Price-setting Mechanism Research Articles

Price Setting Behavior in Spain: Stylized Facts Using Consumer Price Micro Data

This paper identifies the basic features of the price setting mechanism in the Spanish economy, using a large dataset that contains over 1.1 million price records and covers around 70% of the expenditure on the CPI basket. In particular, the paper identifies differences in the frequency and size of price adjustments across types of products and explores how these general features are affected by certain specific factors: seasonality, the level of inflation, changes in indirect taxation and the practice of using psychological and round prices. We find that prices do not change often but do so by a large amount, although there is a marked heterogeneity across products. Moreover, the high frequency of price reductions suggests that there is no strong downward rigidity. Our evidence also supports the use of time and state-dependent pricing strategies.

A Dynamic Price-Setting Mechanism for a Hybrid Matching Market

After observing the problem of the intimate wear market of Nova Friburgo with the distribution of its product both in Brazil and abroad, we designed a dynamic allocation mechanism that sets the prices according to the demand from the buyers, based on their preferences, and that yields an allocation for the core of the market game in a finite number of steps. With this scheme, all agents are simultaneously present and all sellers sell to both national and international markets. We prove that the core allocation produced by this mechanism provides the lowest price among all outcomes for the core that maintains the same allocations of objects for international buyers as the final allocation. In addition, it coincides with the competitive allocation of minimum price equilibrium, when restricted to the national market, and with the allocation produced by the GaleShapley algorithm (1962), in which buyers make proposals and where there is a convenient tie-breaking rule, when all buyers are from abroad.

Price Setting in Transition: The Effect of Takeover on a Petroleum Firm

In this paper, I investigate the effect of the takeover of a Slovak petroleum firm on its price setting mechanism. In particular, I tested the changes in the reaction of output (fuel) price on input (dollar and crude oil) prices and competitors' prices (approximated by the reference Commodity Exchange fuel price). I find that during the time when the company was owned and controlled by managers, only negative changes in input prices were reflected in the output price. After the takeover of the firm by a foreign strategic investor, I identify a different price setting mechanism: the fuel price starts to react symmetrically to the input prices. The fuel price, however, reacts asymmetrically to the competitors' prices. In particular, the fuel price reacts to Brent increases and Gasoline decreases. Consecutive regression confirmed the hypothesis that before takeover the composite input costs and competitors' prices have very little (or no) impact on fuel price. After takeover, composite input costs as well as competitors' prices start to play an important role in price setting.

Does Market Structure Affect the Immediacy of Stock Price Responses to News?

This study compares the speed of price adjustments to seasoned equity offering announcements by NYSE/AMEX and Nasdaq stocks. We find that price adjustments are quicker by as much as one hour on Nasdaq. This result is not due to differences in issuer characteristics or announcement effects across the markets, but due to differences in market structures. Greater risk taking by dealers, more rapid order execution, and more frequent informed trading (SOES bandits) on Nasdaq, as well as stale limit orders and a less efficient opening price-setting mechanism on the NYSE/AMEX, all contribute to faster stock price adjustments on Nasdaq.

Double Auctions Across a Constrained Transmission Line

Auctions are a common price-setting mechanism in many areas of the economy. Certain auctions, for example those in deregulated electric power networks, require that there exist sufficient capacity along the power lines connecting the buyers and the sellers. We investigate how auction participants modify their bidding strategies depending on the influence and behavior of a transmission line owner. We also investigate optimal strategic behavior when multiple buyers and sellers are separated by a possibly-constrained channel, and show that both sides’ strategies converge to truth-telling behavior as the number of market participants increases, and price-taking behavior also emerges as the number of participants increases. We show that limited transmission capacity increases participants’ misrepresentation and increases auction inefficiency, as players modify their bidding strategies in an attempt to increase their profit.

Investor Protection Mechanism and IPO Valuation on the Kuala Lumpur Stock Exchange

August 2002 Abstract In this paper, two important features of the IPO market in Malaysia since the mid-1990s are examined. The first relates to IPO profit guarantee, an exotic mechanism introduced in 1995 to moderate the power of the controlling shareholders to oppress the minority shareholders. The second relates to the regulatory shift from merit-based regulation to disclosure-based regulation in 1996 when the IPO regulator no longer intervened in the IPO price setting mechanism. The paper examines the valuation impact of IPO profit guarantee as an investor protection tool, and the structural changes in IPO pricing for the period before and after deregulation. The evidence points to the paradoxical role of the IPO profit guarantees. Prior to the Asian financial crisis in the third quarter of 1997, investors are willing to pay more for the IPO shares the more the controlling shareholders guaranteed the forecasted profits, consistent with La Porta, Lopez-De-Silanes, Shleifer and Vishny (2002). However i n the aftermath of the crisis, IPO profit guarantees no longer affect IPO valuation. The evidence also lends support to Habib and Ljungqvist (2001) entrepreneurial wealth losses minimisation hypothesis whereby when IPO entrepreneurs are given the freedom to set the IPO price, they take into consideration their IPO participation ratio in arriving at the IPO offer price.

Pharmaceutical price controls and patient welfare.

Price controls could have a substantial negative effect on pharmaceutical research and development. Extensive research is required before the development costs of a new drug or its benefits are known; most new drug development projects fail, sometimes after substantial financial and time costs. These conditions pose intractable practical problems for the operation of price controls, which cannot rest on objective, predictable standards such as the benefits or costs of individual drugs. In the absence of objective standards, pressure from health care providers and others would create powerful incentives for price regulators to decrease drug prices toward marginal costs of production and distribution, well below levels sufficient to reward innovative research. This downwardly biased price-setting mechanism would apply with particular force to the few successful projects that yield innovative drugs, whose prices would not be set by regulatory authorities until after research expenditures have been incurred and the new drugs are ready to enter the market. Manufacturers will expect price controls to reduce the potential payoffs from breakthrough drugs. This expectation would substantially reduce the incentives to pursue innovative research, as is evident in advanced economies in which price controls are now in force. Once established, price controls for pharmaceuticals, like those for medical services in the Medicare system, would also tend toward complexity and entrenchment of vested interests and could easily become permanent regardless of the harm they cause to patients.

Online Auctions

The traditional channels of distribution for overnight accommodations are rapidly being displaced by website scripting, online intermediaries, and specialty brokers. Businesses that pioneered Internet usage relied on it as a sales and marketing alternative to predecessor product distribution channels. As such, websites replace the traditional trading model to the Internet. Web-enabled companies are popular because the medium renders the process faster, less costly, highly reliable, and secure. Auction-based models impact business models by converting the price setting mechanism from supplier-centric to market-centric and transforming the trading model from “one to many” to “many to many.” Historically, pricing was based on the cost of production plus a margin of profit. Traditionally, as products and services move through the supply chain, from the producer to the consumer, various intermediaries added their share of profit to the price. As Internet based mediums of distribution become more prevalent, traditional pricing models are being supplanted with dynamic pricing. A dynamic pricing model represents a flexible system that changes prices not only from product to product, but also from customer to customer and transaction to transaction. Many industry leaders are skeptical of the long run impact of online auctions on lodging industry profit margins, despite the fact pricing theory suggests that an increase in the flow of information results in efficient market pricing. The future of such endeavors remains promising, but controversial.

The design of payment systems for physicians under global budget – an experimental study

This paper analyzes two alternative methods for controlling the cost of physician services under global budgeting: the expenditure target involves quantity control while the expenditure cap is a retrospective price-setting mechanism. Theoretical analysis shows that given the same spending, a larger quantity of physician services will be provided under the symmetric Nash equilibrium outcome of expenditure cap. We conducted laboratory-controlled experiment and found that the behavior of medical students was well-approximated by the symmetric Nash equilibrium. Therefore, the experimental results support the theoretical analysis and confirm that expenditure cap is a better system.

Barometric price leadership

Barometric price leadership refers to situations in which a price leader acts as a barometer of prevailing market conditions for other firms in the industry. In this paper, a model of price setting with costly information acquisition is analyzed. It is shown that the unique equilibrium outcome is for one firm to acquire information and become a price leader, while the other firm does not purchase information and becomes a follower. In contrast to most previous work, leadership in this model is due to the informational setting, not the price-setting mechanism as, with symmetric information, the unique outcome is the symmetric Bertrand equilibrium.

The Warsaw Stock Exchange in the period 1991–1993. Qualitative problems of its modelling

The paper focuses on the analysis of return on shares quoted on the Warsaw Stock Exchange (WSE) in the period 1991–1993. We found that the WSE specific institutional background resulted in a large variation of return rates, their distributional assymetry and truncations which make hypotheses testing procedures about criteria of investors' choice and the price setting mechanism more complicated.

Currency Bands, Target Zones, and Price Flexibility

Exchange rate behavior is analyzed in the context of a stochastic rational expectations model in which there are random shocks to the price-setting mechanism and in which the authorities choose to impose either nominal or real exchange rate bands. The effects of rules for realignment of the band are also examined. Results are compared with those that emerge from a simple monetary model subject to velocity shocks.

Currency Bands, Target Zones, and Cash Limits: Thresholds for Monetary and Fiscal Policy

Exchange rate behavior is analyzed in the context of a stochastic rational expectations model in which there are random shocks to the price setting mechanism and in which the authorities choose to impose either nominal or real exchange rate bands. Results are compared to those which emerge from a simple monetary model subject to velocity shocks. The effects of a realignment of the Band, and of fiscal policy used in conjunction with monetary policy to defend the band, are also examined.

Relative distortions of agricultural incentives: A cross country analysis for wheat, rice and maize

Governments intervene in the agricultural price-setting mechanism in many ways that lead to distorted agricultural incentives. This paper attempts to discriminate among several factors that are hypothesised to affect government behavior in distorting wheat, rice, and maize prices. The analysis shows that governments do distort wheat, rice and maize prices. The main determinant of the extent and direction of the distortions is the level of development of the country. Governments, however, distort, in addition, the relative prices of the same commodities. The results show that countries follow taxing or subsidizing pricing policies that are influenced by vested interest groups and lead to domestic relative prices that are different from the respective international relative prices.

Comment: The Effect of Dual Markets on Common Stock Market Making

In their paper Messrs. Reilly and Slaughter set out two questions, namely:1. Prior to the introduction of technological advance in the securities market was there any difference in the market making between the NYSE and OTC on a sample of 30 stocks?2. Following that introduction what was the effect on the market making of these securities listed on the NYSE?The authors clearly stated the basic economic theory that underlies this exchange of assets and the price setting mechanism, and then concentrated on the empirical study. Their findings are inconsistent with their a priori expectations. This empirical study is well done; the methodology is sound and well presented. However, the authors appear to have overlooked one vital aspect of this type of study, i.e., institutional effects. I shall concentrate upon this area.