Small Price Increase Research Articles

Market Power, Efficiencies, and Entry - Evidence from an Airline Merger

We investigate the competitive effects of the merger between Delta Air Lines and Northwest Airlines (2009) in the domestic U.S. airline industry. Applying fixed effects regression models we find that the transaction led to short term price increases of about 11 percent on overlapping routes and about 10 percent on routes which experienced a merger-induced switch of the operating carrier. Over a longer period, however, our analysis reveals that both merger efficiencies and post-merger entry by competitors initiated a downward trend in prices leaving consumers with a small net price increase of about 3 percent on the affected routes.

In Defense of Market Definition

Market definition, a concept that has long served to structure competitive analysis, is under assault from theoreticians who object to the inability of the standard analysis to define a market compatible with their models of unilateral effects. Although these unilateral models have not been shown to reliably predict competitive behavior in the real world, our paper raises other concerns associated with substituting unilateral effects models for market definition. We suggest that the criticisms of market definition are misplaced, because the theoretical analyses lack the benchmarks necessary to establish findings of monopoly power. Moreover, market analysis serves to build the foundation for a case-specific competitive analysis that reaches well beyond the confines of any one particular economic model. Market definition, structured by the hypothetical monopolist test, and implemented with critical loss analysis, remains a valuable tool for antitrust analysis. As usually applied, the test accepts a proposed market definition as relevant for antitrust analysis whenever the predicted loss in volume (Actual Loss) from a small, but significant and non-transitory increase in price is less than the computed break-even loss in volume (Critical Loss). We discuss how markets can be defined in homogeneous goods, static differentiated goods, and dynamic differentiated goods structures, drawing examples from the case law. Within a relevant market, a case-specific analysis, structured by the concepts in the Merger Guidelines, is able to determine if the merger at issue is likely to substantially lessen competition. Comparable economic analyses can be defined to evaluate a range of other potentially anti-competitive behavior associated using the Rule-of-Reason as a guide.

The Definition of the Relevant Market and the Degree of Market Concentration in the Emerging Economies: Case Study on Brazil and Argentina

The paper analyses the challenges faced by the National Competition Authorities (NCA) of the emerging economies in the application of the econometric tests usually relied on in the merger control analysis. The relevant market and the degree of market concentration are usually defined on the basis of two econometric tests, namely, the Small but Significant and Non-Transitory Price Increase (SSNIP) test and the Herfindahl-Hirschman Index (HHI). Following the example of the US and the EU Merger Guidelines, the newly established NCAs of the emerging economies often refer to these two econometric tests in their merger guidelines without taking in consideration the challenges that they will have to face in applying them. The paper is a case study on Brazil and Argentina, and it aims at defining such challenges. The paper argues in favour of granting a broader margin of discretion to the NCAs of the emerging economies in applying such tests and in favour of the possibility to introduce alternative parameters to apply such tests in comparison to those ones identified by the US and the EU Merger Guidelines.

Critical Loss: Modeling and Application Issues

Critical Loss analysis is an empirical implementation of the hypothetical monopolist test for market definition contained in the Department of Justice and Federal Trade Commission Horizontal Merger Guidelines. As usually applied, the test accepts the proposed market definition as relevant for antitrust analysis whenever the predicted loss in volume (Actual Loss) from a small, but significant and non-transitory price increase is less than the computed break-even loss in volume (Critical Loss). Critics complain that the predicted Actual Loss must be linked to the Critical Loss, claiming both calculations depend heavily upon the firm/industry margin. We note that the critics derive their result from a particular modeling structure useful only in markets where product differentiation leads to a simple form of price-based competition. Moreover, no clear link between Critical Loss and Actual Loss is likely when the markets are best defined with either homogeneous goods or dynamic differentiation assumptions. Thus, the critics have only introduced a special case generalization of the standard Critical Loss methodology.

Days on Market and Home Sales

In April 2006, the real estate listing service in Massachusetts adopted a new policy that prohibits home sellers from resetting their properties' on through relisting. We study the effect of this new policy on home sales along the Massachusetts-Rhode Island border, using homes in Rhode Island, which did not change its relisting policy, as the control group. We find that Massachusetts homes that were on the market at the time of the policy change suffered an average reduction of $16,000 in sale price relative to their Rhode Island counterparts. Homes that were revealed to be slow-moving suffered a greater reduction, but fresher listings only had a small increase in sale price. One reason is that some buyers were unaware of sellers' manipulation of days on market and were thus unable to recognize home listings that were authentically fresh. A direct homeowner survey confirmed that buyer awareness was indeed lacking. Sellers reacted to the new policy by lowering their initial listing price to sell fast. However, in towns where listing price history was more transparent, sellers set a higher listing price to dampen the negative signal of slow sales.

Models, Mathematics and Critical Loss

Critical Loss Analysis is an empirical implementation of the hypothetical monopolist test for market definition contained in the Department of Justice and Federal Trade Commission Horizontal Merger Guidelines. As usually applied, the test accepts the proposed market definition as relevant for antitrust analysis whenever the predicted Actual Loss from a small, but significant and non-transitory price increase is less than the computed break-even Critical Loss. While the traditional analysis does not posit an analytical link between the predicted Actual Loss and the break-even Critical Loss, some economists claim the two concepts are mathematically related. They believe that the Critical Loss test will almost never generate broad market definitions in high margin markets. We suggest that the critics overstate their case, because they have only identified a special case modeling structure which may have limited applicability. Revised analyses, drawing on the concepts introduced in this paper, are available elsewhere on SSRN. Text based on Sections II and IV form the core of Coate, Malcolm B. and Joseph J. Simons, “Critical Loss: Modeling and Application Issues,” 2009. Available at SSRN: http://ssrn.com/abstract=1520069. Text building on Section III, along with Appendix A was published as Coate, Malcolm B. and Joseph J. Simons, “Critical Loss vs. Diversion: Clearing up the Confusion,” GCP Antitrust Chronicle, Dec. 2009. Through the courtesy of the editors, this paper is also available at http://ssrn.com/abstract=1562006.

Housing supply and housing bubbles

Like many other assets, housing prices are quite volatile relative to observable changes in fundamentals. If we are going to understand boom-bust housing cycles, we must incorporate housing supply. In this paper, we present a simple model of housing bubbles that predicts that places with more elastic housing supply have fewer and shorter bubbles, with smaller price increases. However, the welfare consequences of bubbles may actually be higher in more elastic places because those places will overbuild more in response to a bubble. The data show that the price run-ups of the 1980s were almost exclusively experienced in cities where housing supply is more inelastic. More elastic places had slightly larger increases in building during that period. Over the past five years, a modest number of more elastic places also experienced large price booms, but as the model suggests, these booms seem to have been quite short. Prices are already moving back towards construction costs in those areas.

Housing Supply and Housing Bubbles

Like many other assets, housing prices are quite volatile relative to observable changes in fundamentals. If we are going to understand boom-bust housing cycles, we must incorporate housing supply. In this paper, we present a simple model of housing bubbles which predicts that places with more elastic housing supply have fewer and shorter bubbles, with smaller price increases. However, the welfare consequences of bubbles may actually be higher in more elastic places because those places will overbuild more in response to a bubble.The data show that the price run-ups of the 1980s were almost exclusively experienced incities where housing supply is more inelastic. More elastic places had slightly larger increases in building during that period. Over the past five years, a modest number of more elastic places also experienced large price booms, but as the model suggests, these booms seem to have been quite short. Prices are already moving back towards construction costs in those areas.

The Economic Effects of a Citywide Minimum Wage

This paper presents the first study of the economic effects of a citywide minimum wage—San Francisco's adoption of an indexed minimum wage, set at $8.50 in 2004 and $9.14 by 2007. Compared to earlier benchmark studies by Card and Krueger and by Neumark and Wascher, this study surveys table-service as well as fast-food restaurants, includes more control groups, and collects data for more outcomes. The authors find that the policy increased worker pay and compressed wage inequality, but did not create any detectable employment loss among affected restaurants. The authors also find smaller amounts of measurement error than characterized the earlier studies, and so they can reject previous negative employment estimates with greater confidence. Fast-food and table-service restaurants responded differently to the policy, with a small price increase and substantial increases in job tenure and in the proportion of full-time workers among fast-food restaurants, but not among table-service restaurants.

Asymmetric Wholesale Pricing: Theory and Evidence

Asymmetric pricing or asymmetric price adjustment is the phenomenon where prices rise more readily than they fall. We offer and provide empirical support for a new theory of asymmetric pricing in wholesale prices. Wholesale prices may adjust asymmetrically in the small but symmetrically in the large, when retailers face cost of price adjustment. Such retailers will not adjust prices for small changes in their costs. Manufacturers then see a region of inelastic demand where small wholesale price changes do not translate into commensurate retail price changes. The implication is asymmetric—a small wholesale price increase is more profitable because manufacturers will not lose customers from higher retail prices; yet, a small decrease is less profitable, because it will not lower retail prices; hence, there is no extra revenue from greater sales. For larger changes, this asymmetry in the behavior of wholesale price vanishes as the price adjustment cost is compensated by the increase in retailers’ revenue resulting from correspondingly large retail price changes. We present a formal economic model of a channel with forward-looking retailers and cost of price adjustment, test the derived propositions on the behavior of manufacturer prices using a large supermarket scanner data set, and find that the results are consistent with the predictions of our theory. We then discuss the implications for asymmetric pricing, channels, and cost of price adjustment literatures, as well as public policy.

An analysis of asymmetric demand response to price changes: The case of local telephone calls

Asymmetric demand responses to price changes are not an observable implication of classical demand theory, which predicts that consumers will react to a small price increase in much the same way as they do to a small price decrease. Yet applied researchers have long speculated that consumers are more sensitive to price increases than they are to price decreases. In addition, recent empirical studies generally support the theory of asymmetric demand responses. We construct a dynamic model based on data gathered from monthly telephone bills for 128 New York Telephone customers over a five-year period. Our results support the conclusion that customers react more quickly and strongly when prices go up than they do when prices go down.

An export strategy for banana producing countries

Because the growing and exporting of fresh bananas is one of the few comparative advantages of some Latin American countries, it is imparative that the maximum revenue is generated from these operations. The procedures for setting prices through the channels of distribution and the price elasticity of demand at the retail level are estimated from market information acquired in the study. With the application of an equal export tax, the exporting countries could then realize the increased revenues from a small price increase. By using marketing research techniques rather than the traditional econometric methods, the authors develop a strategic approach that should increase the export earnings of the banana producing countries by as much as $73-80 million annually.

Nitrogen and Potassium Fertilization Effects on Yield and Quality of Burley Tobacco

AbstractField studies were conducted in 1983 and 1984 at Lexington, KY to examine the effects of N and K fertilizer on yield and chemical quality of burley tobacco (Nicotiana tabacum L. cv. Ky 14). Treatments included: NH4NO3 at rates of 112, 280, and 448 kg N ha−1; and two sources (K2SO4 and KCl), each at rates of 0, 112, 224, and 448 kg K ha−1. The following agronomic and chemical characteristics were examined: yield, price, leaf N, P, K, Ca, Mg, Cl, Mo, total alkaloid, and solanesol concentrations. Cured leaf yield, price, and solanesol concentration were strongly influenced by N × K interactions. Each was raised by increasing N rates when no K was applied; however, at higher K levels, increasing N rates resulted in smaller price increases, no yield changes, and reductions in solanesol concentrations. Reductions in cured leaf Mo concentration relative to N, K, and Mg levels with increasing K fertilization beyond 0 kg ha−1 were exaggerated as N rates were raised. No effect of N rates on total alkaloids or solanesol concentrations were noted while increased K rates increased concentrations of both. Greater cured leaf yields and Mo concentrations were achieved with KCl than with K2SO4. The positive effect of KCl on Mo concentration at low N application rates was reduced by increased N fertilization suggesting that Mo uptake was enhanced by Cl‐ but reversed at high levels of NO‐3 application.

An Empirical Analysis of the Relationship between Inflation and Economic Growth in 12 Countries, 1950-1969. A Comment

This comment shows that some of the results in Paldam's article An Empirical Analysis of the Relationship between Inflation and Economic Growth in 12 Countries, 1950-69, The Swedish Journal of Economics, Vol. 75, 1973, No. 4, pp. 420-27, [2], are unreliable due to the applied methods of analysis and to the kinds of errors in variables which are likely to be present in his data. The conclusions drawn by Paldam are summarized in five points (Paldam [2], pp. 425-26): (1) In the long run there is no (or at most a weak) relation between price increases and real growth as regards GNP (as well as private consumption). (2) In the very short run-i.e. within the same year-the relation is negative; weakly negative as regards GNP (and clearly negative as regards private consumption). (3) After particularly large (small) real growth there will normally follow particularly large (small) price increases during the next few years. As regards GNP the effect is greatest after one year (and as regards private consumption not until two years afterwards). (4) After a particularly large (small) price increase there will normally follow particularly small (large) real growth during the next few years. (5) More inertia is evident in the price increases than in real growth. The study is based on five data series, collected for each country. On the basis of these series, fifteen series of growth rates have been formed. In order to simplify the discussion we will consider the following case. Let Yt be GNP in current prices and Qt be GNP in fixed prices, while Pt is the GNP deflator. Obviously Qt YtIPt. The study by Paldam [2] can then be presented in a simplified version as a study of correlations between Pt-, and q t-T2 t = 1, 2, 3 ..., T; m, -r2 =0, 1, 2, where Pt is the inflation rate and qt the rate of growth in real GNP. It is a well-known result that errors in variables imply biases (see Johnston [1], Ch. 9), but it seems that in this case the biases will become particularly

IMPOSED HEALTH INSURANCE IN MONOPOLISTIC MARKETS: A THEORETICAL ANALYSIS

The impact of public health insurance on price and output of medical care is analyzed within the context of monopolistic markets for health services. An important result, which is not obtained in competitive markets, is that indemnity benefits cause smaller price increases than service benefits, both directly and indirectly through the effect of benefit structure on the production of information. Various types of price regulation are considered, including limitation to “usual, customary, and prevailing” levels, a frequently used technique. With a simple dynamic model this type of regulation is shown to cause chronic price inflation.

Oil and Gas Developments in Ohio in 1956

The most notable oil and gas activity of the year was the leasing of a large block in the south-central part of the state for proposed test wells to the Cambrian or pre-Cambrian. Gravimetric anomalies have been found and are believed to represent subsurface conditions which might be favorable for oil and gas accumulations. Drilling in search of gas was encouraged by the announcement of a small increase in well-head price and several significant discoveries, primarily located in the northern part of the state. Oil development was most successful in extensions to older pools, although several discoveries off the eastern edge of the present producing trend of Clinton sand pools may forecast additional drilling in these areas.