Abstract
Many price indices are constructed using bilateral transaction prices. This paper shows how the time series behavior of cross‐sectional price moments can reveal useful information about pricing behavior in bilateral transactions markets. Inference is formalized in a microlevel price determination model that allows for rigid pricing at the level of individual buyer/seller transactions as well as asymmetries in bargaining power. The model is used to estimate pricing rigidities in Norwegian salmon export transactions. Results suggest a high rate of price revisions and an informative salmon price index. The moments suggest price revisions are conducted at fixed time intervals consistent with optimal price revisions under costly information and that price revisions are more likely when transaction prices are below the reference price in the market.
Highlights
Many price indices are constructed using bilateral transaction prices
We evaluate two mechanisms for price revisions in the market: (a) updating the price according to price deviations from an observable reference price, and (b) updating at fixed time intervals, and we discuss results and implications of the estimated models
This is especially relevant for bilateral transactions markets where prices and contract terms are private information, as one typically observes in much trade with agricultural products
Summary
This paper shows how the time series behavior of cross-sectional price moments can reveal useful information about pricing behavior in bilateral transactions markets. This paper shows how the relationship between cross-sectional price moments—the mean, standard deviation, skewness, and kurtosis of transactions prices—can reveal useful information about pricing rigidity in the market. The transaction cost, which together with the price revision signal determines the rate of price revisions, might map to economically relevant characteristics of each trade relationship that influences the rate of price revisions This might include common language, culture, distance to market, or history of trade. Ωit = 1 for all t, the individual price is normally distributed around the reference price This will occur at zero transaction cost given that the revision signal is not degenerate. The model is a regime-switching error-correction model with error-correction present in the revision state
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