Price-setting Model Research Articles

A model of price-setting in regional duopolies based on consumer loyalty: theory and evidence from the Austrian newspaper industry

This paper extends a model by Deneckere et al. (J Ind Econ 40:147–156, 1992) to a multi-regional framework. It is assumed that some consumers are loyal to their respective regional firms, while others prefer the nationwide firm’s product. A third type of consumers is sensitive to price. With simultaneous price-setting, it is profitable to undercut or to set the consumers’ reservation price depending on the relative group sizes. With each type of leader–follower game, all firms set the reservation price. In this case, the most profitable scenario for the nationwide firm is to act as a price follower. The model is illustrated by the Austrian newspaper industry, represented by a nationwide firm that enjoys a national market share of over 50 per cent but nevertheless faces strong competition from regional producers in most regional markets. Actual price-setting behaviour is documented and interpreted for the observation period 1979–2003. It is shown that (i) the regional firms’ prices were identical to the nationwide firm’s most of the time, (ii) the nationwide firm almost always acted as a price follower, and (iii) a particular market entrant’s aggressive undercutting was an inept strategy.

Openness and the (Inverted) Aggregate Demand Logic

I build a small open economy version of the Calvo-type staggered price-setting model with limited asset market participation, and I show that the inverted aggregate demand logic is less likely to apply to small open economies. The equilibrium dynamics of the model are reduced to a representation in the output gap and domestic inflation, and depend on the degree of asset market participation in a non-linear way. If asset market participation decreases above a certain threshold, the relationship between the real interest rate and aggregate output strengthens. Below this threshold, the link between the real interest rate and aggregate demand inverts: aggregate domestic output contracts in response to a decrease in the real interest rate. Policy rules have to satisfy an inverted Taylor Principle to ensure a unique equilibrium in this type of economy. When an economy is open, the 'standard' Taylor Principle is strictly more likely to apply. The Taylor Principle is restored regardless of the level of asset market participation when the redistributive dividend tax rate, or the share of domestic firms under foreign ownership, exceeds a certain threshold.

Equilibrium Unemployment Dynamics in a Panel of OECD Countries

AbstractWe focus on the equilibrium unemployment rate as a parameter implied by a dynamic aggregate model of wage and price setting. The equilibrium unemployment rate depends on institutional labour market institutions through mark‐up coefficients. Compared with existing studies, the resulting final equation for unemployment has a richer dynamic structure. The empirical investigation is conducted in a panel data framework and uses OECD data up to 2012. We propose to extend the standard estimation method with time dummies to control and capture the effects of common and national shocks by using impulse indicator saturation (WG‐IIS), which has not been previously used on panel data. WG‐IIS robustifies the estimators of the regression coefficients in the dynamic model, and it affects the estimated equilibrium unemployment rates. We find that wage co‐ordination stands out as the most important institutional variable in our data set, but there is also evidence pointing to the tax wedge and the degree of compensation in the unemployment insurance system as drivers of equilibrium unemployment.

Do Underwriters Compete in IPO Pricing

We propose and implement a direct test of the hypothesis of oligopolistic competition in the U.S. underwriting market against the alternative of implicit collusion among underwriters. We construct two models of IPO price setting: a model of oligopolistic competition among underwriters and a model of price coordination among them. The two models lead to different equilibrium relations between market shares and compensation of various underwriters on one hand and the state of the IPO market on the other hand. Our empirical results, obtained using 39 years of IPO data, are generally consistent with the implicit collusion hypothesis -- banks, especially larger ones, seem to internalize the effects of their underwriting fees and IPO pricing on their rivals.

DYNAMIC PRICE AS BARGAINING RESULT FOR REVENUE MAXIMIZATION IN RETAIL

The application of dynamic price and its modeling was an authentic revolution for the traditional concept of price setting in business environment. The article reviews the essence and the main principles of dynamic price as a bargaining basis. Dynamic price fluctuation range in this paper is collated with the zone of agreement and introduced as an overlap between the maximum purchase price that the buyer is willing to pay and the minimum sell price that the seller is willing to accept. Therefore, the aim of this paper is to analyse the dynamic price as the bargaining basis, research problems, and to assess the dynamic price efficiency based on the dynamic price setting model experiment results. The experimental results suggest that dynamic price is a successful tacit bargaining practice.

Acitvely Learning by Pricing: A Model of an Experimenting Seller

This paper presents a model of a rational seller who is actively learning the slope of his demand curve via his pricing strategy. Consequently, this seller optimally experiments with his price. Resulting price patterns show a lot of discreteness (as observed in the data), which has proved to be a major challenge to most price setting models. The model’s learning dynamics are able to reconcile individual price flexibility with aggregate price sluggishness, while the experimentation motive can explain the presence of many idiosyncratic price changes in the data as well as the observation that prices are more volatile than costs.

Sticky prices or rational inattention – What can we learn from sectoral price data?

This paper derives stylised facts on sectoral inflation dynamics and confronts these facts with two popular theoretical models of price setting. Based on sectoral price responses to macroeconomic shocks estimated from an approximate factor model, we find that the frequency of price changes explains a relevant share of the cross-sectional variation of the speed and size of responses. Moreover, there is little evidence that the volatility of sectoral inflation due to idiosyncratic shocks dampens the size and speed of the responses to macroeconomic shocks. These findings support a multi-sector model with sticky prices rather than a rational-inattention model. We derive the results from different modelling and sampling decisions proposed in the literature, and we find that the explanatory power of the frequency of price changes for the speed of response to a macroeconomic shock proves robust in the face of these decisions. Other results are sensitive with respect to the choice of the factor model and the treatment of outliers.

Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation *

Abstract Is monetary policy less effective at increasing real output during periods of high volatility than during normal times? In this article, I argue that greater volatility leads to an increase in aggregate price flexibility so that nominal stimulus mostly generates inflation rather than output growth. To do this, I construct price-setting models with “volatility shocks” and show these models match new facts in CPI micro data that standard price-setting models miss. I then show that these models imply that output responds less to nominal stimulus during times of high volatility. Furthermore, because volatility is countercyclical, this implies that nominal stimulus has smaller real effects during downturns. For example, the estimated output response to additional nominal stimulus in September 1995, a time of low volatility, is 55% larger than the response in October 2001, a time of high volatility.

Professional Certificate in Financial Investment (Part 6)

This is the set of presentation on options for investment purpose. Topics include: a) overview of option and covered option, (b) what is option, (c) what is covered option, (d) covered option characteristics, (e) option price setting model, (f) covered option risk management, (g) hedging and cross period trading strategy.

Price Rigidity: Microeconomic Evidence and Macroeconomic Implications

We review recent evidence on price rigidity from the macroeconomics literature and discuss how this evidence is used to inform macroeconomic modeling. Sluggish price adjustment is a leading explanation for the large effects of demand shocks on output and, in particular, the effects of monetary policy on output. A recent influx of data on individual prices has greatly deepened macroeconomists’ understanding of individual price dynamics. However, the analysis of these new data raises a host of new empirical issues that have not traditionally been confronted by parsimonious macroeconomic models of price setting. Simple statistics such as the frequency of price change may be misleading guides to the flexibility of the aggregate price level in a setting in which temporary sales, product churning, cross-sectional heterogeneity, and large idiosyncratic price movements play an important role. We discuss empirical evidence on these and other important features of micro price adjustment and ask how they affect the sluggishness of aggregate price adjustment and the economy’s response to demand shocks.

Factors effecting longer term farm contracts in the frozen fries processing industry

Prices are highly volatile in the South African potato industry and the marketing of potatoes are associated with high transaction costs. Most potatoes produced for the processing industry in South Africa are still under short-term contracts. The processors of frozen fries in South Africa want producers to enter into long-term contracts in order to reduce uncertainty and transaction cost. The aim of this paper was to investigate the factors that prevented South African potato producers to enter into long-term contracts. Producers identified advantages and disadvantages of the processing industry and consequently a price setting model was designed. Well established processing companies with large capacity were listed as an advantage. The main disadvantage was the high transaction cost due to uncertainty and asset specificity associated with producing potatoes for processing. The price setting model was used to convert some disadvantages into advantages and opportunities. Processors may use the information regarding perceived advantages and disadvantages, as well as, the price setting model to draw up long-term contracts that are more viable for producers. The model can also serve as a marketing tool since risk associated with different qualities of potatoes and premiums paid for higher qualities are evaluated. Key words: Asset specificity, long-term contracts, potato industry, pricing model, transaction costs.

Price Stickiness and Sectoral Inflation Persistence: Additional Evidence

In this paper, using U.S. as well as French sectoral data and indicators of price rigidity, we reexamine the (lack of) relation between price stickiness and inflation persistence. This has recently been put forward by Bils and Klenow (2004) as evidence against time‐dependent price setting models. We obtain that, when filtering out sector‐specific shocks along the lines of Boivin, Giannoni, and Mihov (2009), and allowing for an alternative assumption on the marginal cost process, the case against the time‐dependent Calvo model is substantially weakened.

Generalised Taylor and Generalised Calvo Price and Wage Setting: Micro‐evidence with Macro Implications

The Generalised Calvo and the Generalised Taylor models of price and wage setting are, unlike the standard Calvo and Taylor counterparts, exactly consistent with the distribution of durations observed in the data. Using price and wage micro-data from a major euro area economy (France), we develop calibrated versions of these models. We assess the consequences for monetary policy transmission by embedding these calibrated models in a standard dynamic stochastic general equilibrium model. The Generalised Taylor model is found to help rationalise the hump-shaped and persistent response of inflation, without resorting to the counterfactual assumption of systematic wage and price indexation.

The price-setting newsvendor with service and loss constraints

Current performance measurement systems consider not only financial measures, like costs and profits, but also non-financial indicators with respect to customer service, quality and flexibility. Using the newsvendor model, we analyse the respective influence of these possibly conflicting performance measures on important operations and marketing decisions, for instance the order quantity and the selling price of a product. As in the classical newsvendor model for price-independent as well as price-dependent demand distribution, the objective of the firm is to maximise expected profit. In this paper, we also consider a service constraint—a lower bound for the level of product availability—and a loss constraint—an upper bound for the probability of a loss occurring. For both models, we provide conditions for the existence of solutions. We then analyse the influence of demand variability using a set of conditions specifying the quantiles of the predetermined performance measures: a higher variability of demand implies a smaller admissible region of the decision variables. In the price-independent case, the optimal solution has a control-limit structure: the optimal order quantity is thus given either by the classical newsvendor solution or by the control-limits corresponding to the constraints. In the price-setting model with multiplicative demand, this structure is used to check whether small admissible prices are determined by the service constraint or by the loss constraint. Using these structural results, a procedure is developed to more easily enable the computation of the optimal values of the order quantity, selling price and expected profit.

Inflation dynamics and real marginal costs: New evidence from U.S. manufacturing industries

This paper deals with the analysis of price-setting in U.S. manufacturing industries. Recent studies have heavily criticized the ability of the New Keynesian Phillips curve (NKPC) to fit aggregate inflation (see, e.g., Rudd and Whelan, 2006). We challenge this evidence, showing that forward-looking behavior as implied by the New Keynesian model of price-setting is widely supported at the sectoral level. In fact, current and expected future values of the income share of intermediate goods emerge as an effective driver of inflation dynamics. Unlike alternative proxies for the forcing variable, the cost of intermediate goods presents dynamic properties in line with the predictions of the New Keynesian theory.

Price Stickiness and Sectoral Inflation Persistence: Additional Evidence

In this paper, using US as well as French sectoral data and indicators of price rigidity, we re-examine the (lack of) relation between price stickiness and inflation persistence. This has recently been put forward by Bils and Klenow (2004) as evidence against time-dependent price setting models. We obtain that, when filtering out sector-specific shocks along the lines of Boivin et al. (2009), and allowing for an alternative assumption on the marginal cost process, the case against the time-dependent Calvo model is substantially weakened.

The frequency and size of price changes: evidence from non-parametric estimations

The majority of price setting models predict a negative correlation between the frequency and size of price changes. Using a unique micro-level price data from Slovakia, we find that a negative correlation between frequency and size of price changes holds only for more rigid prices. On the other hand, less rigid prices such as gasoline prices exhibit positive correlation in line with Rotemberg's pricing model.

A state-dependent model of intermediate goods pricing

Recent analyses of transaction-level data sets have generated new stylized facts on price setting and greatly influenced the empirical open- and closed-economy macroeconomics literatures. This work has uncovered marked heterogeneity in price stickiness, demonstrated that even non-zero price changes do not fully “pass through” exchange rate shocks, and offered evidence of synchronization in the timing of price changes. Further, intrafirm prices have been shown to differ from arm's length prices in each of these characteristics. This paper develops a state-dependent model of price setting by strategic intermediate goods producers that anticipate and respond to their competitors' actions. The model, which allows for both arm's length and intrafirm transactions, is able to generate all of these empirical pricing patterns.

중국 미술품 가격 형성 요인 실증분석 -컨템퍼러리 미술 작가 중심으로-

본 논문에서는 현재 미술시장에서 주목 받고 있는 중국 컨템퍼러리 미술품 가격을 형성하는 요인을 분류하고, 중국 미술품만이 가지고 있는 가격형성 특징에 대해 고찰해 본다. 중국 컨템퍼러리 미술품의 급격한 성장에는 일반적인 미술품의 가격 형성요인과 차별화되는 중국만의 특수한 요인들이 영향을 미쳤을 것으로 판단하여 기존 선행 연구에서 사용되었던 가격형성요인에 중국의 작가 및 사회적 특징을 반영한 요인을 추가하였다. 미술품이 가지고 있는 다양한 특성들을 개별요인함수로 두고 실거래 가격을 종속변수로 하는 헤도닉 가격모형을 적용하여 데이터를 분석하였다. 그 결과로 중국 컨템퍼러리 미술품은 경매도시, 경매회사, 경매 월 등의 판매요인보다는 출신지역, 주 활동지역, 최종학력소재지 등의 작가적 요인이 더 많은 영향을 미치는 것으로 나타났다. 또한 최근 제작된 작품일수록 가격이 높게 책정되었고, 중국 컨템퍼러리 미술의 특징인 '인물의 유무' 요인에서는 작품 속 인물이 존재할수록 가격이 높게 책정된 것을 알 수 있었다. 사회적 요인인 중국 GDP가 중국 컨템퍼러리 미술품 가격과 동반 상승하였다는 점에도 주목할 만하다. 중국 컨템퍼러리 미술에 대한 관심과 수요가 높은 시점에서 본 연구의 결과는 중국 컨템퍼러리 미술품에 대한 이해도를 높이고, 컬렉터들에게 설득력 있는 구매방향을 제시해 줄 것이라 생각한다. This paper classifies factors that form Chinese contemporary art price which comes into the spotlight in the current fine art market and consider the characteristics that form price with Chinese art only. The data were analyzed applying hedonic price setting models which include market value as a dependent variable with the various characteristics that art includes as the individual factors. The result has found that Chinese contemporary art has the more effects on factors of artists than sales factors. The social factor is worthy of notice in that Chinese GDP jointly raised with the price of Chinese contemporary art. At this point that interest in and demand of Chinese contemporary art are higher, it is thought that the result of this study will raise comprehension and convincing purchase direction will be suggested to collectors.

Recovering markups from production data

In this paper, I discuss, what I call, the Production-Approach to recovering markups. In contrast to the most popular approach in empirical IO, which relies on demand estimation, this approach requires standard production data while allowing for various price-setting models and puts no restrictions on underlying consumer demand. Using production data together with standard cost minimization allows a researcher to obtain markups in a flexible way. After presenting a brief and selective overview of the literature I contrast the production approach to that of the more popular demand estimation approach. This discussion makes it clear that both approaches face important trade-offs and at a minimum empirical economist should have both techniques as part of their toolbox. The hope is that the use of both methods will only depend on the data at hand and the relevant institutional knowledge, paired with the actual research question we are trying to answer.