Observed Price Differences Research Articles

A Single-Buyer Model of Imbalance Cost Pass-Through Pricing Forecasting in the Malaysian Electricity Supply Industry

The imbalance cost pass-through (ICPT) is a flexible component of the incentive-based regulation (IBR) that empowers power producers to adjust tariffs in response to variable fuel prices, thereby enhancing the economic resilience of electricity generation. In Malaysia, the Energy Commission has conducted biannual reviews of fuel and other generation costs. Any cost savings or increases identified during these reviews will be passed on to customers in the form of rebates or surcharges. Meanwhile, if an increment in the ICPT price signal can be provided to electricity providers and consumers, early preparation for operation budgeting can be realised, and energy management program development can be properly prepared. Due to this reason, this study proposes ICPT price forecasting for the electricity market in Peninsular Malaysia that will benefit the stakeholders. The study aims to construct an ICPT-related baseline model for the peninsular generation data by employing three forecasting methods. The forecasting performance is analysed using the mean absolute percentage error (MAPE). In light of our findings, the ARIMA method is one of the most accurate forecasting methods for fuel prices compared to the moving average (MA) and LSSVM methods. The observed price differences between the ARIMA and LSSVM models for ICPT are minimal. The ICPT price for July–December 2022 and January–June 2023 is MYR 0.21/kWh for the ARIMA and MYR 0.18/kWh for LSSVM, which are close to the actual TNB’s ICPT tariff. As for forecasting, the ICPT price is expected to drop in the next announcement. The findings of this study may have a positive impact on the sustainability of the energy sector in Malaysia.

Declining discount rates in Singapore's market for privately developed apartments

SummarySingapore's market for new privately developed apartments exhibits wide quasi‐experimental variation in ownership tenure. We develop an empirical model in which prices are decomposed into the utility of housing services and a factor that shifts with asset tenure and the discount rate schedule, which we discipline to vary smoothly over time. We estimate discount rates that decline over time and, to accommodate the observed price differences, fall to 0.5–1.5% p.a. by year 400. The finding that households making sizable transactions do not entirely discount benefits accruing centuries from today is relevant, with the appropriate risk adjustment, for evaluating climate‐change investments.

Did the 1918–19 Influenza Pandemic Kill the US Life Insurance Industry?

Using a novel, hand-collected dataset of U.S. life insurance companies during the Influenza Pandemic of 1918–19, we show that high-exposure firms charged higher prices on new policies vis-à-vis less exposed firms. Since the pandemic surprisingly increased mortality rates among young adults, we argue that insurers used product pricing as a risk management tool to mitigate the probability of financial distress. Consistent with this channel, health shocks significantly impact firms’ exit and entry decisions depending on a state’s exposure to the disease. Finally, we show that competing explanations for the observed price differences find little support from the data.

The Supply Network and Price Dispersion in the Canadian Gasoline Market

Abstract This paper examines the impact of variation in transportation options – what I denote the “supply network” – on observed price differences between locations for a specific good, retail gasoline. I use a unique data set of weekly gasoline prices across 44 Canadian cities to analyze how the existence of variation in the available modes of transportation for gasoline between cities (via pipeline, marine tanker, rail or truck) accounts for observed price differences across locations. I find that the supply network is significant – cities connected by lower cost-per-unit methods like pipelines or seaports exhibit smaller mean- and weekly-price differences than those connected only by road or rail, after controlling for distance, regional effects and market size. A pipeline connection results in a reduction in weekly price dispersion equivalent to a 53% reduction in distance between cities, while a maritime connection has the equivalent effect of a 38% reduction in distance between cities.

Sequential Markets, Market Power, and Arbitrage

We develop a framework to characterize strategic behavior in sequential markets under imperfect competition and restricted entry in arbitrage. Our theory predicts that these two elements can generate a systematic price premium. We test the model predictions using microdata from the Iberian electricity market. We show that the observed price differences and firm behavior are consistent with the model. Finally, we quantify the welfare effects of arbitrage using a structural model. In the presence of market power, we show that full arbitrage is not necessarily welfare-enhancing, reducing consumer costs but increasing deadweight loss. (JEL D42, D43, L12, L13, L94, Q41)

How Do Households Discount Over Centuries? Evidence from Singapore's Private Housing Market

We examine Singapore's fairly homogeneous private-housing market and show that new apartments on historical multi-century leases trade at a non-zero discount relative to property owned in perpetuity. Descriptive regressions indicate that new apartments with 825 to 986 years of tenure remaining are priced 4 to 6% below new apartments under perpetual ownership contracts that are otherwise comparable. We consider an empirical model in which asset value is decomposed into the utility of housing services and a second factor that shifts with asset tenure and the discount rate schedule. Exploiting the supply of new property with tenure ranging from multiple decades to multiple centuries, we estimate the discount rate schedule, restricting it to vary smoothly over time through alternative parametric forms. Across different specifications and subsamples, we estimate discount rates that decline over time and, accounting for the observed price differences, are of the order of 0.5% p.a. by year 400-500. The finding that households making sizable transactions do not entirely discount benefits accruing many centuries from today is new to the empirical literature on discounting and, with the appropriate risk adjustment, of relevance to evaluating climate-change investments.

How Do Households Discount Over Centuries? Evidence from Singapore's Private Housing Market

We examine Singapore's fairly homogeneous private-housing market and show that new apartments on historical multi-century leases trade at a non-zero discount relative to property owned in perpetuity. Descriptive regressions indicate that new apartments with 825 to 986 years of tenure remaining are priced 4 to 6% below new apartments under perpetual ownership contracts that are otherwise comparable. We consider an empirical model in which asset value is decomposed into the utility of housing services and a second factor that shifts with asset tenure and the discount rate schedule. Exploiting the supply of new property with tenure ranging from multiple decades to multiple centuries, we estimate the discount rate schedule, restricting it to vary smoothly over time through alternative parametric forms. Across different specifications and subsamples, we estimate discount rates that decline over time and, accounting for the observed price differences, are of the order of 0.5% p.a. by year 400-500. The finding that households making sizable transactions do not entirely discount benefits accruing many centuries from today is new to the empirical literature on discounting and, with the appropriate risk adjustment, of relevance to evaluating climate-change investments.

Is Risk Arbitrage Compensated? Evidence from the European STRIPS Market

Previous published studies document price differences between principal and coupon strips although both securities promise identical cash flows at maturity. This paper gauges the economic significance of this apparent anomaly and investigates if holders of the higher-priced strips can exploit the observed price differences by switching to lower-priced strips. Our empirical analysis of the main European strips markets finds that potential switching profits are economically very small. Switching operations by investors keep prices of principal and coupon strips very close to one another. Investors are only marginally compensated for the risks of risk arbitrage in the European strips market.

Advertising, Free-Riding, and Price Differences in the Market for Prescription Drugs

Abstract This article studies the pricing and advertising of prescription drugs in a duopoly market. If advertising is banned, decisions of the prescribing physician are price-sensitive. The emerging market equilibrium is characterized by marginal-cost pricing and normal profits. The introduction of advertising, and physician-oriented advertising (detailing) in particular, creates market power and asymmetric pricing and advertising behavior. In an equilibrium, one firm chooses maximum detailing and the rival firm invests less in physician-oriented advertising. The asymmetric detailing strategies explain the observed price differences in the market for prescription drugs. The model also predicts free-riding in DTC advertising. According to the predictions of the model, the free-rider is the firm with a low level of physician-oriented advertising. The firm with maximum detailing invests money in DTC advertising, expanding the market for prescription drugs.

Maize Market Liberalisation in Benin: A Case of Hysteresis

This article analyses the effect of 10 years of 'liberalisation' policy on price integration in the Beninese maize market. The comparison of price series for two periods, before and after the policy change, shows that the expected positive effect is not confirmed by co-integration analysis. Though markets were, and are, integrated in the long run, the sluggish speed of adjustment has not improved, which is why observed price differences between market places are often larger than marketing costs can justify. We conclude that the liberalisation policies did not significantly affect maize market integration and that, therefore, more effective policy instruments are required in order to strengthen the competitive forces in the market.

Products Liability and Prescription Drug Prices in Canada and the United States

This article provides the first estimate of the degree to which product liability costs in this country contribute to the observed differences in pharmaceutical prices between the United States and Canada. Measures of liability risk show up as large and strongly significant explanatory variables in regressions of U.S. and Canadian price differences. In the sample used here, accounting for liability effects reduces the mean of the predicted price difference distribution by about one‐half and the median by about one‐third. These reductions come about by virtually eliminating the upper tail of the distribution. Though liability effects cannot account for all the observed price differences in this sample, they clearly must play a role. Efforts to explain international price differences in drug products which do not take account of the effects of differing legal systems are missing an important effect and suffer from a substantial omitted variable bias.

International Price Discrimination in the European Car Market

Why are car prices so different across European countries? I construct and estimate an oligopoly model to analyze whether international price discrimination can explain the puzzle. Three sources of international price discrimination are considered: price elasticities, import quota constraints, and collusion. The data reveal that international price discrimination accounts for an important part of the observed price differences. Low price elasticities (or domestic market power) are present in France, Germany, the United Kingdom, and especially Italy. Binding import quota constraints on Japanese cars exist in France and Italy. The possibility of collusion cannot be rejected in Germany and the United Kingdom.

On the theory of growth controls

Numerous empirical studies have examined the effect of growth controls on housing prices.’ These studies have used many different techniques ranging from hedonic price model estimation to paired comparisons but have all come to the same conclusion: growth controls raise the price of housing. In theory, there are both demand and supply side explanations (which need not be mutually exclusive) for these observed price differences. On the supply side, housing caps, zoning restrictions, limitations on the amount of developable land, and other forms of growth control may reduce the supply of housing over time. This, in turn, may produce scarcity effects which manifest as shifts (or other changes) in the housing supply curve and attendant price increases. On the demand side, to the extent that growth controls may reduce or internalize expected negative externalities and/or congestion costs associated with growth, controls may also produce amenity effects. Such amenity effects manifest as changes in the demand curve and likewise may be capitalized in land values (and wages), e.g., the price of a house rises as commute time falls.

A Comparison of Forward and Futures Prices of an Interest Rate‐Sensitive Financial Asset

ABSTRACTThis paper focuses on contractual distinctions as an explanation for the price divergence between futures and forward contracts. Specifically, it investigates the effect of marking‐to‐market on the observed price differences using the pricing model described in Cox, Ingersoll, and Ross (CIR) (1981, Journal of Financial Economics 9, 321–346). Using previously unavailable data, this paper employs Eurodollars, an interest rate‐sensitive financial asset, to test the CIR model. Unlike prior empirical studies, test results support both the weak prediction concerning the sign of the average price difference and the stronger prediction that specific covariances explain the variation in the price differences.

Economic issues in tariffication: an overview

Abstract The agricultural trade liberalization proposal known as ‘tariffication’ aims at converting all existing non-tariff barriers (NTBs) to trade into bound tariffs, and to reduce these tariffs over time. This is in tune with the original philosophy of the General Agreement on Tariffs and Trade (GATT) and it calls for a dramatic overhaul of existing agricultural policies in many developed countries. The main economic issues that arise with tariffication stem from the non-equivalence of tariffs and NTBs in a number of scenarios. This paper analyzes non-equivalence arising from the existence of: imperfect competition in importing countries; price instability in importing and exporting countries; and, inefficient allocation of quantitative restrictions. It is shown that in all these cases the definition of an appropriate ‘equivalent tariff’ to be used in tariffication is not straightforward, and that in general this equivalent tariff cannot be computed on the basis of only observed price differences between countries. Tariff-rate quotas, which are meant to be the main tool of implementation of tariffication according to the existing proposal, are analyzed in some detail. Concerning the relationship between tariffication and the other elements of the trade liberalization package, it is shown that tariffication would limit the scope of export subsidy policies. It is also shown that the existence of production and export subsidies makes observed price gaps between countries of questionable value in setting equivalent tariff levels. Finally, it is argued that the main focus of tariffication should be the conversion of NTBs to acceptable long-run (bound) tariffs rates, and considerable flexibility in this conversion process could be exercised in the transition period.

Economic issues in tariffication: an overview

ABSTRACTThe agricultural trade liberalization proposal known as ‘ tariffication’ aims at converting all existing non‐tariff barriers (NTBs) to trade into bound tariffs, and to reduce these tariffs over time. This is in tune with the original philosophy of the General Agreement on Tariffs and Trade (GATT) and it calls for a dramatic overhaul of existing agricultural policies in many developed countries. The main economic issues that arise with tariffication stem from the non‐equivalence of tariffs and NTBs in a number of scenarios. This paper analyzes non‐equivalence arising from the existence of: imperfect competition in importing countries; price instability in importing and exporting countries; and, inefficient allocation of quantitative restrictions. It is shown that in all these cases the definition of an appropriate 'equivalent tariff to be used in tariffication is not straightforward, and that in general this equivalent tariff cannot be computed on the basis of only observed price differences between countries. Tariff‐rate quotas, which are meant to be the main tool of implementation of tariffication according to the existing proposal, are analyzed in some detail. Concerning the relationship between tariffication and the other elements of the trade liberalization package, it is shown that tariffication would limit the scope of export subsidy policies. It is also shown that the existence of production and export subsidies makes observed price gaps between countries of questionable value in setting equivalent tariff levels. Finally, it is argued that the main focus of tariffication should be the conversion of NTBs to acceptable long‐run (bound) tariffs rates, and considerable flexibility in this conversion process could be exercised in the transition period.

Comments on Lewit, Coate, and Grossman

LEWIT, Coate, and Grossman have found that cigarette prices strongly influence teenagers' smoking patterns, while the Fairness Doctrine had a short-term but not a long-term impact. Given the objectives of the study and data available, the study is well executed, and economists will find the price result congenial. However, some questions remain concerning the interpretation of the results and their implications. The price differences measured in this study are due primarily to differences in cigarette taxes across states. However, the quality-adjusted cigarette prices across states may differ from observed price differences, since taxes affect the characteristics of cigarettes as well as the quantity sold. Cigarettes are not homogeneous: they differ along such dimensions as size, strength, taste, tar level, nicotine level, filter, availability, and image. A tax levied on cigarettes which does not tax all these characteristics simultaneously will induce substitution away from the taxed characteristic into others. Consequently, cigarettes in high-tax states may be of a higher quality than cigarettes in low-tax states along several nontaxed dimensions, and the observed differences in purchase price of cigarettes will reflect more than simply the difference in taxes. For example, Yoram Barzel observed in a cross-state comparison of cigarette prices that for every cent increase in cigarette taxes, the total purchase price increased 1.065 cents.' Thus the quality-adjusted differences across states will differ from those observed by Lewit, Coate, and Grossman; hence the calculated elasticities require some adjustment.