Absolute Price Levels Research Articles

Coherently arbitrary pro-environmental behavior

An accurate understanding of pro-environmental behavior is a key research topic within environmental psychology and a prerequisite for an adequate psychological response to environmental issues. In this study, we present an experiment testing the degree to which decision makers’ pro-environmental behavior is “coherently arbitrary”. Coherent arbitrariness refers to the phenomenon that behavior in experimental models may only appear rational, as if supported by fixed preferences, despite being affected by arbitrary factors unrelated to preferences. Using the Carbon Emission Task, the present research extends this behavioral economic finding to pro-environmental behavior research. We find that (a) objectively identical trade-offs are evaluated substantially differently depending on the relative rather than absolute price level of comparative choices, and (b) biospheric values correlate robustly with behavior across conditions. This result may also help to explain findings documenting a motivation-impact gap in pro-environmental behavior, as people may find it difficult to objectively and globally assess the costs and benefits associated with their choices.

Strategic alignment of pricing oil products from Brent conditionally on market regimes using Markov and cluster‐based switching dynamics

AbstractAsymmetries and non‐linearities in oil prices are of high importance for energy policy and strategy. The effectiveness of energy policy depends heavily on the ‘conceptualization’ of states, regimes and less on the absolute price level. Based on the strategic alignment theory and the matching perspective, we claim that recurring oil market dynamics showcase the existence of various regimes across which pricing relationships differ. Regimes are examined by combining two methodologies: Cluster‐based Regression (CBR) and Markov‐Switching Dynamic Regression (MSDR). CBR identifies spatial regimes by clustering Brent as a proxy variable, while MSDR identifies temporal regimes by presuming a probabilistic superposition of states which transition as a discrete time Markov chain. Results have both policy and methodology contributions. A reversion and a cyclicality phenomenon in pricing, resembles the Joseph and Noah effects in terms of persistence, expected duration and probability of transition. CBR describes a serial process in pricing from ‘bull’ to ‘bear’ and then to ‘transitory’ state. Differences in asymmetry and high price premiums, conditionally on market states, are detected among products. Matching probabilities show robustness of results.

The Impact of Price on Firm Reputation

While a business's reputation can impact its pricing, prices can also impact its reputation. To explore the effect of prices on reputation, we investigate daily data on menu prices and online ratings from a large rating and ordering platform. We find that a price increase of 1% leads to a decrease of 3%-5% in the average rating. Consistent with this, the overall distribution of ratings for cheaper restaurants is similar to that of more expensive restaurants. Finally, these effects don't seem to be driven by consumer retaliation against price changes, but by changes in absolute price levels.

The Effect of Price on Firm Reputation

Although a business’s reputation can affect its pricing, prices can also affect its reputation. To explore the effect of prices on reputation, we investigate daily data on menu prices and online ratings from a large rating and ordering platform. We find that a price increase of 1% leads to a decrease of 3%–5% in the average rating. Consistent with this, the overall distribution of ratings for cheaper restaurants is similar to that of more expensive restaurants. Finally, these effects do not seem to be driven by consumer retaliation against price changes but by changes in absolute price levels. This paper was accepted by Duncan Simester, marketing.

The Impact of Prices on Firm Reputation

While a business's reputation can affect its pricing, prices can also affect its reputation. To explore the effect of prices on reputation, we investigate daily data on menu prices and online ratings from a large rating and ordering platform. We find that a price increase of 1% leads to a decrease of 3%-5% in the average rating. Consistent with this, the overall distribution of ratings for cheaper restaurants is similar to that of more expensive restaurants. Finally, these effects don't seem to be driven by consumer retaliation against price changes, but by changes in absolute price levels.

The size-growth relationship: a test of house price growth across the regions of the British Isles

PurposeThis paper aims to propose that a Neave-Worthington Match Test for Ordered Alternatives is a simple, non-parametric test that can be used to consider Gibrat’s law. Whether the law, that states that the proportional rate of growth is independent of absolute size, is supported by regional house price growth rates is considered. The Match Test is further used to test the applicability of beta-convergence and dual economy models to a house price context.Design/methodology/approachThe Match Test relates an actual rank order with an expected one. Gibrat’s law implies house price growth rates are independent of the absolute price levels. Beta-convergence posits that growth rates are inversely related to the initial price level. With a divergent system, there is a direct relationship between size-order and growth rates. As such, the Match Test is used to test alternative models of size-growth relationship.FindingsRather than convergence, there is a tendency to diverge across the UK, but not in Eire. That said, the size of growth shocks is related to price level on the upswing of a price cycle, but not in the down. Assigning the high-priced regions of the two islands into core and the rest into a periphery, total matching is dominated by the capital cities’ growth. The sigma-convergence observed in British house prices is likely to be associated with slower beta-divergence, not a convergent system. The law of Gibrat is not found to apply in a regional house price context.Research limitations/implicationsThis work only covers two countries and nineteen regions. Gibrat’s law in regional house prices may be better examined using a multi-country analysis.Practical implicationsAs the law of Gibrat is not found to apply in a regional house price context and core-regions appearing to dislocated, this has interesting implications for growth trend analysis and the claim of cointegration, which should be explored further. In particular, the level-growth relationship in the cyclical price upswing points to a ratcheting of differentials between high and low house price regions. The common trends in the long run may result from corrective periodic crashes. Not an ideal mechanism for policymakers.Originality/valueTo the best of the author’s knowledge, this paper makes a novel use of the Neave-Worthington test in the realm of regional convergence-divergence and in the first consideration of the law of Gibrat in a house price context across two countries.

The Effect of Price on Firm Reputation

While a business's reputation can affect its pricing, prices can also affect its reputation. To explore the effect of prices on reputation, we investigate daily data on menu prices and online ratings from a large rating and ordering platform. We find that a price increase of 1% leads to a decrease of 3%-5% in the average rating. Consistent with this, the overall distribution of ratings for cheaper restaurants is similar to that of more expensive restaurants. Finally, these effects don't seem to be driven by consumer retaliation against price changes, but by changes in absolute price levels.

Eurozone Prices: A Tale of Convergence and Divergence

This article provides a methodology to test absolute and relative price convergence (in mean and variance) based on a model of relative prices that includes a transition path, and offers a way to measure the speed of price convergence across countries. By applying this test to the European Monetary Union (EMU) price indices from 2001 to 2011, we find empirical evidence of different price level patterns and the lack of price level convergence in the long run for most countries. In terms of the price gap between countries, only when we compare the German with French and Italian prices, we do get zero-gap (absolute) price level convergence. A few other countries report relative price level convergence. These results underscore the existence of a “convergence cost” that EMU countries with lower price levels paid and that does not tend toward zero in the long-term in the absence of convergence. This finding might be of particular interest to European monetary policymakers as it implies that implemented monetary policy does not affect (benefit/harm) all EMU members equally. Monitoring the relative and absolute price level convergence is advised to understand the monetary policy efficiency in the long run.

Differential Pricing of Pharmaceuticals: Theory, Evidence and Emerging Issues.

Differential pricing-manufacturers varying prices for on-patent pharmaceuticals across markets-can, in theory, lead to increased patient access and improved research and development (R&D) incentives compared with charging a uniform price across markets. Theoretical models of price discrimination and Ramsey pricing support differentials based inversely on price elasticities, which are plausibly related to average per capita income. However, these models do not address absolute price levels and dynamic efficiency. Value-based differential pricing theory incorporates insurance coverage and addresses static and dynamic efficiency. Limited empirical evidence indicates a weak positive relationship between prices and gross domestic product (GDP) per capita. External referencing and parallel trade undermine differential pricing. We discuss previously neglected factors that undermine differential pricing in practice. High price growth relative to GDP in the USA leads to widening differentials between the USA and other countries. Concerns over the effects of confidential rebating challenges acceptance of this approach to implementing price differentials. The growth of branded generics in low- and middle-income countries leads to complex markets with product and price differentiation.

Nocebo effects from negative product information: when information hurts, paying money could heal

PurposeThis research aimed to find whether information about a product can give rise to negative perceptions even in inert situations (nocebo effects), and to understand how price levels impact such judgments.Design/methodology/approachIn all experiments, participants were exposed to negative product information in the form of potential side-effects. In an initial study, a higher non-discounted versus a discounted price frame was presented for a health drink after customers were exposed to negative aspects. Then, in experiment 1, price (high vs low) and exposure to information (no information vs negative information) was manipulated for skin creams where participants physically evaluated the cream. In experiment 2, price was manipulated at three levels (low, high, discounted) orthogonally with product information (no negative information vs with negative information) to get a more nuanced understanding.FindingsIn the initial study, after exposure to negative information, the non-discounted group had more positive ratings for the drink. Study 1 showed that reading about negative information resulted in a nocebo effect on perception of dryness (side-effect). Moreover, when no information was presented, perception of dryness by low and high price groups were similar but in the face of negative information, perception of dryness by low-price group was more pronounced compared to a high-price group. Study 2 conceptually replicated the effect and also confirmed that not only discounts (commonly linked with product quality), but absolute price levels also show a similar effect.Practical implicationsNocebo effects have been rarely documented in consumer research. This research showed how simply reading generically about potential side effects gives rise to nocebo effects. In addition, even though marketers might find it tempting to lower prices when there is negative information about certain product categories, such an action could backfire.Originality/valueTo the best of our knowledge, the link between observable nocebo effects and its link with pricing actions is a novel research thread. We were able to show a nocebo effect on product perception after reading about negative information and also find that a higher price can mitigate the nocebo effect to some extent.

Revisiting Tick Size: Implications from the SEC Tick Size Pilot

This paper analyzes the effect of the SEC tick size pilot on market quality variables. We find the predicted trade-off from bigger tick sizes: greater cost of execution (spreads) and greater displayed liquidity in the form of increased depth. This suggests that with greater tick sizes investors can trade larger blocks of assets at the best prices (bid/ask) but at the same time the cost of small transactions is greater. Moreover, we find this effect to be significant only in assets for which the quoted spread is of a magnitude similar to the new tick size, thus the effect is significant for assets with a quoted spread which is proportionately large relative to the tick size. Increasing the tick size has a second effect, namely it reduces the minimum price variation. We find that this minimum price variation affects all assets in that we find a significant decrease in the number of changes in the best prices (bid or ask) in all assets. We also find that the increase in minimum price variation decreases the range of prices (the difference between the maximum and minimum price) though this effect is only weakly significant for assets which have quoted spreads that are significantly larger than the tick size. %This decrease in volatility could be the result of higher trading costs and lower volume and activity. The undesired effect comes from volume and activity. We also find a significant decrease in NASDAQ intraday trading volume as well as across the sum of all venues. This effect is contrary to the SEC's stated objective and that of the JOBS Act, namely to increase volume, and we find that the effect is most significant for the treatment group with the trade-at restriction (treatment group 3). Finally, we document a reduction in the level of market activity as measured by messages and trades that are posted and subsequently canceled in a short period of time (fleeting order). We find that the effect of the pilot is consistent with theoretical predictions and that this effect is statistically and economically significant for assets with quoted spreads that are of a similar magnitude as the tick size, and weakly or non-significant for assets with quoted spreads that are large relative to the tick size. These results suggest that the focus of evaluating the effect of tick sizes should be on the relative size of the asset's quoted spread, and not, as is often the case in the literature, the relative tick size as measured in terms of the asset's absolute price level.

Deadline differentiated pricing in practice: marketing EV charging in car parks

Electric vehicle charging is considered as a prime case of load flexibility in future smart grids. We examine a scenario where electric vehicles are charged in a car park with local photovoltaic (PV) generation. In this setting, temporal charging flexibility can be leveraged to increase utilization of local generation. To incentivize flexible loads we apply a deadline differentiated pricing scheme. Prices are set by the car park operator in a profit-maximizing manner in settings with varying PV capacity and costs of conventional generation. This allows us to assess the value of flexibility passed on to customers in form of discounts. Furthermore, we determine the minimum flexibility level qualifying for this discount. By and large, absolute price levels and flexibility discounts are mainly driven by the cost of conventional generation. On the other hand, the minimum flexibility requirements are affected by both the costs of conventional generation as well as the local PV capacity: higher costs of conventional generation as well as larger PV capacities will decrease this threshold.

Real Balance Effects, Timing, and Equilibrium Determination

By assuming that money balances at the beginning instead of at the end of the period provide transaction services, standard results on nominal and real determinacy in monetary models are overturned. The key is that predetermined real money balances can be a state variable. Whereas the determination of the absolute price level typically depends on fiscal policy under an exogenous interest setting, nominal determinacy is now achieved even when fiscal policy is Ricardian. Also, in contrast to the Taylor principle, the interest rate policy should respond passively to changes in inflation, thus ensuring nonoscillatory and locally stable equilibrium sequences.

Commodity Index Traders and the Boom/Bust Cycle in Commodities Prices

Since 2005, the public has lived with high and volatile prices for basic energy and agricultural commodities. The public focus on this unprecedented commodity price volatility has been intense, because a large proportion of the cost of living borne by individuals and families in the U.S. (and around the globe) is represented by commodities-based costs, notably food, fuel, and clothing. Interestingly, as commodity prices have shown more price volatility, there has been an accompanying significant increase in the volume of commodities futures and swaps transactions, as well as commodities markets open interest. Moreover, Commodity Index Traders ('CITs'), a relatively new type of participant, now collectively make up the single largest group of non-commercial participants in commodities futures markets. These CITs, which represent giant institutional pools of capital, have at times been the single largest class of participant, outweighing bona fide hedgers (producers and consumers of commodities) and traditional “speculators,” who take short-term bi-directional bets and provide liquidity. Given both the size and the specific and largely homogeneous investment strategy of the CITs, many market observers have concluded that this group is most likely responsible for greatly disrupting price formation in commodities futures markets. Further, it has been posited that this distortion has directly led to recent unprecedented price volatility and higher absolute price levels for numerous food and energy commodities in markets around the world. Using a new set of analytic approaches, the authors seek to test whether the behavior of CITs has impacted commodities prices in a manner independent of fundamental supply and demand forces. Specifically, we examine the behavior of futures price spreads before, during, and after the monthly CIT 'Roll' period, a set period from the 5th to 9th business day of each month, during which funds tracking the most popular commodity index, the Standard & Poor’s Goldman Sachs Commodity Index (GSCI) must roll forward their expiring futures contracts. We find strong evidence that the CIT Roll Cycle systematically distorts forward commodities futures price curves towards a contango state, which is likely to contribute to speculative 'boom/bust' cycles by changing the incentives of producers and consumers of storable commodities, and also by sending misleading and non-fundamental, price signals to the market.

Do Stock Prices Conform to an Absolute Price Level?

We study nominal and real stock prices in Sweden over the one hundred and ten year period 1900-2009. We find that the average stock price has declined over time; consistent with the drop in price l ...

Fire Sale Acquisitions: Myth vs. Reality

A consequence attributed to economic crises is that firms could be forced to sell at deep discounts, or fire sale prices. In addition to the wealth transfer from the shareholders of the selling firms to that of the acquiring firms, the economy may also lose when bargain hunting acquirers may not be the ones that could provide the best utilization of the assets. The purpose of our study is to provide empirical evidence to support or reject these conjectures. Specifically, we calculate and compare prices at which companies are sold under normal and recessionary periods for selling firms that are and are not under pressure or in weakened bargaining positions. We find the existence of fire sale discounts depends critically on the reference price used in calculating deal premiums (discounts). Using the stock price near the announcement date as a reference point, instead of a discount, we find distressed firms in crisis periods received a 26% higher offer premium than distressed firms in normal economic periods. When compared to non distressed firms, distressed firms received a 31% higher premium in crisis periods. Decomposing the discounts in transaction prices, we find economic crises brought an average premium of 19% to all target firms. Acquirer announcement return results show that the market reacts negatively for all acquisitions, including those involving distressed firms and/or economic crises. Long term return results also show negative acquirer performance for all acquisitions not taking place during a crisis period. Combining all results, we find that on average, fire sale acquisitions related to firm distress do not exist and that stock prices near the announcement date are relatively efficient, even for distressed firms, although the absolute price levels may be too low in crisis periods. Thus, the notion of fire sale discounts may have to rely on a behavioral explanation.

A Short History of Price Level Convergence in Europe

We study the evolution of price level dispersion in Europe by combining time‐series information on harmonized indices of consumer prices (HICPs) with occasional observations of absolute price levels. We find that European price levels converged over much of the last 40 to 50 years. In the United States, our benchmark, price level dispersion is more or less stable. A back‐of‐the‐envelope calculation suggests that indirect tax rate harmonization, convergence of nontraded input costs, and convergence of traded input costs (in the form of exchange rate stability and increased openness) are all important in explaining European price level convergence.

Have Absolute Price Levels Converged for Developed Economies? The Evidence since 1870

We compare price level and income convergence since 1870 for eleven developed economies using implicit price deflators derived from the GDP data of Maddison (1995, 2001, 2003). We find that “sigma” and “beta” convergence for prices occurs later and to a lesser extent than income. Price levels converge after 1950 while income convergence begins in the 1880s. We find no evidence for stochastic price convergence or for “club” price convergence.

Arbitrage Algebra and the Price of Multi‐Peril ILS

At this year's third annual Bond Market Association Risk‐Linked Securities Conference, John Seo gave an excellent address entitled “Risk Management Tools for Investors.” The more colorful subtitle was along the lines of “evaluating multi‐peril bonds and avoiding the Bermuda rectangle.” Yes, rectangle. We will leave the Bermuda angle (rect‐ or tri‐) for John to explain and he can be found (together with his brother Nelson) at Fermat Capital Management LLC managing a fund specializing in investing in cat bonds and other exotica. However, this article takes advantage of his basic plea (simplification) to further explore a favorite topic of ours—how should cat bonds be priced? In particular, to explore the vexing question of multi‐peril bonds compared to single peril bonds. Our approach is to explore “arbitrage‐equivalent” pricing in which covers can be either bought or sold. We do not yet know how to determine how the absolute level of cat bond prices should be set—although we expect it must be driven by two old friends (a.k.a. supply and demand)—but the Seo simplification allows greater insights into relative prices of single vs. multi‐peril bonds even in our arbitrage context. We begin with a reprise of John's examples (see Exhibit 1).

What can US city price data tell us about purchasing power parity?

We study the dispersion of absolute price levels for US cities since 1918. By absolute price levels, we mean price indices that measure the cost of a given consumption basket at each point in time. We find strong evidence that city price levels converge over time and that the dispersion of price levels is lower for US cities than between OECD countries. We argue that price level convergence for US cities will produce bilateral real exchange rate nonstationarity. In this case, however, nonstationarity is not evidence against Purchasing Power Parity (PPP), rather it is the consequence of improved market integration.