Temporary Price Changes Research Articles

Do Physicians Warm Up to Higher Medicare Prices? Evidence from Alaska

AbstractMedicare is a roughly $700 billion public program, with physician payments representing one of its largest expenditures. Medicare's prices are also administratively set, which leaves the structure of payment changes subject to a political process that may introduce idiosyncratic features and even perverse incentives. At the same time, physician responses to changes in Medicare reimbursements are likely to vary according to the policy's duration, scope, and size. We study a setting where broad federal laws contained specific provisions that financially benefit a narrow group: Alaskan physicians. The geographically targeted payment reforms were also unique along key dimensions. Using difference‐in‐differences strategies, we find that large, temporary price changes increase spending but elicit no detectable supply response. Conversely, generous and permanent price shocks induce greater service flows but not uniformly across specialties. Our findings suggest that Congress may engage in fiscally inefficient Medicare spending to accomplish other legislative objectives.

Consistent Evidence on Duration Dependence of Price Changes

We develop an estimator and tests of a discrete time mixed proportional hazard (MPH) model of duration with unobserved heterogeneity. We allow for competing risks, observable characteristics, and censoring, and we use linear GMM, making estimation and inference straightforward. With repeated spell data, our estimator is consistent and robust to the unknown shape of the frailty distribution. We apply our estimator to the duration of price spells in weekly store data from IRI. We find substantial unobserved heterogeneity, accounting for a large fraction of the decrease in the Kaplan-Meier hazard with elapsed duration. Still, we show that the estimated baseline hazard rate is decreasing and a homogeneous firm model can accurately capture the response of the economy to a monetary policy shock even if there is significant strategic complementarity in pricing. Using competing risks and spell-specific observable characteristics, we separately estimate the model for regular and temporary price changes and find that the MPH structure describes regular price changes better than temporary ones. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Consistent Evidence on Duration Dependence of Price Changes

We develop an estimator and tests of a discrete time mixed proportional hazard (MPH) model of duration with unobserved heterogeneity. We allow for competing risks, observable characteristics, and censoring, and we use linear GMM, making estimation and inference straightforward. With repeated spell data, our estimator is consistent and robust to the unknown shape of the frailty distribution. We apply our estimator to the duration of price spells in weekly store data from IRI. We find substantial unobserved heterogeneity, accounting for a large fraction of the decrease in the Kaplan-Meier hazard with elapsed duration. Still, we show that the estimated baseline hazard rate is decreasing and a homogeneous firm model can accurately capture the response of the economy to a monetary policy shock even if there is significant strategic complementarity in pricing. Using competing risks and spell-specific observable characteristics, we separately estimate the model for regular and temporary price changes and find that the MPH structure describes regular price changes better than temporary ones.

Temporary Price Changes, Inflation Regimes, and the Propagation of Monetary Shocks

We present a sticky price model that features the coexistence of many price changes, most of which are temporary, with a modest flexibility of the aggregate price level. Stickiness is introduced in the form of a price plan, namely a set of two prices: either price can be charged at any moment but changing the plan entails a menu cost. We analytically solve for the optimal plan and for the aggregate output response to a monetary shock. We present evidence consistent with the model implications using scanner data, as well as Consumer Price Index data across a wide range of inflation rates. (JEL D22, E31, E52, L11, O11, O23)

Price-Setting in Ukraine: Evidence from Online Prices

This study examines price duration and price-setting mechanisms in Ukraine using web-scraped prices. I found that the mean average duration of prices is about 2 months. Average price duration is lower for those products that are more exposed to temporary price changes (sales). Moreover, imported goods have a higher average price duration compared to domestic goods. In terms of the price-setting mechanism, the data supports timedependent price setting behavior over state-dependent. The evidence of time-dependent price setting is 1) the size of price change being positively related to the age of price; 2) many price changes of a size close to zero; and 3) the hazard function being non-increasing for the whole sample and tends to be flatter within relatively homogeneous groups of products.

Real Rigidities and the Cross-Sectional Distribution of Price Stickiness: Evidence from Micro and Macro Data Combined

We use a standard sticky-price model to provide evidence on three mechanisms that can reconcile somewhat frequent price changes with large and persistent real effects of monetary shocks. To that end, we estimate a semi-structural model for the U.S. economy that allows for varying degrees of real rigidities, and cross-sectional heterogeneity in price stickiness. The model can extract some information about these two features of the economy from aggregate data, and discriminate between different distributions of price stickiness. Hence it can also speak to the debate about the role of sales and other temporary price changes in shaping the effects of monetary policy. Employing a Bayesian approach, we combine macroeconomic time-series data with information about empirical distributions of price stickiness derived from micro price data for the U.S. economy. Our estimates point to the presence of both large real rigidities and an important degree of heterogeneity in price stickiness. Moreover, cross-sectional distributions of price stickiness that factor out sales improve the empirical fit of the model. Our results suggest that bridging the gap between micro and macro evidence on nominal price rigidity may require the combination of several mechanisms.

Rational habits in gasoline demand

The dynamics of demand for energy goods such as gasoline are complicated by investment decisions and behavioral habits. Both types of complication can be captured by a habits model, in which past consumption enters into an agent's current utility function. If the agent is forward-looking, or ‘rational’, then habits imply his consumption of the habit-forming good will be sensitive to his expectation of future market conditions, in particular future prices. This sensitivity implies, in turn, that traditional measures of price elasticity will underproject consumers' responsiveness to policy interventions.This paper examines the implications of rational habits on gasoline demand. Using a simple model encompassing myopic and rational habits, I demonstrate that an agent with rational habits will respond to anticipated future price changes and react more strongly to permanent than to temporary price changes, with this distinction increasing in the strength of the habit. I then estimate several habits models using panel data on U.S. states for the years 1989 through 2008. My preferred specification yields evidence of rational habits, and moreover I find consumers to be twice as responsive to tax-driven price changes as to market-driven price changes. Taxes and other policies that operate through the gasoline price are a more powerful policy instrument than traditional price elasticity would lead us to believe.

Asymmetric Changes in Stock Prices and Investor Recognition around Revisions to the S&P 500 Index

This study finds that first-time additions to the S&P 500 Index or its family experience permanent price increases; however, companies upgraded from lesser-known S&P indices, reentering the S&P 500, or dropped from the index experience temporary price changes. These price patterns can be explained by changes in investor recognition.

Intertemporal Effects of Consumption and Their Implications for Demand Elasticity Estimates

Consumption of a good typically diminishes the marginal utility of consuming more, but for how long? This paper adapts a model of consumption capital to allow consumption to have a lasting effect that diminishes the marginal utility of future consumption. Estimates of the model find that it takes the 25th, median and 75th percentile of consumers 19, 32 and 43 days for their marginal utilities to return to pre-consumption levels, and they are forward-looking with respect to these effects. This generates intertemporal substitution of consumption that leads to an overestimate of the own-price elasticity of demand of ten percent when it is estimated using temporary price changes. In addition to these implications consumption effects share with those of durable and storable goods, consumption effects also raise concerns for capacity constrained industries because the timing of consumption affects capacity utilization. In the empirical application in this paper, price variation in one time period generates substantial changes in capacity utilization in that period, but minimal changes in other periods because the intertemporal substitution is spread over many time periods.

Availability and settlement of individual stock futures and options expiration-day effects: evidence from high-frequency data

This study examines whether the expiration-day effects of stock options traded in Australian Stock Exchange on return, volatility, trading volume, and temporary price changes of individual stocks vary with the availability and the settlement method of individual stock futures contracts. Using transaction data of the stocks that have both options and futures contacts from 1993 to 1997, we find that options expiration has significant effects on return and volatility of the underlying stocks in absence of individual stock futures. After introduction of a cash-settled stock futures contract, the effects decrease notably. However, the switch of a futures contract from cash settlement to physical delivery promotes the expiration effects on return and volatility and boosts temporary price changes on expiration days. Finally, options expiration has little effect on trading volume. Trading activity tends to behave normally regardless whether stock futures contracts are available or not.

Oil supply and economic development strategy: A dynamic planning approach

Most oligopolistic models of the oil market begin with the assumption of rising supply curves for oil. Lack of convincing evidence that high oil prices are being maintained by oligopolistic action has raised the possibility of competitive behavior in the oil market and therefore of a backward bending supply curve. This paper presents numerical solutions of a linear dynamic planning model of an oil exporting country with a development strategy which consists of utilizing oil revenues for building an export sector to replace oil. To make a stronger case a high absorber, Algeria, is used as an example. The numerical results are consistent with the hypothesis that there may well be good economic reasons to restrict supply of oil in response to increased prices. Three important characteristics of the model which produce this result are (a) diminishing marginal utility of consumption, (b) absorptive capacity, and (c) imperfect capital markets. A ‘perverse’ supply behavior is found consistent with optimal allocation of oil resources when a price increase is expected to last for a long time. The effects of temporary price changes which can, for example, result from temporary supply shocks or demand changes during the business cycle are also studied. It is shown that in response to such short term price changes competitive behavior is ‘normal’, i.e., supply varies in the same direction as the price. This implies that reductions in OPEC production which have taken place during the recent market downturns cannot be taken as evidence of cartel coordination, as they usually are, since they are also consistent with price-taking behavior.

An Experimental Investigation of Consumer Behavior in a Controlled Environment

This article describes the general structure of controlled economic environments and reports the results of a series of experimentally-induced price changes on consumer behavior in one such environment. The experimental results demonstrate the suitability of controlled economic environments as laboratories for the experimental analysis of consumer behavior and add to our understanding of consumer behavior, particularly with respect to the continuing effects of temporary price changes on the composition of consumption.