Choice Of Price Research Articles

The Impact of Yield-Dependent Trading Costs on Pricing and Production Planning Under Supply Uncertainty

This paper studies the role of the yield-dependent trading cost structure influencing the optimal choice of the selling price and production quantity for a firm that operates under supply uncertainty in the agricultural industry. The firm initially leases farm space, but its realized amount of fruit supply fluctuates because of weather conditions, diseases, etc. At the end of the growing season, the firm has three options: convert its crop supply to the final product, purchase additional supplies from other growers, and sell some (or all) of its crop supply in the open market without converting to the finished product. We consider the problem both from a risk-neutral and a risk-averse perspective with varying degrees of risk aversion. The paper offers three sets of contributions: (1) It shows that the use of a static cost exaggerates the initial investment in the farm space and the expected profit significantly, and the actual value gained from a secondary (emergency) option for an agricultural firm is lower under the yield-dependent cost structure. (2) It proves that although the risk-neutral firm does not benefit from fruit futures, a sufficiently risk-averse firm can benefit from the presence of a fruit futures market. The same risk-averse firm does not purchase fruit futures when it operates under static costs. Thus, fruit futures can only add value under yield-dependent trading costs. (3) Contrary to the results presented for the newsvendor problem under demand uncertainty, the firm does not always commit to a lower initial quantity (leased farm space) under risk aversion. Rather, the firm might lease a larger farm space under risk aversion.

A New Nation of Goods: The Material Culture of Early America (review)

A New Nation of Goods: The Material Culture of Early America. By David Jaffee. (Philadelphia: University of Pennsylvania Press, 2010. Pp. 400. Cloth, $45.00.)Reviewed by Wendy A. WolosonA New Nation of Goods is the latest contribution to a growing body of scholarship dedicated to American material from the 1790s to the 1850s. David Jaffee's book documents the material objects and creators that together worked as agents of change, driving the and material transformations that paved the way for mass consumption before the Civil War. Focusing on New England towns in Massachusetts and Connecticut, the author richly details how, like their urban counterparts, Americans living in the hinterlands had serious material aspirations that fulfilled by a group of talented local artisans.Each sprawling chapter begins with a different object, moving us through time, generations, and significant market transformations. The book opens with a deep analysis of two eighteenth-century portrait paintings of the Ebenezer Devotions Sr. and Jr., illustrating the shifts in education, religion, craftsmanship, authority, and regional culture from one generation to the next. The paintings depict the intellectual authority of the clergyman and its displacement by the economic authority of the ascendant merchant, the father's extensive library in the background of his portrait replaced by a quill pen and open account book in the foreground of his son's portrait.The following chapter on the Village Enlightenment documents these shifts in greater detail. The object lesson here is Marlborough, Massachusetts resident Silas Felton's Franklinesque manuscript autobiography, which, among other things, expresses his keen desire to read books all day, rejecting the of farming into which he was born. For ambitious young men, the country's increasing access to print exposed them to ideas that themselves agents of change and inspired their readers, already primed and anxious for experiences, to be the agents of change through the production and consumption of consumer goods. This new group of lesser lights, the rising men and women of the post-Revolutionary gentry, according to Jaffee, eager to engage in the project of improving their persons, their houses, and their villages (96).The process of cultural integration and hybridization (145) that took place in newly cosmopolitan communities could not have been possible without material adaptation and invention. Clocks perhaps best exemplify the transformation of consumer during this time. Finely crafted precision objects that occupied valuable domestic real estate, tall case clocks the ultimate status symbols in upper-class households. By the first decades of the nineteenth century, artisan-entrepreneurs such as Eli Terry fundamentally changed their design, exchanging expensive brass workings for standardized wooden parts, assembling them using efficient divisions of labor, and making them mantle-sized to accommodate more modest household budgets and the logistical needs of the people who peddled them.Indeed, itinerant peddlers' ability to easily transport clocks (and tinware, books, and fancy goods) was crucial to their commercial success. Itinerants, Jaffee writes, were at the center of the process of commercialization, facilitating the shift from local exchange, fostering the expansion of production in the countryside, and expanding the role of commodities in everyday life (157). Peddlers distributed more widely the production of rural artisans and brought into the hinterlands products from cities that came from across the Atlantic. Itinerants encouraged their customers to consume beyond necessities, educated them about the latest fashions, and promoted the transforming properties of goods (157).In order to meet consumer demand, craftsmen applied manufacturing efficiencies to their work to increase production and offer a choice of styles and prices. …

Partial horizontal and vertical ownership

Others have shown that in vertically related Cournot oligopolies, partial ownership could have no real effects on total output or price choice, and in a separate way that increasing cross-ownership among rivals leads to more collusive outcome. In a complementary manner we study the interactions between vertical and horizontal partial ownership giving no control over target. This article shows that when the choice of optimal cross-ownership profile is simultaneous, a mixed equilibrium with upward vertical and horizontal participations can be achieved, vertical and horizontal ones being strategic substitutes. We finally exhibit the significant influence of vertical shareholdings on output price as on profits and on consumer surplus, which in our model is harmful at optimum from a consumer and a social point of view.

OPEC's oil exporting strategy and macroeconomic (in)stability

Aguiar-Conraria and Wen (2008) argued that dependence on foreign oil raises the likelihood of equilibrium indeterminacy (economic instability) for oil importing countries. We argue that this relation is more subtle. The endogenous choices of prices and quantities by a cartel of oil exporters, such as the OPEC, can affect the directions of the changes in the likelihood of equilibrium indeterminacy. We show that fluctuations driven by self-fulfilling expectations under oil shocks are easier to occur if the cartel sets the price of oil, but the result is reversed if the cartel sets the quantity of production. These results offer a potentially interesting explanation for the decline in economic volatility (i.e., the Great Moderation) in oil importing countries since the mid-1980s when the OPEC cartel changed its market strategies from setting prices to setting quantities, despite the fact that oil prices are far more volatile today than they were 30 years ago.

Optimal pricing and capacity choice for a public service under risk of interruption

We develop rules for pricing and capacity choice for an interruptible service that recognize the interdependence between consumers’ perceptions of system reliability and their market behavior. Consumers post ex ante demands, based on their expectations on aggregate demand. Posted demands are met if ex post supply capacity is sufficient. However, if supply is inadequate all ex ante demands are proportionally interrupted. Consumers’ expectations of aggregate demand are assumed to be rational. Under reasonable values for the consumer’s degrees of relative risk aversion and prudence, demand is decreasing in supply reliability. We derive operational expressions for the optimal pricing rule and the capacity expansion rule. We show that the optimal price under uncertainty consists of the optimal price under certainty plus a markup that positively depends on the degrees of relative risk aversion, relative prudence and system reliability. We also show that any reliability enhancing investment—though lowering the operating surplus of the public utility—is socially desirable as long as it covers the cost of investment.

Do Government Regulations Prevent Transfer Pricing Manipulations?

This study investigated the effects of government regulations and incentives on the setting of transfer prices. I found significant main effects of both variables on transfer price choices. Transfer pricing is important, particularly for Multinational Corporations (MNCs), because of increased trends toward globalization of business activities and, simultaneously, decentralization. These trends have led to increased pressures for sound internal pricing systems, specifically transfer pricing, in order for organizations to ensure optimal and efficient allocations of organization resources and to provide profit performance measurements (Tang 1992). It has generally been recognized in the literature that in order to maximize after tax cash flows, MNCs shift profits from high to low tax jurisdictions. Governments in some countries, particularly those with high tax rates, are greatly concerned as to whether or not companies attempt to avoid tax liabilities via transfer pricing manipulation, specifically in terms of trying to shift profits to lower tax jurisdictions, and have enacted laws to limit transfer price choice.

Marketing Control: Exogenous Aspects Of Price Variance

Marketers should compare the relative impact of changing their price and the impact of a changing market price using variance analysis. In 1977 Hulbert and Toy improved the traditional analysis of variance by expanding the quantity variance to include the variance in market share and the variance in the size of the market. They successfully argued that if managers were to understand the impact that changes in quantity were having on the differences between the planned profits and actual profits they should measure the impact that changing market size and changing market share have on revenues and contribution margins. In this paper we present a method for expanding the price variance to include the variances in the market price and the firms choice of relative market price.

OPEC’s Oil Exporting Strategy and Macroeconomic (In)Stability

Aguiar-Conraria and Wen (2008) argued that dependence on foreign oil raises the likelihood of equilibrium indeterminacy (economic instability) for oil importing countries. We argue that this relation is more subtle. The endogenous choices of prices and quantities by a cartel of oil exporters, such as the OPEC, can affect the directions of the changes in the likelihood of equilibrium indeterminacy. We show that fluctuations driven by self-fulfilling expectations under oil shocks are easier to occur if the cartel sets the price of oil, but the result is reversed if the cartel sets the quantity of production. These results offer a potentially interesting explanation for the decline in economic volatility (i.e., the Great Moderation) in oil importing countries since the mid-1980s when the OPEC cartel changed its market strategies from setting prices to setting quantities, despite the fact that oil prices are far more volatile today than they were 30 years ago.

Quality coordination and complementary products

This article models the choice of price and quality, where products are complementary; and components can be provided by either one or two monopolists. The firms have to choose price and quality simultaneously, but can coordinate in the latter dimension. We consider two specifications for the quality of the composite good: ‘bottleneck’ and additive set-ups. In both cases, a single monopolist may produce lower quality as compared to dual ownership, if the latter is modelled as a single-stage quality-and-price setting game. When separate markets for components of the composite good are added to the model, we provide an example where dual ownership leading to higher quality also yields higher consumer surplus (but not total welfare) than a single monopolist.

How Do Firm Financial Conditions Affect Product Quality and Pricing?

We analyze the interaction of firm product quality and pricing decisions with financial distress and bankruptcy in the airline industry. We consider an airline's choices of quality and price as dynamic decisions that trade off current cash flows for future revenue. We examine how airline mishandled baggage, on-time performance and pricing are related to financial distress and bankruptcy, controlling for the endogeneity of financial distress and bankruptcy. We find that an airline's quality and pricing decisions are differentially affected by financial distress and bankruptcy. Product quality decreases when airlines are in financial distress, consistent with financial distress reducing a firm's incentive to invest in quality. In addition, firms price more aggressively when in financial distress consistent with them trying to increase short-term market share and revenues. In contrast, in bankruptcy product quality increases relative to financial distress.

Discussion of “decentralized capacity management and internal pricing”

Dutta and Reichelstein (2010) study the role of transfer pricing and organizational choice in providing incentives for efficient decisions on the acquisition and subsequent reallocation of capacity within decentralized firms. Their analysis suggests that transfer prices based on the historical cost of capacity facilitate the efficient allocation of resources. They also find that symmetric responsibility center structures are generally better suited for providing efficient investment incentives than hybrid organizations. An important condition for the derivation of the two results is the linearity of the shadow prices of capacity. If shadow prices are nonlinear, transfer prices should be below (above) the historical cost of capacity in order to counteract the managers’ incentives to underinvest (overinvest). Because profit center organizations can use transfer prices for mitigating the inefficiency caused by nonlinear shadow prices, they offer a natural advantage over pure investment center organizations in implementing efficient capacity decisions. Overall, these observations suggest that the curvature of profit functions is an important factor in determining the suitable instruments for decentralized capacity management.

Retail Gasoline Markets as Networks

The structure of a gasoline market can be an important element in the pricing choices of its participants. However, structure is often measured only indirectly by, for example, the number of independent sellers, or by seller density. Here we present a more direct and literal way of exploring market structure by representing it as a network. We use the structure of the network to delineate submarkets and present some measures from mathematical sociology which can be used to summarise aspects of network structure for use in further analysis. Although our case study here is in retail gasoline markets, the approach has broader application wherever spatial competition is important.

Is there an optimum grant size and exercise price for incentivizing executives?

This study tests the Hall and Murphy (2000, 2002) propositions using a dataset wherein in-the money and out-of-the-money option grants are just as prevalent as at-the-money option grants. The choice of grant size and exercise price in determining optimal pay-performance sensitivity, reveals an over prescription of at-the-money options at the expense of in-the-money options, particularly for high risk-averse CEOs. Also, pay-performance sensitivity is found unexpectedly negatively related to the exercise price, which is attributed to an equally unexpected inverse relation between risk aversion and grant size.

Ordered search and equilibrium obfuscation

This paper demonstrates the incentives for an oligopolist to obfuscate by deliberately increasing the cost with which consumers can locate its product and price. Consumers are allowed to choose the optimal order in which to search firms and firms are able to influence this order through their choice of search costs and prices. Competition does not ensure market transparency — equilibrium search costs are positive and asymmetric across firms. Intuitively, an obfuscating firm can soften the competition for consumers with low time costs by inducing the remaining consumers to optimally first search its rival.

IPO Offer Prices and Firm Performance

This paper explores the determinants of IPO prices and studies the relationship between price choice of firms going public and post-issue stock performance and firm characteristics. I find that IPO prices positively relate to median industry prices, underwriter reputation, and book-to-market ratio of the firm going public. I further show that raw and risk-adjusted stock returns of IPOs monotonically increase with the ratio of offer price to average industry price. The difference in returns between IPOs with the highest and lowest relative offer prices averages 9% during one year following the issuance, and exceeds 60% over five years. The group of IPOs with high relative prices does not exhibit any underperformance relative to matches at any horizon. I also document a positive relation between underpricing and relative offer prices. I further show that firms with high relative prices generate better earnings after going public. These firms have larger market betas around the IPO, and spend considerably more on investment during five years following the offering.

Cost awareness among anesthesia practitioners at one institution

Study Objective To characterize the accuracy of clinician knowledge of anesthesia drug and equipment costs at one institution. Design Anonymous survey instrument. Setting Large academic medical center. Measurements 130 questionnaires were sent to departmental practitioners, including residents, CRNAs, and attendings. An updated list of acquisition costs for commonly used drugs and equipment is posted on our departmental website and is sent to all clinical staff by electronic mail annually. For each item, the respondent was given a choice of price ranges and indicated the range in which they believed the actual cost of the item to be. Accuracy was calculated as the difference between the identifier of the correct and chosen ranges. The mean and variance of these differences were then calculated for each item within each practitioner group and tested to identify statistically significant differences among practitioner groups. Main Results A total of 103 (79%) completed questionnaires were received. Many practitioners overestimated or underestimated the actual costs of most of the items. There was no significant difference between the groups for the mean accuracy across the entire set of items. For variance in price estimation, there was a statistically significant greater variance only for CA1 residents compared with attendings, CRNAs, and CA3 residents. Conclusions Many experienced practitioners in an academic setting lack accurate knowledge of the acquisition costs of common drugs and supplies.

Market Structure and Cross-Sector Competitive Effects in Wisconsin Nursing Homes, 1992-2002

This study incorporates market-level fixed effects into an analysis of panel data from Wisconsin to assess whether competitor market share influences choices of price and quality at for-profit and nonprofit nursing homes. The measured competitive effects are quite small, both between firms of the same ownership type and between firms of different types. A distinction is made between incumbent expansion (contraction) and entry (exit). Entering and exiting nursing homes engage in significantly different conduct than do incumbents, with entering nonprofits producing higher quality at lower prices than incumbents of either type, and exiting for-profits producing lower quality.

Collusion in Experimental Bertrand Duopolies with Convex Costs: The Role of Information and Cost Asymmetry

We report the results of a series of experimental Bertrand duopolies where firms have convex costs. Theoretically these duopolies are characterized by a multiplicity of Nash equilibria. Using a 2x2 design, we analyze price choices in symmetric and asymmetric markets under 2 information conditions: complete versus incomplete information about profits. We find that information has no effect in symmetric markets with respect to market prices and the time it takes for markets to stabilize. However, in asymmetric markets, complete information leads to higher average market prices and quicker convergence of price choices.

Improving Pension Management and Delivery: An (Im)Modest and Likely (Un)Popular Proposal

The single-minded aim of retirement savings policy is to maximize after-cost returns to members while providing products and services to meet individual needs. In that it fails. The dominant cause of failure is ineffective and unnecessary competition. The dominant solution is greater cooperation. This article demonstrates how excessive competition has undermined investors’ ability to save for retirement through inefficient pricing, agency costs, and excessive choice. To ensure more cooperation, and less competition, the authors propose a three-pronged approach: Structuring management arrangements to extract maximum economic growth and investment returns; taking steps to rid the system of over-servicing; and, structuring relationships to minimize agency costs. While the authors use Australia as their institutional setting, their (im)modest, and likely (un)popular proposal has universal (un)appeal and applicability.

The Choice of Prices versus Quantities under Uncertainty

This paper analyzes a duopoly model with stochastic demand in which firms first commit to a strategy variable and compete afterwards. We find that in equilibrium the relative magnitude of demand uncertainty and the degree of substitutability determines firms' variable choice. Firms set prices if uncertainty is high compared to the degree of substitutability and quantities if the reverse holds true. The reason is that demand uncertainty and the degree of substitutability have countervailing effects on variable choice: Prices adapt better to uncertainty while quantities induce softer competition. If no effect dominates, firms choose different strategy variables in equilibrium.