Downward-sloping Demand Curve Research Articles

Downward Sloping Demand Curve, Price Pressure, or Slow Moving Capital?: Evidence from an Exogenous Supply Shock

We examine the price reaction to an exogenous share sale by inside blockholders, who were forced to reduce their stake due to a regulatory change. We conjecture that the price reaction to this event may be explained by three competing hypotheses, namely, a downward sloping demand curve, price pressure, and slow moving capital. Consistent with all three hypotheses, the affected firms experience a negative cumulative abnormal return of 4.5% during the week of the share sale. Crucially, prices revert completely in about 85 days, although the selling pressure eases within eight days. Our results are consistent with the slow moving capital paradigm and rule out the other hypotheses.

Price Effects on Compound Commodities

We explore effects of simultaneous price changes for the demand of a group of goods, which we refer to as a compound commodity. Specifically, we consider unit and proportional cost components (e. g., taxes, transportation costs, etc.) imposed on the compound commodity. We find that there is a serious aggregation problem implying that the property of a downward-sloping demand curve does not generally hold for the demand of a compound commodity. Notably, both substitution effects of the unit cost and of the proportional cost for a compound commodity may be unambiguously opposed. Finally, we apply these results to commodity taxation.

Do you know how much it costs?

Economics, as a scientific discipline, deals with the production, distribution, and consumption of goods and services and is chiefly concerned with the allocation of scarce resources. From an economics standpoint, if something is scarce, it will have market value. There are two laws that every student of economics learns in the first week of the first class during the first year of their education. The first law, known very simply as the law of supply, states that, all other factors being equal, as the price of a good or service increases, the quantity of that good or service offered or sold by the suppliers of that good or service will increase. The second law (known as the law of demand) is just as elegant and states that, all other factors being equal, as the price of a good or service increases, consumer demand for that good or service will decrease. Importantly, in a perfectly competitive market, the equilibrium price of a good or service occurs at the point at which the quantity demanded and quantity supplied are equal (i.e., at the point at which the downwardsloping demand curve and the upward-sloping supply curve intersect each other, see Fig. 1). In other words, if the supply of a good or service is low, the market price will rise, as long as there is sufficient demand from consumers. If there is excess supply of a good or service, the market price will fall. In a similar way, as long as there is sufficient supply of a good or service, if consumer demand for that good or service is low, the market price will fall. Conversely, if the demand of the good or service increases, the market price will rise. Many economists would argue that the best way to allocate a scarce resource is to rely upon free market principles. A perfectly competitive market is defined as a market where prices are determined entirely by the laws of supply and demand, with little or no government control. There are three fundamental criteria that are necessary for perfect competition:

Venture Capital Trusts and the Expiration of IPO Lockup Provisions

Venture capital trusts (VCTs) were introduced to provide private equity capital for small expanding companies and to promote innovation. Investors in IPOs are rewarded with tax relief on the cost of lock-up provisions to stabilise the market. This paper examines the market reaction and trading activity around the expiration of lockup provisions of 148 VCTs listed on the London Stock Exchange from 1995 to 2006. Downward-sloping demand curve theory suggests that an increased supply of VCT shares at the expiry date could shift their value to a new equilibrium at a lower price. Supporting this prediction, we document evidence of negative abnormal returns as well as permanent increases in the price discount relative to net asset value and trading volumes at and around the expiries of the required holding periods of VCTs. In addition, less negative abnormal returns, lower abnormal discounts and lower abnormal trading volumes are associated with VCTs that invest in AIM-listed companies due to lower information asymmetry, that experience lower prior performance due to a less pronounced disposition effect, and that are subject to a shorter lock-up horizon or are offering more generous tax benefits.

Buyback contracts with price-dependent demands: Effects of demand uncertainty

We explore buyback contracts in a supplier–retailer supply chain where the retailer faces a price-dependent downward-sloping demand curve subject to uncertainty. Differentiated from the existing literature, this work focuses on analytically examining how the uncertainty level embedded in market demand affects the applicability of buyback contracts in supply chain management. To this end, we seek to characterize the buyback model in terms of only the demand uncertainty level (DUL). With this new research perspective, we have obtained some interesting new findings for buyback. For example, we find that (1) even though the supply chain’s efficiency will change over the DUL with a wholesale price-only contract, it will be maintained constantly at that of the corresponding deterministic demand setting with buyback, regardless of the DUL; (2) in the practice of buyback, the buyback issuer should adjust only the buyback price in reaction to different DULs while leave the wholesale price unchanged as that in the corresponding deterministic demand setting; (3) only in the demand setting with an intermediate level of the uncertainty (which is identified quantitatively in Theorem 5), buyback provision is beneficial simultaneously for the supplier, the retailer, and the supply chain system, while this is not the case in the other demand settings. This work reveals that DUL can be a critical factor affecting the applicability of supply chain contracts.

Associated effects of index composition changes: an evidence from the S&P CNX Nifty 50 index

Purpose – The purpose of this paper is to test the long-term effects of price and volume with the help of Downward Sloping Demand Curve (DSDC) hypothesis, and also the short-term price and volume effects with the help of Price Pressure Hypothesis (PPH) for the index revisions on the S&P CNX Nifty 50 index. Design/methodology/approach – In order to report the long-term and short-term effects, the current study reviews two testable hypotheses, namely, DSDC hypothesis and PPH. The study has used the event study approach by including GARCH (1, 1) conditional variance in the market model. Findings – The results report that, the added stocks experienced a significant increase in price and volume on the effective date; whereas the deleted stocks experienced significant volume levels and insignificant price levels on the effective date. Accordingly, the study finds support in favor of PPH. Research limitations/implications – The study could not find evidence to support the most studied DSDC hypothesis. Practical implications – Index reorganization presumably affects the fund managers, domestic as well as international investors. As a result, studying the effect of index changes is a subject of attention to academicians and investors alike. Originality/value – The study contributes to the body of knowledge on index inclusion and exclusion effects by providing Indian evidence on long-term and short-term price and volume effects, and also documenting contrary results to the previous Indian and global research works.

A Theory of Price Adjustment Under Loss Aversion

We present a new partial equilibrium theory of price adjustment, based on consumer loss aversion. In line with prospect theory, the consumers' perceived utility losses from price increases are weighted more heavily than the perceived utility gains from price decreases of equal magnitude. Price changes are evaluated relative to an endogenous reference price, which depends on the consumers' rational price expectations from the recent past. By implication, demand responses are more elastic for price increases than for price decreases and thus firms face a downward-sloping demand curve that is kinked at the consumers' reference price. Firms adjust their prices flexibly in response to variations in this demand curve, in the context of an otherwise standard dynamic neoclassical model of monopolistic competition. The resulting theory of price adjustment is starkly at variance with past theories. We find that - in line with the empirical evidence - prices are more sluggish upwards than downwards in response to temporary demand shocks, while they are more sluggish downwards than upwards in response to permanent demand shocks.

Depicting the Bid-Offer Spread

In a number of financial market texts the bid-offer spread in flow markets is not well depicted. In such markets the demand and supply curves to the left of the equilibrium point cannot exist. This article offers an alternative depiction: only the curves to the right of the equilibrium point exist and the spread is the differential between the highest bid (the superior) price on the demand curve and the lowest (the superior) price on the supply curve. There are inferior bid and offer prices, represented by the downward-sloping demand curve and upward-sloping supply curve, respectively. The alternative depiction offered applies to both quote-driven and order-driven markets.

The EU Market for apparel exports, China's cotton imports, and the end of the ATC

Abstract The expiration of the WTO Agreement on Textiles and Clothing (ATC) in January 2005 coincided with surges of China's apparel exports and apparent increases in China's cotton imports, the former of which has led to trade conflicts between China and its main trading partners, and the latter of which has seemingly prompted China to relax its restrictions on cotton imports. Using monthly trade data, this study employs a vector autoregression model to investigate the interlinkages between China's and its competitors’ apparel exports to the EU and between China's apparel exports and its cotton imports. Our analysis shows that (1) there appears to be a downward-sloping and elastic demand curve for China's apparel products by the EU; (2) China's and its competitors’ apparel exports to the EU are imperfect substitutes and the “crowding out” effects of Chinese apparel exports seem to be modest in the EU market; (3) the interrelationship between China's apparel exports and its demand for imported cotton is f...

How Do Banks’ Funding Costs Affect Interest Margins?

We use a dynamic factor model and a detailed panel data set with quarterly accounts data on all Norwegian banks to study the effects of banks’ funding costs on their retail rates. Banks’ funds are categorized into two groups: customer deposits and long-term wholesale funding (market funding from private and institutional investors including other banks). The cost of market funding is represented in the model by the three-month Norwegian Inter Bank Offered Rate (NIBOR) and the spread of unsecured senior bonds issued by Norwegian banks. Our estimates show clear evidence of incomplete pass-through: a unit increase in NIBOR leads to an approximately 0.8 increase in bank rates. On the other hand, the difference between banks’ loan and deposit rates is independent of NIBOR. Our findings are consistent with the view that banks face a downward-sloping demand curve for loans and an upward-sloping supply curve for customer deposits.

Rothbard on V Shaped Average and Total Cost Curves

Rothbard (1993, pp. 638-45) refuted the important economic fallacy that excess capacity is a normal consequence of profit maximizing behavior by businesses in some industries when they are in long-run equilibrium. And, in so doing provided a manifest example of misuse of mathematics in modern economics.According to standard theory, given a U-shaped, average-cost curve (ACC), in equilibrium, a firm whose demand is perfectly competitive will operate at the point where its horizontal demand curve is just tangent to the ACC; i.e., at the point where average cost (AC) is at its minimum. Alternatively, a firm in an industry characterized by monopolistic competition will face a downward-sloping demand curve. In that case, again in equilibrium, the firm will operate where the demand curve is just tangent to the U-shaped ACC. However, in that case, the point of tangency will occur at lesser quantity than that at which AC is at its minimum.

Financial asset demand is elastic: Evidence from new issues of Federal Home Loan Bank debt

We estimate the slope of the demand curve for newly auctioned FHLB discount notes and investigate the impacts of arbitrage risk and heterogeneity of investor beliefs on demand elasticity. Our unique dataset of roughly 2900 observations of two price-quantity pairs—the first from a pre-auction dealer survey, the second from actual auction results—provides the quantity shift necessary to identify demand. In contrast to previous findings of downward-sloping demand curves for equities, we show that demand for newly issued FHLB notes is nearly perfectly elastic during normal market conditions. We find, however, that frictions like arbitrage risk and, to a lesser extent, heterogeneity of investor beliefs negatively affect elasticity and explain the nearly 50% drop in elasticity observed during the recent financial crisis.

The Impact of Passive Investing on Corporate Valuations

Over the past 20 years, a trend toward index fund investing has emerged. Currently, more mutual fund assets are indexed to the S&P 500 than any other index. Prior research on downward-sloping demand curves suggests that widespread acceptance of S&P 500 index investing may push prices of companies in the S&P 500 beyond fundamental values. This paper explores the impact of flows into S&P 500 index funds on corporate valuations. The results show that money flow into S&P 500 index funds is inflating the values of companies in the index relative to those outside of the index.

A Keynes-Robinson Controversy: A Methodological Matter

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">This paper examines a minor methodological foray by Keynes:<span style="mso-spacerun: yes;">  </span>his 1941 reaction to what is now a well-known conclusion of price theory, the so-called “below-capacity theorem” first advanced by Joan Robinson’s 1933 Economics of Imperfect Competition.<span style="mso-spacerun: yes;">  </span>By the graphical analysis that has now become universal, the theorem “proves” that any profit-maximizing firm faced with a downward-sloping demand curve will produce to the left of the average cost curve’s lowest point, the difference between this lowest-cost output and the output determined by MC=MR being a measure of excess capacity.<span style="mso-spacerun: yes;">  </span>The paper will conclude that Keynes’ denigration of the theorem is wholly due to his different cast of mind, to a methodology that preferred observation and history over deductive methods.<span style="mso-spacerun: yes;">  </span></span></span></p>

Downward-sloping Demand Curves or Price Pressure Effects? New Evidence from Japanese Seasoned Equity Issues

Downward-sloping Demand Curves or Price Pressure Effects? New Evidence from Japanese Seasoned Equity Issues

Buyback Contracts with a Stochastic Demand Curve

We explore buyback contracts in a supplier-retailer supply chain where the retailer faces a price-dependent downward-sloping demand curve subject to uncertainty. We formulate the problem as a supplier-led Stackelberg game and derive explicitly the equilibrium contract parameters along with the corresponding retail price and order quantity - all as functions of the demand curve uncertainty level. We examine the value of buyback and assess its impact on the supply chain's efficiency. We find that in equilibrium (i) Pareto-improvement can be attained using buyback only at an intermediate uncertainty level, (ii) the supply chain's efficiency is maintained at 75% of the optimal channel profit regardless of the uncertainty level, (iii) the retailer orders more only at an intermediate uncertainty level, (iv) the supplier need not change the equilibrium wholesale price associated with the corresponding deterministic demand curve and only needs to adjust the buyback price in response to the uncertainty level, and (v) the end consumers do not benefit from buyback regardless of the uncertainty level. We derive insights and managerial implications of the theoretical results.

Is the Demand Curve for Stocks Downward-Sloping? New Evidence from Seasoned Equity Offerings

Is the demand curve for stocks downward-sloping? The index-inclusion literature tries to answer this question by looking at price reactions to stocks added or deleted from major stock indices. We look for new evidence using another well-established event: the negative price reaction to the seasoned equity offerings. While this can be caused by asymmetric information, another plausible explanation might be a downward-sloping demand curve for stocks. We argue that we can disentangle the two factors using a natural experiment in China's stock market, where companies' equity offering plans need to be approved by the regulator. We find strong negative price reactions to the announcement of such approval. Since all information on the overvaluation of the firm is released when the firm announces its equity offering plan, the negative reaction to the approval of the plan cannot be explained by changes in the valuation of the firm. Furthermore, we find different price reactions in China's segmented stock market when the firm only issues new shares in one of the two domestic markets (A- and B-share markets). The evidence suggests that a significant part of the negative price reaction of equity offerings is related to a supply shock to a downward sloping demand curve.

Large the IPO Lock-Up Period: Implications for Market Efficiency and Downward Sloping Demand Curves

After an initial public offering, most existing shareholders are subject to a lock-up period in which they cannot sell their shares for a prespecifed time. At the end of the lock-up, there is a permanent and large shift in the supply of shares. The lock-up expiration is a particularly interesting event to study because it is (i) completely known and observable, and (ii) potentially meaningful economically given the existing literature on supply shocks. This paper investigates volume and price patterns around this period, and documents several interesting results. Specifically, even though the event is totally anticipated, there is a 1% - 3% drop in the stock price, and a 40% increase in volume, when the lock-up ends. Various explanations are considered and rejected, suggesting a new anomalous fact against market efficiency. However, convincing evidence is provided which shows that this inefficiency is not exploitable, i.e., arbitrage is not violated. This aside, the evidence points to a downward sloping demand curve for shares, with the most likely explanation pointing to a permanent, long-run effect.

The Effect of Demand on Stock Prices: Evidence from the S&P Index Float Adjustment

I examine the effect of demand on stock prices by analyzing the transition of the S&P 500 index from market capitalization to free float weighting, which occurred in 2005. I find that a decrease in demand produced a permanent stock price decline, which was accompanied by significant abnormal trading volume. The results provide support for the downward-sloping demand curve hypothesis.

Reviewing Progress in PJM's Capacity Market Structure via the New Reliability Pricing Model

The Reliability Pricing Model introduces significant changes to the capacity market structure of PJM. The main feature of the RPM design is a downward-sloping demand curve, which replaces the highly volatile vertical demand curve. The authors review the latest RPM structure, results of the auctions, and the future course of the implementation process.