Reserve Price Research Articles

The effects of seemingly nonbinding price floors: An experimental analysis

Price floors are common policies in markets for storable goods such as commodities, bankable emissions permits, and currencies. Hard price floors are implemented as unlimited government buybacks and prevent the price from falling below the floor; soft floors, whether implemented as limited buybacks or as reserve prices in emission permit auctions, allow the market price to fall below the floor. We specify and then test in the laboratory a two-period model with the same properties as our infinite-horizon model, Salant et al. (2022). Theory predicts that asset prices will respond to price floors even in a set of circumstances where the floor seems nonbinding. Most of our experimental findings are consistent with theoretical predictions: a seemingly nonbinding floor can cause the price and carryover to jump up, the jump is higher with a hard floor than a soft one, and when the floor is so low that the theory predicts no effect, none is observed. In contrast to theoretical predictions, however, the soft floor fails to increase the carryover and market price in our experiment.

Collection and Marketing of Tendu Leaves in Rajasthan, India

Tendu (Diospyros melanoxylon Roxb.) belong to the Family Ebenaceae, which is endemic to the Indian subcontinent. Locally, it is known as temburini. The leaves obtained from Diospyros melanoxylon, vernacularly known as ‘tendu’, ‘kendu’, ‘abnus’ or ‘bidi’ are the most extensively collected both for local consumption and for export. Tribal people in the nation have the right to gather, protect, and promote forest resources under the Forest Rights Act. As tendu leaves are the main source of money for a sizable population that depends on collecting forest food, it is also known as "green gold" in tribal areas. The harvesting of tendu leaves provides work for 75 lakh (7.5 million) individuals nationwide for around three months, according to data from the Tribal Cooperative Marketing Development Federation of India. The State Government determines the collection fees per typical bag of 1000 bundles (50 leaves/bundle), or 50,000 leaves/ bag, which are to be given to tendu leaves collecting labour. Tendu Patta collection & trade is controlled by the Rajasthan Tendu Leaves (Regulation of Trade) Act, 1974 and rules made there under called Rajasthan Tendu Leaves (Regulation of Trade) Rules, 1974. In the districts of Pratapgarh, Banswara, Udaipur, Dungarpur, Pali, Baran, Bhilwara, Jhalawar, and Dholpur, among others, tendu leaves are mostly harvested. In the summer, both locals and tribal members gather these leaves. Aside from this, over 30 lakh (3 million) people rely on creating bidis from these leaves for their living. In the year 2021–2022, 317206 bags were sold, generating a total of ₹4069 lakhs in revenue. The analysis showed a stagnant but significant growth both in production and revenue generated from tendu leaves. Assured reserve prices and bonuses for labourers will help in increasing the revenue from tendu leaves as it will give impetus to labourers.

Did doubling reserve requirements cause the 1937–38 recession? New evidence on the impact of reserve requirements on bank reserve demand and lending

In 1936–37, the Federal Reserve doubled member banks’ reserve requirements. Friedman and Schwartz (1963) famously argued that the doubling increased reserve demand and forced the money supply to contract, which they argued caused the recession of 1937–38. Using a new database on individual banks, we find that higher reserve requirements did not generally increase banks’ reserve demand or contract lending because reserve requirements were not binding for most banks. Aggregate effects on credit supply from reserve requirement increases were therefore economically small and statistically zero.

A stochastic analysis of the energy and reserve operation for battery storage-assisted prosumer aggregator in the Southwest Power Pool Market

To facilitate the integration of renewable energy in electric power systems, the installed capacity of distributed renewable energy sources has been increased rapidly worldwide in recent years, and the prosumers and prosumer aggregators have become important players in smart grid. To maximize the economic benefits of a prosumer aggregator in power markets, a stochastic model used for generating the day-ahead (DA) energy and operating reserve scheduling strategies is proposed. The uncertainties associated with solar power productions, demands and prices in energy and operating reserve markets are handled via stochastic optimization technique. To manage the potential risks faced by the prosumer aggregator, the conditional value at risk is adopted to measure and manage its potential low profits or losses. Finally, case studies are performed by using the data in the energy and operating reserve markets operated by the Southwest Power Pool (SPP), and the optimal energy and operating reserve bids are generated effectively by solving the proposed model. The values of the operating reserve markets and battery storages are analyzed in detail via simulation, and it shows that higher reserve prices and larger battery storage capacity would lead to higher expected profit and lower risks for the prosumer aggregator.

A generalization of the Symmetric Translog functional form

Feenstra and Weinstein introduced a special case of the translog cost function, the Symmetric Translog (ST) Cost Function, which replaced all of the second order parameters which are present in the Translog functional form by a single positive parameter. The ST functional form is useful in the context of estimating consumer preferences over related products and provides an alternative to the use of Constant Elasticity of Substitution (CES) preferences in this context. The ST functional form has a potential advantage over the CES functional form that it produces finite estimates for reservation prices for missing products whereas the CES reservation prices are always infinite. The present paper proposes a Generalized Symmetric Translog Cost Function which also generates finite reservation prices but is more flexible than the ST functional form.

Modeling the Reserve Demand to Facilitate Central Bank Operations

Modeling the Reserve Demand to Facilitate Central Bank Operations

An efficient system of incentivizing truck drivers to accept night loads

ABSTRACT Night deliveries are increasingly used by motor carriers to cut costs, but many carriers struggle to secure night truck drivers because many drivers dislike night driving. Monetary incentives are offered to drivers to accept night loads, but the incentive system currently used in practice is inefficient, as it not only pays more incentives than necessary but also does not incentivize the right drivers, both of which increase costs. This paper develops a new incentive system that allows carriers to secure night drivers at lower costs. Based on the interviews conducted with seven motor carriers, as well as the analysis of large night delivery data, we propose a bi-level programming approach that (1) generates a unique incentive for each driver based on his/her night driving performance, and (2) implicitly aligns the incentive paid to each driver with his/her reservation price. Simulation experiments conducted with real-world data showed that by using our approach carriers can not only avoid over-incentivizing drivers, but also (1) incentive only the right set of drivers who can bring cost savings and (2) encourage other drivers to improve night driving. Results also showed that our approach may give cost savings of up to 2.5% over the current system.

Balancing Attraction and Risk Revelation: The Optimal Reservation Price in Peer-to-Peer Loan Auctions

Balancing Attraction and Risk Revelation: The Optimal Reservation Price in Peer-to-Peer Loan Auctions

Carrot or stick? A study on “bid-rigging norms” by simulation: inducing factors and deterring measures

This study aims to analyze the structure of the emergence and maintenance of the cartel mechanism as an informal organization and the measures to deter bid-rigging. We propose an agent-based bid-rigging norms model and validate it with a mathematical model. We clarify that the auction system primarily used in public procurements has a structure inducing bid-rigging in which meta-norms are unnecessary. We also show that punishment for deviation from bid-rigging plays a critical role in establishing and maintaining it. In addition, we explore the authorities' actions to deter bid-rigging by examining three measures: the flexible setting of reserve prices, the administrative surcharge and leniency system under the Antimonopoly Law, and applying the bid-rigging offense under the Criminal Law. As a result, the study reveals that the administrative surcharge and the leniency system are insufficient to deter bid-rigging, and the adequate measures are the flexible setting of reserve prices and applying the bid-rigging offense. Furthermore, the simultaneous implementation of these three measures more effectively enables deterring bid-rigging.

Day-Ahead Dynamic Assessment of Consumption Service Reserve Based on Morphological Filter

With the development goal of a low-cost and low-carbon reserve market, this paper proposes a dynamic assessment method for day-ahead consumption service reserve demand considering the forecast error of uncertainty power. The iterative self-organizing data analysis techniques algorithm is adopted to cluster the historical actual power into typical scenarios. In addition, the online matching between the typical scenario and the day-ahead forecast power is conducted. In order to realize the hierarchical quantification of reserve demand, the reserve resources in the whole power system are classified according to their response time. Furthermore, the mathematical morphology filter based on the structural elements that are consistent with the response time of the hierarchical reserve resources is initially applied to decompose the historical forecast error of the matched scenarios. The simulation results verify that the proposed dynamic assessment effectively reduces the reserve cost on the basis of being able to cope with multi-time-scale power fluctuations.

Commentary: Lying about Reservation Prices in Business Negotiation: A Qualified Defense – Corrigendum

Commentary: Lying about Reservation Prices in Business Negotiation: A Qualified Defense – Corrigendum

Auction design by an informed seller: A foundation of reserve price signalling

AbstractThis paper studies mechanism design by a seller privately informed of the (continuous) quality of an indivisible object. An important solution to this informed‐principal problem, the Rothschild–Stiglitz–Wilson mechanisms, which correspond to the least‐cost separating allocations in the signalling literature, is characterized. The characterization reveals that reserve prices are the least costly device to separate sellers of different qualities: In the RSW mechanisms, the lowest‐quality seller adopts her public‐information optimal selling procedure, and each higher‐quality seller adopts a selling procedure that differs from her public‐information optimal one only in that the reserve prices are higher. This finding provides a mechanism‐design foundation for reserve‐price signalling studied in the literature.

The professionalisation of the art trade in early nineteenth century London: Exploring the business model of Christie’s auction house

By 1800, the city of London had developed into a major hub for the art trade and numerous auction houses vied for market share in this competitive environment. Combining data from the Getty Provenance Index® and a unique set of journals preserved at the Christie’s archives in London which contain presale evaluations for paintings during the 1820s, this paper explores the business strategy of the auction house. We gauge the relationship between the estimates and the hammer price or highest bid in the subsequent public auction, and the reserve price when available. We argue that Christie’s developed the expertise and engendered the trust among sellers to secure consignments of desirable works of art, which were estimated at realistic and attractive levels that gave the company a competitive advantage in the booming London art market.

Improving the performance of airport shuttle through demand-responsive service with dynamic fare strategy considering mixed demand

Given the booming aviation industry, airport landside transportation systems have been facing severe challenges. With the development of communication technologies, the conventional airport shuttle—one of the major components of landside transportation—is expected to operate more flexibly to meet diverse travel demands. Therefore, this study aims to explore how the demand-responsive airport shuttle might work and support the decision-making for airport management in the aspects of flexible stop location and diversified service design. The mixed demand, consisting of reservation and real-time demand, is considered. First, we propose an improved clustering method that takes into account the spatio-temporal similarity of reservation demand to identify demand-driven fixed stops, and the batch response strategy for the selection of demand-responsive stops meeting real-time demand. The dynamic fare strategy is further presented to discuss the effects of fare incentives for spatio-temporal service adjustments. Moreover, we develop a two-stage service optimization approach considering the cost and benefits from the perspective of passengers and operators. Trips from the Huitian area (located to the north of Beijing, China) and Beijing Capital International Airport are used as case studies. The results show that the design of 5 routes with 14 fixed stops effectively covers the areas of dense travel demand. Without affecting the on-time arrival of the demand-responsive shuttle at the airport, the load factor for all arriving vehicles exceeds 80% when demand-responsive stops are also served. The study thus provides deep insights into the service design of the demand-responsive airport shuttle and the development of differentiated operating strategies.

Non-iterative multi-area coordinated energy and reserve allocation model for hybrid AC/DC power systems with flexible frequency operation

As the result of renewable energy natural intermittency, load shedding and renewables curtailment are inevitable to keep supply and demand balance in high penetration level power systems. Luckily, with accurate estimation and proper allocation of the reserve, power fluctuation can be smoothed appreciably. Therefore, this study presents a novel coordinated day-ahead economic dispatch model for both energy and reserve in bulk hybrid AC/DC power systems. Flexible frequency operation for each regional sub AC system is applied to estimate reserve demand, while renewable energy forecast error is described by the versatile probability distribution. Considering practical operation structure in China, a non-iterative bi-layer dispatch algorithm is proposed to share power and reserve between interconnected subsystems by applying DC tie-lines’ flexibility. This bi-layer structure is achieved through the upper layer deciding the boundary variables with aggregated generation information provided by the lower layer. Then each lower layer regional AC grid solves its own programming with the boundary variables. Simulation is carried out to verify the efficacy of the proposed dispatch model and distributed solution methodology.

Unconventional monetary policy and the bond market in Japan: A new Keynesian perspective

Using the lens of a medium scale DSGE model, we analyze macroeconomic effects of Japan’s unconventional monetary policy which is known as Qualitative and Quantitative Easing (QQE). Our focus is on the bond market. The model features: (i) commercial bank’s demand for excess reserve in response to liquidity risk and (ii) linkage among central bank, commercial banks and the government via government bonds and bank reserve. We simulate the policy effects of a quantitative easing (QE) shock and a negative shock to the interest rate on excess reserve (IOER). The QE multiplier for real GDP is 1.94 and it has substantial effect on lowering the bond yield in line with the policy target of QQE. On the other hand, an IOER cut has qualitatively similar effects on the real and financial sectors but quantitatively its effect is of second order importance. In light of these policy simulations, we evaluate Japan’s recent yield curve control policy.

Comparisons of standard royalty auctions with seller post-auction effort

This study considers standard royalty auctions, in which each bidder’s valuation is determined endogenously by his type and the seller’s post-auction effort. We first characterize the unique symmetric separating D1 PBE of both sealed bid and ascending bid royalty auctions and compare them in terms of allocative efficiency, production efficiency, and seller revenue. We then show that no symmetric (semi-) pooling PBE survives the D1 criterion in these auctions (under mild conditions). Furthermore, we explore each bidder’s equilibrium bidding strategy, the associated efficiency and revenue, under a second-price royalty auction without disclosing the winning bid. We also consider a scenario where the seller adopts an entry fee instead of a reserve price to maximize their expected payoff. Finally, we examine the robustness of revenue ranking with respect to general forms of value creation.

Active timber management by outsourcing stumpage price uncertainty with the American put option

Timber production is risky, with price uncertainties caused by stumpage price fluctuations. In this study, the American put option is employed to outsource such uncertainty and establish the reservation prices at various stand ages. Put option values and the reservation prices derived thereof, thus, help forestland owners decide whether the stumpage price is high enough to justify an immediate timber harvest. With a series of simulations, we demonstrated that using an American put option to cover the downside price risk could substantially increase the average land expectation value compared to the certainty case. Besides, the simulations confirm that buying an American option as a price insurance would deduct land expectation values compared to the methods proposed by Brazee and Mendelsohn. In addition, we proposed a rolling put option method that allows forestland owners to buy partial length put options to balance their cost and price uncertainty protection. Overall, with the help of American put option, forestland owners for the first time could actively make their harvest decisions from the price setter perspective instead of being pure market price taker like they have been since the beginning of commercial forestry.

Multi-region dynamic economic dispatch with active power real-time balance constraint

In this paper, a multi-region dynamic economic dispatch model with power balance constraint is constructed to seek the actual reserve demand and reasonable reserve allocation method of the system by relying on the dynamic response process of the units to the power balance of the interconnected system. For this kind of dynamic optimization problem with differential equation constraints, a discrete-optimization rolling solution strategy based on scale-optimization is proposed. First, in the discrete part of the dispatching model, basing on the correlation between the continuous quantities discrete scale and the active real-time balancing effect of the dispatching scheme, a continuous quantities discrete scale optimization strategy is proposed to maintain the safe and economic operation of the system; then, for the convergence problem of the solution of the dispatching model after discretization, this paper introduces the idea of decentralized coordination optimization and the operator splitting quadratic programming (OSQP), and through the limited information exchange between the regional grid and the coordinator, the consistent coordination of consistent variables is achieved. The simulation results verify the effectiveness of the model and the solution strategy.

Examining sharing economy operations: A process perspective

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