Lower Input Prices Research Articles

Input prices, productivity, and trade dynamics: long‐run effects of liberalization on Chinese paint manufacturers

AbstractWe develop a dynamic model to analyze the impact of input tariff liberalization on input prices, trading decisions, and productivity. Although input tariffs directly affect input price benefits of importing, their impact on trade participation generates indirect benefits through productivity improvements and complementarity between importing and exporting. To disentangle these effects, we separately measure importing's effect on input prices and productivity and examine Chinese paint manufacturers' reaction to input tariff liberalization. We find that a mild short‐term effect of tariff liberalization is amplified in the long run by induced trade participation, resulting in even higher productivity and lower input prices.

Vertical cross‐ownership, input price discrimination, and social welfare

AbstractIn this paper, we analyze the impact of vertical cross‐ownership with input price discrimination on social welfare. A higher degree of product differentiation will raise industry profit, consumer surplus, and social welfare; under forward cross‐ownership, a higher degree of cross‐ownership has the same effect, in addition, it will reduce rival firm's profit and increase upstream firm's profit; however, under backward cross‐ownership, a higher degree of cross‐ownership has an opposite effect. Furthermore, under Cournot and Bertrand competition, forward cross‐ownership will incentivize downstream firms to produce more via a lower input price, achieving the above effect.

China's impact on regional employment: Propagation through input–output linkages and co‐location patterns

AbstractHow do imports from China affect local labour markets in Japan? We examine this question using commuting zones as regional units and analysing shock propagation through supply chains and co‐location patterns. Applying the method proposed by Autor et al. (American Economic Review, 103, 2121, 2013) and Acemoglu, Autor et al. (Journal of Labor Economics, 34, S141, 2016), we examine the impact of import shocks on regional manufacturing employment using input–output tables which allows us to investigate the propagation of shocks to both upstream and downstream industries and to relate the regional impact to industry co‐location patterns. We find that the negative direct effect on local employment is underestimated in previous studies that do not consider the regional propagation of the shock through supply chains, especially the positive shock to downstream industries. Downstream industries in Japan, for example, significantly benefit from imports from China as they lower input prices and increase employment. In contrast to downstream industries, we find no significant impact on upstream industries. Our results imply that the direct negative effect on local labour markets is somewhat mitigated by effects on downstream industries within the same region.

Endogenous Production Networks

We develop a tractable model of endogenous production networks. Each one of a number of products can be produced by combining labor and an endogenous subset of the other products as inputs. Different combinations of inputs generate (prespecified) levels of productivity and various distortions may affect costs and prices. We establish the existence and uniqueness of an equilibrium and provide comparative static results on how prices and endogenous technology/input choices (and thus the production network) respond to changes in parameters. These results show that improvements in technology (or reductions in distortions) spread throughout the economy via input–output linkages and reduce all prices, and under reasonable restrictions on the menu of production technologies, also lead to a denser production network. Using a dynamic version of the model, we establish that the endogenous evolution of the production network could be a powerful force towards sustained economic growth. At the root of this result is the fact that the arrival of a few new products expands the set of technological possibilities of all existing industries by a large amount—that is, if there are n products, the arrival of one more new product increases the combinations of inputs that each existing product can use from 2 n−1 to 2 n , thus enabling significantly more pronounced cost reductions from choice of input combinations. These cost reductions then spread to other industries via lower input prices and incentivize them to also adopt additional inputs.

Input Prices, Productivity and Trade Dynamics: Long-run Effects of Liberalization on Chinese Paint Manufacturers

We develop a dynamic structural model to analyze the impact of input tariff liberalization on input prices, trading decisions, productivity, and firm performance. While input tariff liberalization directly affects input price benefits of importing, its impact on trade participation generates indirect benefits through additional channels, such as productivity improvements and complementarity between importing and exporting. To disentangle these effects, our model separately measures importing's effect on intermediate input prices and productivity. We apply the model to examine the reaction of Chinese paint manufacturers to China's accession to the World Trade Organization (WTO). We find a mild short-term effect of input tariff liberalization in the industry. The effect is amplified in the long run by induced trade participation, resulting in even higher aggregate productivity and lower input prices. Overall, this effect increases the average present firm value by 2.3 percent.

Valuing Protection against Health-Related Financial Risks.

There is strong interest in both developing and developed countries towards expanding health insurance coverage. How should the benefits, and costs, of expanded coverage be measured? While the value of reducing the financial risks that result from insurance coverage have long been recognized, there has been less attention in how best to measure such benefits. In this paper, we first provide a framework for assessing the financial value from health insurance. We focus on 3 distinct potential benefits: Pooling the risk of unexpected medical expenditures between healthy and sick households, redistributing resources from high to low income recipients, and smoothing consumption over time. We then use this theoretical framework and an illustrative example to provide practical guidelines for benefit-cost analysis in capturing the full benefits (and costs) of expanding health insurance coverage. We conclude by considering other potential financial effects of broad insurance coverage, such as the ability to consolidate purchases and thus lower input prices.

Uticaj ekonomske politike na menadžment konkurentnosti poljoprivrednog sektora Srbije

There is a tendency of increase and change in the structure of demand for the products from agricultural sector in the modern global environment. Such situation demands market orientation of agricultural producers, from business entities to individual agricultural holdings, in order to offer the appropriate response to the changes in the environment conditions and new market demands. The entrance and survival in the developed world market demand raising the competitiveness of agricultural sector which cannot be based on the low input prices alone (land, workforce), but the application of modern knowledge and innovation, that is, the synergistic effect of all the competition factors. For their part, the state and local governments should create an encouraging social and economic environment for agriculture and rural development, especially in undeveloped regions and areas of the Republic of Serbia. The undeniable agricultural potentials can significantly contribute to foreign trade balance improvement, public debt reduction, unemployment decrease and increase of the living standard of the population.

Endogenous Production Networks

We develop a tractable model of endogenous production networks. Each one of a number of products can be produced by combining labor and an endogenous subset of the other products as inputs. Different combinations of inputs generate (prespecified) levels of productivity. Markets are “contestable” in the sense that production technologies are available to a large number of potential producers. We establish the existence and uniqueness of an equilibrium with an endogenous production network and provide comparative static results on how prices and endogenous technology choices (and thus the production network) respond to changes in parameters. These results show that improvements in technology (or reductions in distortions) spread throughout the economy via input-output linkages and reduce all prices, and under reasonable restrictions on the menu of production technologies, also lead to a denser production network. Using a dynamic version of the model, we show that the endogenous evolution of the production network could be a powerful force towards sustained economic growth. At the root of this result is the fact that the arrival of a few new products expands the set of technological possibilities of all existing industries by a large amount — that is, if there are n products, the arrival of one more new product increases the combinations of inputs that each existing product can use from 2n-1 to 2n , thus enabling significantly more pronounced cost reductions from the choice of optimal technology combinations. These cost reductions then spread to other industries that benefit from lower input prices and are further incentivized to adopt additional inputs.

Uncertainty of food contamination origin and liability rules: Implications for bargaining power

AbstractWe propose an industrial organization model to analyze the role of bargaining power and liability rules in creating incentives for downstream and upstream supply chain operators to invest in good practices. We investigate the case in which either upstream production practices or downstream distribution may cause product contamination resulting in noncompliance with the authorized thresholds of residues (maximum residue limit [MRL]). We provide a comparative analysis of the retailers’ liability rule‐based accountability and the liability rule “polluter pays,” which penalizes an operator who is directly responsible for a noncompliant product. We show that choosing the optimal liability rule is a complex problem, as the choice depends on the effectiveness of food safety controls and on the magnitude of the fine associated with rejecting noncompliant products. Moreover, the choice of the liability rule can change the negotiating power of both operators and, according to the rule chosen, the retailer will have to pay a higher or lower input price. [EconLit citations: L15, L22, Q18].

Strategic Trade Policy in the Presence of International Outsourcing in a Duopoly Model

This paper analyzes how domestic government sets its optimal export policy in a duopoly model when its domestic firm can only outsource its input while the rival firm is able to both produce and outsource its input. First we analyze the strategic outsourcing behavior of the foreign firm. We find that the foreign firm’s decisions on whether to outsource input or to make it by itself depend on the trade policy taken by the domestic government. The foreign firm will strategically outsource the entire quantity of its input production to the supplier with an input price higher than its in-house cost, if the domestic firm is subsidized by the domestic government. However, when the domestic firm is being charged a positive export tax by the domestic government, the foreign firm will decide to make input by itself despite the lower input price under the outsourcing regime. From the domestic government’s point of view, we find that the conditions for the foreign firm’s decisions correspond to the domestic social welfare maximization problem. When the foreign firm chooses to outsource its input to the supplier, the domestic government will impose a negative export tax on its firm, namely subsidy. While when the foreign firm chooses to make input by itself, the domestic government will impose an export tax on its firm as trade policy.Keywords: Trade Policy, Export Tax, Subsidy, Outsourcing

Do Price Dynamics Drive Musical Evolution?

Do lower input prices to creative production reduce output prices or do they increase product variety? We propose an evolutionary model connecting price dynamics in input markets to innovation and variety generation in output markets. Lower input prices may be competed away in market share dynamics, but they may also induce a fall in the opportunity cost of entrepreneurial experimentation, leading to increased variety in output markets. Increased variety in creative output markets (i.e. niche creation through conceptual revolution) is explained here as a consequence of the entrepreneurial opportunities due to falling input prices. This falling-input-price-induced niche proliferation mechanism is examined with price and genre data from the music industry. We find that falls in input prices do seem to correlate with music genre proliferation.

Effects of technical interventions on flexibility of farming systems in Burkina Faso: Lessons for the design of innovations in West Africa

African farmers have always been exposed to climatic and economic variability and have developed a range of coping strategies. Such strategies form part of flexible farm management, an ability that may prove very valuable in the face of future climate change and market dynamics. The generally low productivity of African smallholder farming systems is usually addressed by research and development institutions by a variety of solutions for improving farm performance. However, changes to the system may affect the flexibility of farms and thus their ability to cope with variability. We quantified the added value of being flexible and how this flexibility is affected by technical changes, such as composting and cattle fattening recurrently proposed and promoted by research and development institutions and projects. The study was conducted in two villages of the agro-pastoral area of Burkina Faso, where livestock, cereals and cotton are the main farming activities. A whole-farm simulation model was developed based on information gathered during focus group meetings with farmers and detailed individual monitoring of farmers' practices. The model simulates farmers' decision rules governing the management of the cropping and livestock farm components, as well as crop and livestock production and farm gross margin. Using the existing decision rules, current farm performance was simulated by assessing the cereal balance, the fodder balance and the whole farm gross margin. Then, by comparing the mean and the coefficient of variation of these indicators resulting from (a) the existing decision rules (baseline scenario) and (b) a set of less flexible rules (rigid scenario), the added value of flexible management was revealed. The adoption of composting practices allowed a slight increase in gross margin associated with a decrease in its between-year variability in comparison with conventional practices. Cattle fattening only led to a higher gross margin in the years with high rainfall and low input prices when no management practices were used to limit dependence on external input. This kind of technical change thus requires increased management agility by farmers to deal with climatic and economic variability. We conclude that assessing the impact of technical interventions not only in terms of productivity but also in terms of changes in flexibility is useful for a better understanding of potential adoption of technical changes.

Benchmarking the performance of Chinese airlines: An investigation of productivity, yield and cost competitiveness

In the past decade, the Chinese airline industry experienced extraordinary growth in size and profitability. However, no quantitative study has investigated the performance of Chinese airlines in terms of productivity and cost competitiveness. This study investigates the leading Chinese airlines' productivity, yield, cost competitiveness and input prices, and benchmarks them against major airlines around the world. It finds that Chinese airlines' productivity has improved significantly in the past decade but still lags behind that of industry leaders. Chinese carriers enjoyed high yields and low input prices in the domestic market, which led to high profitability in recent years. However, their cost advantage has been diminishing. To sustain long-term growth, Chinese airlines need to adopt the industry's best practices in a timely manner. Both the aviation markets and input markets in China should be further liberalized.

Agricultural Prices, Selection, and the Evolution of the Food Industry

AbstractWe present a model that explains the relationship between low input prices, high exit rates, and industrial concentration. We argue that falling input prices force less productive firms to exit the market, and lead to the expansion of more efficient incumbents at the expense of less productive producers. Our model helps reconcile some well‐established empirical results regarding the food processing industry. Indeed, agricultural prices fell between the early 1900s and 2006, and over the same period there was a trend towards higher concentration in the food industry, with an increase in average productivity.

Cartelization Through Buyer Groups

Retailers may enjoy stable cartel rents in their output market through the formation of a buyer group in their input market. A buyer group allows retailers to commit credibly to increased input prices, which serve to reduce combined final output to the monopoly level; increased input costs are then refunded from suppliers to retailers through slotting allowances or rebates. The stability of such an ‘implied cartel’ depends on the retailers’ incentives to source their inputs secretly from a supplier outside of the buyer group arrangement at lower input prices. Cheating is limited if retailers sign exclusive dealing or minimum purchase provisions. We discuss the relevancy of our findings for antitrust policy.

An analysis of input choice, input prices, and environmental factors on the costs of seawater reverse osmosis systems

This paper examines optimal input allocations in the context of a seawater desalination reverse osmosis (SWRO) system used to produce municipal water. The objective of this research is to better understand the effects on the total costs and the input portfolio of a SWRO system from changes in water quality, daily operations schedule, and input prices. A cost-minimization model is developed, a production function is estimated, and sensitivity analyses are conducted. The results indicate that lower total system costs are associated with warm-weather water quality parameters and lower input prices. Conditional findings indicate a range of system characteristics that yield, in optimality, moderate levels of both capital and hourly operations. This finding is due to the substitution between capital and daily-hours of operation. Additionally, an interruptible (or off-peak) electrical power supply regime is evaluated and determined to contribute to lower system costs under realistic conditions.

Why Doesn't Technology Flow from Rich to Poor Countries?

What is the role of a country's financial system in determining technology adoption? To examine this, a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation. The terms of finance are dictated by an intermediary's ability to monitor and control a firm's cash flow, in conjunction with the structure of the technology that the firm adopts. It is not always profitable to finance promising technologies. A quantitative illustration is presented where financial frictions induce entrepreneurs in India and Mexico to adopt less-promising ventures than in the United States, despite lower input prices.

Economic performance differentiation of the processing stage within the commodity chain

The article is focused on the evaluation of economic differentiation of subjects on particular processing stages within the wheat commodity chain in the Czech Republic with regard to agro-food market development in the last years. The analysis is based on the statement that better economic results of businesses can be achieved not only by successful business strategy or quality management and employees but also by business ability to advance its own interests and to influence market conditions, such as setting higher prices, pressure on lower input prices, better position for negotiations with business partners etc. The Spider Analysis was used for evaluation. The results of analysis have proved worsening of economic position of the second stage of processing (bakeries) in comparison with the first stage of processing (mills) within the commodity chain in the last time, especially as a result of increasing market power of retail. It was also confirmed that decisive subjects in milling industry become bigger mills with joining to raw commodity supplier and subsequent processing stages.

Efficient Cartelization Through Buyer Groups

In industries with unobservable wholesale contracting, retailers may enjoy cartel rents in their output market through the formation of a buyer group in their input market. A buyer group allows retailers to credibly commit to increased input prices, which serve to reduce combined final output to the monopoly level; increased input costs are then refunded from suppliers to retailers through slotting allowances or rebates. The stability of such an 'implied cartel' depends on the retailers' incentives to secretly source from a supplier outside of the buyer group arrangement at lower input prices. Cheating is limited if retailers sign exclusive dealing or minimum purchase provisions. If the buyer group brings about cost efficiencies, the mechanism may be stable for every discount factor, while consumer welfare may actually be raised above competitive levels.

Plant Turnover and Structural Reforms in Colombia

In a healthy economy, plant turnover increases aggregate productivity because efficient producers are more likely to survive. Given high entry and exit rates and the potential importance of turnover in accounting for aggregate productivity, in this paper we examine the determinants of plant exits and then examine how exits and other forms of output reallocation contribute to aggregate productivity. Using a unique plant-level longitudinal data set for Colombia for the period 1982-98, we examine the role of productivity and demand as well as input costs in determining plant exits. Moreover, given the important structural reforms introduced in Colombia during the early 1990s, we explore whether and how plant survival changed after these reforms. Our data permit measurement of plant-level quantities and prices, which allows us to decompose productivity and demand shocks and, in turn, to estimate the effects of these fundamentals on plant exit. We find that higher productivity, higher demand, and lower input prices decrease the probability of plant exit. We also find that the importance of physical efficiency and costs in determining exits increases after the introduction of structural reforms. Finally, a decomposition of aggregate productivity suggests that reallocation through entry and exit is important in accounting for the increase in aggregate productivity after the introduction of structural reforms. Copyright 2006, International Monetary Fund