Showing papers on "Price level published in 2003"

Consumer Perceptions of Price (Un)Fairness

Abstract: A series of studies demonstrates that consumers are inclined to believe that the selling price of a good or service is substantially higher than its fair price. Consumers appear sensitive to several reference points—including past prices, competitor prices, and cost of goods sold—but underestimate the effects of inflation, overattribute price differences to profit, and fail to take into account the full range of vendor costs. Potential corrective interventions—such as providing historical price information, explaining price differences, and cueing costs—were only modestly effective. These results are considered in the context of a four‐dimensional transaction space that illustrates sources of perceived unfairness for both individual and multiple transactions.

Price Informativeness and Investment Sensitivity to Stock Price

Abstract: Stock prices and real investments are highly correlated. Previous literature has offered two main explanations for this high correlation. The first explanation relies on price being informative about investment opportunities, the second one is based on financing constraints. In this paper we empirically examine the effect of price informativeness on the sensitivity of investment to stock price. Using price non-synchronicity and PIN as measures of price informativeness, we find that the degree of informativeness is positively correlated with the sensitivity of investment to stock price. Since, according to previous literature, these measures reflect private information, the result suggests that prices perform an active role, i.e., that managers learn from stock price when making investment decisions. This result is robust to the inclusion of various control variables (such as controls for managerial information) and to changes in specification.

Measuring Prices and Price Competition Online: Amazon.com and BarnesandNoble.com

Abstract: Despite the interest in measuring price sensitivity of online consumers, most academic work on Internet commerce is hindered by a lack of data on quantity. In this paper we use publicly available data on the sales ranks of about 20,000 books to derive quantity proxies at the two leading online booksellers. Matching this information to prices, we can directly estimate the elasticities of demand facing both merchants as well as create a price index for online books. The results show significant price sensitivity at both merchants but demand at BarnesandNoble.com is much more price-elastic than is demand at Amazon.com. The data also allow us to estimate the magnitude of bias in the CPI due to the rise of Internet sales.

The Effects of Time Constraints on Consumers' Judgments of Prices and Products

Abstract: This article examines how time constraints influence consumers' product evaluations over different levels of price information. To understand the effects of time constraints (time pressure), a conceptual framework incorporating both the motivational and the resource effects of time constraints on consumers' information processing is developed. Using price as the attribute information to be evaluated, specific hypotheses about the effects of time constraints on the relationship between price and consumers' perceptions of quality and monetary sacrifice are proposed. The results of a replicated experiment show that perceptions of quality and monetary sacrifice exhibit different response patterns depending on the time constraints, price levels, and subjects' motivations to process information. Additional analyses provide insights into how these two perceptions are integrated to form perceptions of value.

Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others

Abstract: Existing proposals to escape from a liquidity trap and deflation, including my Foolproof Way,' are discussed in the light of the optimal way to escape. The optimal way involves three elements: (1) an explicit central-bank commitment to a higher future price level; (2) a concrete action that demonstrates the central bank's commitment, induces expectations of a higher future price level and jump-starts the economy; and (3) an exit strategy that specifies when and how to get back to normal. A currency depreciation is a direct consequence of expectations of a higher future price level and hence an excellent indicator of those expectations. Furthermore, an intentional currency depreciation and a crawling peg, as in the Foolproof Way, can implement the optimal way and, in particular, induce the desired expectations of a higher future price level. I conclude that the Foolproof Way is likely to work well for Japan, which is in a liquidity trap now, as well as for the euro area and the United States, in case either would fall into a liquidity trap in the future.

The Trade-off Between the Selling Price of Residential Properties and Time-on-the-Market: The Impact of Price Setting

Abstract: When a house is placed on the market, the seller must choose the initial offer price. Setting the price too high or too low affects the marketability of the property. While there is near universal agreement that the seller faces a trade-off between selling at a higher price and selling in less time, there is less agreement about how to measure this trade-off. This paper offers a framework for analysis and shows that an increase in the list price increases expected time-on-the-market (TOM). Because house buyers must solve a type of signal extraction problem, the effect of a higher list price is magnified for houses in a market segment having a low predicted variance of the list price. This paper also shows that the list price of houses which are withdrawn before sale has a higher mean and variance, and that the possibility of withdrawal censors information about the time-on-the-market.

Optimal Monetary Policy

Abstract: Optimal monetary policy maximizes the welfare of a representative agent, given frictions in the economic environment. Constructing a model with two sets of frictions-costly price adjustment by imperfectly competitive firms and costly exchange of wealth for goods-we find optimal monetary policy is governed by two familiar principles. First, the average level of the nominal interest rate should be sufficiently low, as suggested by Milton Friedman, that there should be deflation on average. Yet, the Keynesian frictions imply that the optimal nominal interest rate is positive. Second, as various shocks occur to the real and monetary sectors, the price level should be largely stabilized, as suggested by Irving Fisher, albeit around a deflationary trend path. Since expected inflation is roughly constant through time, the nominal interest rate must therefore vary with the Fisherian determinants of the real interest rate. Although the monetary authority has substantial leverage over real activity in our model economy, it chooses real allocations that closely resemble those which would occur if prices were flexible. In our benchmark model, there is some tendency for the monetary authority to smooth nominal and real interest rates.

Escaping from a liquidity trap and deflation: the foolproof way and others

Abstract: Existing proposals to escape from a liquidity trap and deflation, including my “Foolproof Way,” are discussed in the light of the optimal way to escape. The optimal way involves three elements: (1) an explicit central-bank commitment to a higher future price level; (2) a concrete action that demonstrates the central bank’s commitment, induces expectations of a higher future price level and jump-starts the economy; and (3) an exit strategy that specifies when and how to get back to normal. A currency depreciation is a direct consequence of expectations of a higher future price level and hence an excellent indicator of those expectations. Furthermore, an intentional currency depreciation and a crawling peg, as in the Foolproof Way, can implement the optimal way and, in particular, induce the desired expectations of a higher future price level. I conclude that the Foolproof Way is likely to work well for Japan, which is in a liquidity trap now, as well as for the euro area and the United States, in case either would fall into a liquidity trap in the future.

Interactions of Commitment and Discretion in Monetary and Fiscal Policies

Abstract: We consider monetary-fiscal interactions when the monetary authority is more conservative than the fiscal. With both policies discretionary, (1) Nash equilibrium yields lower output and higher price than the ideal points of both authorities, (2) of the two leadership possibilities, fiscal leadership is generally better. With fiscal discretion, monetary commitment yields the same outcome as discretionary monetary leadership for all realizations of shocks. But fiscal commitment is not similarly negated by monetary discretion. Second-best outcomes require either joint commitment, or identical targets for both authorities - output socially optimal and price level appropriately conservative - or complete separation of tasks.

Brand and Quantity Choice Dynamics Under Price Uncertainty

Abstract: We develop a model of household demand for frequently purchased consumer goods that are branded, storable and subject to stochastic price fluctuations. Our framework accounts for how inventories and expectations of future prices affect current period purchase decisions. We estimate our model using scanner data for the ketchup category. Our results indicate that price expectations and the nature of the price process have important effects on demand elasticities. Long-run cross price elasticities of demand are more than twice as great as short-run cross price elasticities. Temporary price cuts (or “deals”) primarily generate purchase acceleration and category expansion, rather than brand switching.

Brand and Quantity Choice Dynamics Under Price Uncertainty

Abstract: We develop a model of household demand for frequently purchased consumer goods that are branded, storable and subject to stochastic price fluctuations. Our framework accounts for how inventories and expectations of future prices affect current period purchase decisions. We estimate our model using scanner data for the ketchup category. Our results indicate that price expectations and the nature of the price process have important effects on demand elasticities. Long-run cross price elasticities of demand are more than twice as great as short-run cross price elasticities. Temporary price cuts (or ‘‘deals’’) primarily generate purchase acceleration and category expansion, rather than brand switching.

European Healthcare Policies for Controlling Drug Expenditure

Abstract: In the last 20 years, expenditures on pharmaceuticals - as well as total health expenditures - have grown faster than the gross national product in all European countries. The aim of this paper was to review policies that European governments apply to reduce or at least slow down public expenditure on pharmaceutical products. Such policies can target the industry, the wholesalers and retailers, prescribers, and patients. The objectives of pharmaceutical policies are multidimensional and must take into account issues relating to public health, public expenditure and industrial incentives. Both price levels and consumption patterns determine the level of total drug expenditure in a particular country, and both factors vary greatly across countries. Licensing and pricing policies intend to influence the supply side. Three types of pricing policies can be recognised: product price control, reference pricing and profit control. Profit control is mainly used in the UK. Reference pricing systems were first used in Germany and The Netherlands and are being considered in other countries. Product price control is still the most common method for establishing the price of drugs. For the aim of fiscal consolidation, price-freeze and price-cut measures have been frequently used in the 1980s and 1990s. They have affected all types of schemes. For drug wholesalers and retailers, most governments have defined profit margins. The differences in price levels as well as the introduction of a Single European Pharmaceutical Market has led to the phenomenon of parallel imports among member countries of the European Union. This may be facilitated by larger and more powerful wholesalers and the vertical integration between wholesalers and retailers. To control costs, the use of generic drugs is encouraged in most countries, but only few countries allow pharmacists to substitute generic drugs for proprietary brands. Various interventions are used to reduce the patients' demand for drugs by either denying or limiting reimbursement of products and providing an incentive for patients to reduce their consumption of drugs. These interventions include defining a list either of drugs reimbursed (positive list) or one of drugs not reimbursed (negative list), and patient co-payments, which require patients to pay a proportion of the cost of a prescribed product or a fixed charge. Policies intended to affect physicians' prescribing behaviour include guidelines, information (about price and less expensive alternatives) and feedback, and the use of budgetary restrictions.

Interactions of Commitment and Discretion in Monetary and Fiscal Policies

Abstract: We consider monetary-scal interactions when the monetary authority is more conservative than the scal. With both policies discretionary, (1) Nash equilibrium yields lower output and higher price than the ideal points of both authorities, (2) of the two leadership possibilities, scal leadership is generally better. With scal discretion, monetary commitment yields the same outcome as discretionary monetary leadership for all realizations of shocks. But scal commitment is not similarly negated by monetary discretion. Second-best outcomes require either joint commitment, or identical targets for both authorities { output socially optimal and price level appropriately conservative { or complete separation of tasks. (JEL E61, E63)

Optimal Monetary Policy with Imperfect Common Knowledge

Abstract: This paper determines optimal nominal demand policy in a flexible price economy in which firms pay limited attention to aggregate variables. Firms' inattentiveness gives rise to idiosyncratic information errors and imperfect common knowledge about the shocks hitting the economy. This is shown to have strong implications for optimal nominal demand policy. In particular, if firms' prices are strategic complements and economic shocks display little persistence, monetary policy has strong real effects, making it optimal to stabilize the output gap. Weak complementarities and sufficient shock persistence, however, cause price level stabilization to become increasingly optimal. With persistent shocks, optimal monetary policy shifts from output gap stabilization in initial periods following the shock to price level stabilization in later periods, potentially rationalizing the medium-term approach to price stability adopted by some central banks.

Divergent Inflation Rates in EMU

Abstract: We analyze the sources of divergent national inflation rates among EMU member countries. At one level, we review the Irish ‘outlier’ experience; at another, we estimate panel regressions for the 1999-2001 period. We highlight the role played by differential exposure to euro exchange rate movements in explaining inflation divergence. In addition, we find evidence that output gaps and a “price level convergence” effect have also been important. We draw some policy conclusions for the accession countries that are hoping to join EMU.

Cartel Pricing Dynamics in the Presence of an Antitrust Authority

Abstract: Price-fixing is characterized when firms are concerned about creating suspicions that a cartel has formed. Antitrust laws have a complex effect on pricing as they interact with the conditions determining the internal stability of the cartel. Dynamics are driven by two forces - the sensitivity of detection to price movements causes a cartel to gradually raise price while the sensitivity of penalties to the price level induces the cartel to lower price over time in order to maintain the stability of the cartel. While antitrust laws can lower collusive prices, they can also raise them by making it easier for firms to collude.

Discriminatory price auctions in electricity markets: low volatility at the expense of high price levels

Abstract: A “pay-as-offered” or discriminatory price auction (DPA) has been proposed to solve the problem of inflated and volatile wholesale electricity prices. Using the experimental method we compare the DPA with a uniform price auction (UPA), strictly controlling for unilateral market power. We find that a DPA indeed substantially reduces price volatility. However, in a no market power design, prices in a DPA converge to the high prices of a uniform price auction with structural market power. That is, the DPA in a no market power environment is as anti-competitive as a UPA with structurally introduced market power.

Prices and Poverty in India, 1987-2000

Abstract: Using consumption data from the 43rd, 50th and 55th rounds of the National Sample Survey, this paper computes for each of the large Indian states, by urban and rural sectors separately, a range of consumer prices indexes for 1999-2000 relative to 1993-94 and for 1993-94 relative to 1987-88. The main focus of the paper is to explain the methodology underlying the new price indexes and to incorporate them into poverty lines.

Real Implications of the Zero Bound on Nominal Interest Rates

Abstract: If monetary policy succeeds in keeping average inflation very low, nominal interest rates may occasionally be constrained by the zero lower bound. The degree to which this constraint has real implications depends on the monetary policy feedback rule and the structure of price-setting. Policy rules that make the price level stationary lead to small real distortions from the zero bound. If policy imparts persistence into the inflation rate, the real implications of the zero bound are large in the presence of backward looking price-setting, and small if prices are set to maximize profits.

Are Share Price Levels Informative? Evidence from the Ownership, Pricing, Turnover, and Performance of IPO Firms

Abstract: Firms choose a share price level both when they split their seasoned shares and when they go public. The stock splits literature, which has examined whether this choice has any economic significance, remains divided on the question of whether firms split their shares to achieve a desired share price or to signal private information. In the market microstructure literature, the share price has been considered significant primarily as a proxy for market liquidity. Controlling for liquidity as well as size effects, we ask whether a firm's choice of IPO price is informative in the sense that it relates systematically to the firm's other choices and characteristics. We make several contributions to the literature. We first examine whether there are systematic differences in ownership structure (individual vs. institutional) between low and high-priced IPOs. We find that both institutional ownership and underwriter reputation increases monotonically with the chosen IPO price level. We next examine the relationship between price level and IPO underpricing, turnover and performance. We find that the relationship between IPO price level and under pricing is U-shaped. The U-shape is robust to controls for the Hanley (1993) partial adjustment phenomenon. In contrast, post-IPO turnover displays an inverted U-shaped relation to IPO price. Moreover, firms choosing a higher (lower) stock price level experience lower (higher) mortality rates. Our results remain unchanged when we confine our analysis to the sub-period following the 1990 Penny Stock Reform Act, when we control for the listing exchange, and when we specifically exclude penny stocks from our sample.

The law of one price: intranational evidence for Canada

Abstract: This study investigates the behaviour of intranational prices for 45 specific consumer goods across 25 Canadian cities. It finds positive roles for distance and provincial borders in intercity price disparities. While sizable, the provincial border effect is an order of magnitude smaller than the estimates for the Canada-U.S. border. A majority of the intercity relative price series are stationary around small mean values, indicating that long-run price differences are close to zero. The intercity prices converge at rates considerably faster than the consensus estimates for international prices. In fact, half-lives for intercity price deviations average well under a year. JEL Classification: F15, F31 La loi d’un seul prix : resultats intra-nationaux pour le Canada Ce memoire examine le comportement des prix intra-nationaux de 45 biens de consommation specifiques dans 25 villes canadiennes. Il semble que la distance et les frontieres inter-provinciales ont un impact sur les differentiels de prix entre villes.Meme si l’impact des frontieres inter-provinciales est important, il est beaucoupplus petit que l’impact de la frontiere Canada- U.S. Une majorite des series de prix relatifs entre villes sont stationnaires autour de petites valeurs moyennes, ce qui suggere que les differences de prix a long terme s’approchent de zero. Il est clair que les prix entre villes convergent a des taux considerablement plus rapides que ce qu’on observe au niveau international. En fait les deviations de prix entre villes ont une esperance de vie qui en moyenne est de moins d’un an.

Hybrid Inflation and Price-Level Targeting

Abstract: In this paper we investigate the properties of monetary regimes that combine price-level and inflation targeting. We look both at an optimal control and at a simple rule characterisation of these regimes. We derive numerical results by modelling the economy as a small-scale open-economy RE model calibrated on UK data. We conclude that: (1) the relative merits of price-level and inflation targeting, as well as of mixes of these two, depend on particular modelling and policy assumptions; and (2) these merits do not always change gradually and/or monotonically as we move from one regime to another.

The Impact of Monetary Union on Trade Prices

Abstract: Two seemingly unconnected empirical results suggest an intriguing mechanism. First, economic integration helps harmonize prices internationally, with trade being the primary channel (Rogoff 1996, Goldberg and Knetter 1997). Second, monetary union may greatly increase the amount of trade among members (Rose 2001). Putting these together, we see that formation of a monetary union may induce changes that help harmonise inflation rates. The effect might be large if the elimination of exchange rate volatility simultaneously leads to a large increase in intra-union trade and a big increase in the speed at which price shocks are transmitted across members' goods markets. This paper investigates part of this mechanism and finds that monetary union may indeed result in faster cross-border transmission of price movements via the import and export price channel which, in turn, would tend to homogenise price movements across the member countries of a monetary union. JEL Classification: D40, F15, F31

Method and interface for consolidating price levels on a trading screen

Abstract: A trading screen may display price and quantity information for price levels in a static axis of prices. The static axis of prices may be divided into two or more different regions. The price and quantity information for one or more of the regions may be consolidated from price and quantity information from plurality of un-consolidated price levels.

Price Clustering and Natural Resistance Points in the Dutch Stock Market

Abstract: This discussion paper resulted in an article in the 'European Economic Review' (2006). Volume 50, issue 8, pages 1937-1950. The main contribution of this study is the finding that round numbers can act aspricebarriers for individual stocks. In addition, a first step is made to explain this and therelated phenomena of round number clustering by testing two competing hypotheses,using data from the Dutch stock market during 1990-2001. After January 1, 1999stock prices were listed in euros, while guilders were still the currency of daily lifeuntil 2002. According to the aspiration level hypothesis investors will have targetprices for the stocks they own. This hypothesis predicts that round number effects inguilders will only slowly disappear. The odd price hypothesis originates fromcognitive psychology and marketing. Humans have to tendency to compare numbersdigit by digit from left to right, and therefore consider an odd price of 19.90 asconsiderable less than 20.00. This hypothesis predicts an abrupt change in roundnumber effects after January 1, 1999. The results reject the aspiration level hypothesisand are in line with the odd price hypothesis.

The stock market, the housing market and consumer behaviour

Abstract: After the buoyancy of stock markets in the late nineties, share prices have generally trended downwards since 2001. By contrast, house prices have continued to increase, rising more rapidly than the general price level in several countries. These developments have led to renewed interest in the impact of asset prices on consumption and overall demand. This paper analyses the roles of household financial wealth and housing wealth across G7 countries (with the exception of Germany), in determining private consumption. It provides some estimates of the sensitivity of consumption to various forms of wealth and tests whether these sensitivities have changed over time. The impacts of recent financial and housing market developments on consumption are also quantified. The main results are, first, that for all countries, wealth channels are identified, second, that these effects vary significantly across countries, and third that for some countries, their importance has tended to rise markedly over the recent past.