of limit orders in the order book, i.e. a small liquidity, is a necessary prerequisite for the occurrence of extreme price fluctuations.
Abstract: We analyse large stock price changes of more than five standard deviations for (i) TAQ data for the year 1997 and (ii) order book data from the Island ECN for the year 2002. We argue that a large trading volume alone is not a sufficient explanation for large price changes. Instead, we find that a low density of limit orders in the order book, i.e. a small liquidity, is a necessary prerequisite for the occurrence of extreme price fluctuations. Taking into account both order flow and liquidity, large stock price fluctuations can be explained quantitatively.
TL;DR: In this article, the authors provided some new empirical features on price setting behavior for French producers using micro data underlying the producer and business-services price indices over the period 1994-2005.
Abstract: This paper provides some new empirical features on price setting behaviour for French producers using micro data underlying the producer and business-services price indices over the period 1994-2005. Some crucial methodological issues on the collection of producer prices are raised. Then, the main features of producers' price setting are presented: producer prices are modified quite frequently and by small amounts. A high heterogeneity across sectors is also observed: business-services prices change less often than industrial producer prices. The data lend some support to predictions of both time- and state-dependence models: Taylor contracts are not unusual but prices also respond to the changes in the firm's economic conditions. Nevertheless, time-dependent models are shown to be the most relevant theories to explain the producer price rigidity.
TL;DR: In this article, substantial variation in the prices of common stocks in U.S. markets due to firms selecting particular price ranges for their shares was found to explain roughly two-thirds of the variation in share prices.
Abstract: We document substantial variation in the prices of common stocks in U.S. markets due to firms selecting particular price ranges for their shares. Cross‐sectional evidence indicates that variables consistent with Merton’s model of capital market equilibrium explain roughly two‐thirds of this variation in share prices. In addition, measures of trading range and share price appreciation predict stock splits, and the “investor base” of firms that split their stock increases compared to other firms. We conclude that firms manage share price levels to increase the value of the firm.
TL;DR: This paper analyzes the pricing problem with a limited number of price changes in a dynamic, deterministic environment in which demand depends on the current price and time, and there is a capacity/inventory constraint that may be set optimally ahead of the selling season.
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TL;DR: In this article, the authors explore the price-setting behavior of Austrian firms based on survey evidence and find that customer relationships are a major source of price stickiness in the Austrian economy.
Abstract: This paper explores the price-setting behavior of Austrian firms based on survey evidence. Our main result is that customer relationships are a major source of price stickiness in the Austrian economy. We also find that the majority of firms in our sample follows a time-dependent pricing strategy. However, a substantial fraction of firms deviates from time-dependent pricing in the case of large shocks and switches to a state-dependent pricing strategy. In addition, we present evidence suggesting that the price response to various shocks is subject to asymmetries.
TL;DR: This article presents a comprehensive model to integrate pricing and capacity allocation decisions in most revenue management models for perishable products, and shows that at any time, a customer class is active if and only if the price offered is over a threshold level.
TL;DR: In this paper, the authors explored the role of a number of factors in explaining the heterogeneity in the degree of price stickiness across industries, on the basis of the information provided by surveys on pricing behavior conducted in nine euro area countries.
Abstract: This paper explores the role of a number of factors in explaining the heterogeneity in the degree of price stickiness across industries, on the basis of the information provided by surveys on pricing behavior conducted in nine euro area countries. The main focus is placed on the influence of competition on the degree of price flexibility. Our results suggest that the price setting strategies of the most competitive firms give them a greater capacity to react to shocks and make, in practice, for greater flexibility in their prices. The direct influence of market competition on price flexibility is corroborated by a cross-country cross-industry econometric analysis based on the information provided by surveys. This analysis also shows that the cost structure and demand conditions help to explain the degree of price flexibility. Finally, it suggests that countries in which product market regulation is more relevant are characterized by less price flexibility.
TL;DR: Research on electronic markets has revealed that IT has increased market transparency due to increased accessibility and availability of market information, but what online sellers do in terms of strategic pricing decisions, in particular price adjustment behavior over time, has not been fully investigated.
Abstract: Determining prices is a key management task for a merchant. IT-enabled electronic markets facilitate price discovery by both buyers and sellers compared to traditional, physical markets. Recent research on electronic markets has revealed that IT has increased market transparency due to increased accessibility and availability of market information. How ever, what online sellers do in terms of strategic pricing decisions, in particular price adjustment behavior over time, has not been fully investigated. Due to the ease of making price changes, electronic sellers can execute a number of dif ferent pricing strategies, including setting the frequency and
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TL;DR: In this paper, the authors analyzed the pricing behavior of Luxembourg firms based on survey evidence and found that a majority of firms use price review rules that include elements of state dependency, and that adjustment speed is faster when cost goes up and demand goes down than in the opposite cases.
Abstract: This paper analyses the pricing behaviour of Luxembourg firms based on survey evidence. Luxembourg firms typically have low market share, many competitors and longstanding customer relationships. Price discrimination is frequently applied. A majority of firms use price review rules that include elements of state dependency. The median firm reviews and changes prices twice a year. The results suggest an almost equal share of firms applying forward-looking, backward-looking and rules of thumb behaviour. The adjustment speed is faster when cost goes up and demand goes down than in the opposite cases. The most relevant theories explaining price rigidity are implicit contracts, cost-based pricing and explicit contracts. Increases in labour and other costs are the most important factors leading to price increases; for price reductions it is price reductions by competitors followed by declining labour costs.
TL;DR: In this article, the authors used data from the Austrian retail gasoline market to find that a higher station density reduces average prices, however, this is negatively related to the density of stations, and suggest causality running from station density to price.
Abstract: Using data from the Austrian retail gasoline market we find that a higher station density reduces average prices. Market (i.e. ownership) concentration does not significantly affect average price, however is negatively related to the density of stations. Estimation of the pricing and entry equations as simultaneous equations does not alter our conclusions, and suggests causality running from station density to price. We argue that the spatial dimension of markets allows the identification of market conduct, which is particularly relevant for competition policy.
TL;DR: In this paper, the authors put forth a sales response model to explain the differences in immediate and dynamic effects of promotional prices and regular prices on sales, which consists of a vector autoregression that is rewritten in error correction format, allowing the authors to disentangle the immediate effects from the dynamic effects.
Abstract: The authors put forth a sales response model to explain the differences in immediate and dynamic effects of promotional prices and regular prices on sales. The model consists of a vector autoregression that is rewritten in error correction format, which allows the authors to disentangle the immediate effects from the dynamic effects. In a second level of the model, the immediate price elasticities, the cumulative promotional price elasticity, and the long-term regular price elasticity are correlated with various brand-specific and category-specific characteristics. The model is applied to seven years of data on weekly sales of 100 different brands in 25 product categories. The authors find many significant moderating effects on the elasticity of price promotions. Brands in categories that are characterized by high price differentiation and that constitute a lower share of budget are less sensitive to price discounts. Deep price discounts increase the immediate price sensitivity of customers. The ...
TL;DR: In this paper, the authors characterize collusive pricing patterns when buyers may detect the presence of a cartel and find that the cartel price path is comprised of two phases, namely the transitional phase and the stationary phase.
TL;DR: In this paper, the authors examine how the effects of a low price guarantee are moderated by consumer perception of market price dispersion and show that higher levels of penalty can help restore a low-price guarantee's effectiveness.
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TL;DR: In this paper, the authors examined the magnet effect in the Korea stock exchange and found that a significant magnet effect exists in all five market microstructure variables (the rate of return, trading volume, volatility, order flow and order type) when the limit hit becomes imminent.
Abstract: We examine the existence and the forms of the magnet effect using transaction files and limit order book of the Korea Stock Exchange. A significant magnet effect exists in all five market microstructure variables (the rate of return, trading volume, volatility, order flow, and order type) when the limit hit becomes imminent. Specifically, investors place increasingly more orders, choose proportionally more market orders, and frequently reposition existing orders to advance transactions. We also find that: (i) a narrower price limit exhibits higher acceleration rates in all five variables compared to a wider price limit; and (ii) the upper limit hits draw heavier volumes of transactions, order submissions and market orders than the lower limit hits. We confirm that the magnet effect is a phenomenon unique only to markets with daily price limit systems.
TL;DR: In this article, economic growth and food security effects may dominate more conventional welfare costs of food price fluctuations, although estimating the empirical magnitude of the effects is hampered by the lack of consensus on the extent to which price fluctuations actually reduce economic growth or food security.
TL;DR: A method for easily finding the optimal price and quantity that applies to more general cases than the usual one in which uncertainty is either additive, multiplicative, or a combination of the two is developed.
Abstract: Pricing and quantity decisions are critical to many firms across different industries. We study the joint price/quantity newsvendor model where only a single quantity and price decision is made, such as a fashion or holiday product that cannot be replenished and where the price is advertised nationally and cannot be changed. Demand is uncertain and sensitive to price. We develop a method for easily finding the optimal price and quantity that applies to more general cases than the usual one in which uncertainty is either additive, multiplicative, or a combination of the two. We represent a quantity by its fractile of the probability distribution of demand for a given price. We use a standard approach to approximating a given distribution with a finite number of representative fractiles and assume that these fractile functions are piecewise linear functions of the price. We identify effects that are not usually seen in a joint price/quantity newsvendor model. For example, although the optimal quantity is a decreasing function of the unit cost, the optimal price can be nonmonotone in the unit cost and we shed insight into why. We illustrate that using a simplified structure of demand uncertainty can result in substantially lower profits.
TL;DR: In this paper, the authors show that adding an LPG to an MBG can help improve economic efficiency as both retailer loss and customer hassle costs from excessive returns are reduced, which serves as a counter argument against those who believe that LPGs should be prohibited.