Auction versus Negotiated Sale: Evidence from Real Estate Sales

We offer a theoretical and empirical comparison of auctions and negotiated sales. We first build a simple model to show that auctions generate a higher relative price than negotiated sales when demand for the asset is strong, when the asset is more homogeneous and when the asset attracts buyers with higher valuations. Using data from property sales in Singapore, we find support for our theoretical predictions. In addition, we find that auctions do not necessarily generate a higher price premium for foreclosed properties than for nonforeclosed properties.     

Estimating store choices with endogenous shopping bundles and price uncertainty

We develop a structural model of retail store choices for which household shopping plans and price beliefs are endogenously determined. In our model individual households make their store choices based on their expected basket costs, which are determined by their shopping plans and price beliefs. Previous studies use realized purchases as a proxy for unobserved shopping lists and also assume homogenous price expectation across all households over the entire sample period. Our approach improves the measures of expected basket costs by estimating intended shopping lists of households using a duration model and also by constructing household-, time-, store-, and goods-specific price expectations. In our empirical application using a scanner data set, we find that the store choices become significantly more elastic to prices when the correction is applied.     

Durability Versus Concentration as an Explanation for Price Inflexibility

We document the extent of price rigidity across United States manufacturing industries in the 1980s and early 1990s and compare rigidity across different phases of the business cycle. We measure price rigidity in three ways – each under four different sets of assumptions. We take an approach that relies on disaggregated data; we look at price patterns for over 4000 individual manufactured commodities. Both durability and seller concentration are found to be important factors explaining differences in price rigidity across industrial product classes. Using our data, we replicate the regression results found in Carlton (1986) that were based on actual transaction prices from the 1960s.     

Is Airline Price Dispersion the Result of Careful Planning or Competitive Forces?

We develop a model of price dispersion to distinguish the impact of price discrimination from that of peak load pricing schemes or atypical competition resulting from the financial difficulties of the early 1990s. By utilizing three alternative measures of dispersion and appealing to economic theory for our specification, we find robust results suggesting an estrangement between price dispersion and price discrimination. While some discrimination continues to persist at monopolized endpoints, most dispersion is associated with fare wars and peak load pricing schemes.     

Search and price dispersion in online grocery markets

Consumers often purchase multiple products at a time from retailers, creating multi-product incentives for search. In this paper we consider how product variety affects consumer search intensity and the dispersion of prices in multi-product retail markets. We employ online grocery pricing data from four large retailers in the UK to estimate search costs and equilibrium price dispersion for food products under circumstances where: (i) consumers search for single products; and (ii) consumers search for multiple products at once. We compare estimates in each case between a model in which utility increases with product variety and a model in which utility is not a function of variety. Relative to our preferred specification with variety effects in utility, we find estimates of both search cost and search frequency to be biased upwards in single product settings when variety effects are ignored; however, we find estimates of search costs are biased upwards while search frequency is biased downwards in multi-product settings when variety effects in utility are ignored.     

Edgeworth Price Cycles in Gasoline: Evidence from the United States

Studies of gasoline prices in multiple countries have found sequences of a sharp price increase followed by gradual decreases. This pattern is linked to Maskin and Tirole (Econometrica 56:571–599, 1988) duopoly pricing game and labeled Edgeworth price cycles. We examine data on average daily MSA-level retail gasoline prices for 350 MSAs in the US from 1996–2010. We confirm the finding of others and show that a relatively small number of US MSAs in contiguous upper Midwestern states evidence price cycling. However, our lengthy data set allows us to see that these MSAs began cycling in 2000. Thus, we can examine prices in cycling and non-cycling MSAs before and after cycling and find that prices are lower in MSAs that began cycling.     

Asymmetric Price Effects of Competition

When price dispersion is prevalent, a relevant question is what happens to the whole distribution of equilibrium prices when the number of firms changes. Using data from the gasoline market in the Netherlands, we find, first, that markets with N competitors have price distributions that first‐order stochastically dominate the price distributions in markets with N+1 firms. Second, the effect of competition is stronger for the medium to upper percentiles of the price distribution. Finally, consumer gains from competition are larger for relatively well‐informed consumers. To account for these empirical patterns, we extend Varian's [1980] model by allowing for richer heterogeneity in consumer price information.     

Imperfect Information and Investor Inferences From Housing Price Dynamics

We examine characteristics of housing price dynamics that may be consistent with rational learning and not simply irrational feedback trading. We find significant patterns of temporal and spatial diffusion that are more amenable to explanations that allow for rational components. First, we execute our tests not simply on housing price changes, but on town-by-town differentials from regional average price changes. Second, we find significant relationships with own and neighboring town differentials, but not with control groups of non-neighboring towns. Third, we find that population density, a proxy for scale economies in information production, accelerates the diffusion process. Test were performed on quarterly data for large samples from Connecticut and the San Francisco area, employing method of moments estimators.     

Food scare crises and price volatility: The case of the BSE in Spain

Recent incidents of contaminated food products coupled with the widespread diffusion of news by mass media and the growing social concerns about food safety, have resulted in significant food market crises. One of the most highly publicized recent food scares involved Bovine Spongiform Encephalopathy (BSE). In our analysis, we evaluate the impacts from a BSE outbreak on the price volatility transmission along the Spanish food marketing chain by using a smooth transition conditional correlation (STCC) GARCH model. Our work is the first to assess price volatility responses to food scares. Results suggest that two distinct regimes involving different price volatility behavior can be distinguished, one characterized by turbulent markets and another where markets are calming down.     

List Prices,Sale Prices and Marketing Time: An Application to U.S. Housing Markets

Many goods are marketed after first stating a list price, with the expectation that the eventual sales price will differ. In this article, we first present a simple model of search behavior that includes the seller setting a list price. Holding constant the mean of the buyers’ distribution of potential offers for a good, we assume that the greater the list price, the slower the arrival rate of offers but the greater is the maximal offer. This trade‐off determines the optimal list price, which is set simultaneously with the seller's reservation price. Comparative statics are derived through a set of numerical sensitivity tests, where we show that the greater the variance of the distribution of buyers’ potential offers, the greater is the ratio of the list price to expected sales price. Thus, sellers of atypical goods will tend to set a relatively high list price compared with standard goods. We test this hypothesis using data from the Columbus, Ohio, housing market and find substantial support. We also find empirical support for another hypothesis of the model: atypical dwellings take longer to sell.     

Personalized prices and uncertainty in monopsony

We analyze personalized pricing by a monopsonist facing a finite number of ex ante identical, capacity constrained suppliers with privately known costs. When the distribution of costs is sufficiently smooth and regular, the buyer chooses to make the same offer to all suppliers, leading to a posted price. When demand is sufficiently concave (convex) this price is lower (higher) than the classical monopsony price. In the limit as the seller capacities tend to zero, we obtain the classical monopsony price. Therefore, our model provides a decentralized micro-foundation for monopsony.     

A tale of two tails: Explaining extreme events in financialized agricultural markets

The substantial booms and busts in agricultural prices marked by extreme events across commodities lead to heated debates about the effects of speculative trading on commodity price fluctuations. This study proposes a new approach to understanding extreme events and boom–bust processes in agricultural markets. Using weekly futures data for twelve indexed agricultural commodities during 2006 to 2016, we find that extreme price changes, located in the 10% tails of the distribution, cluster across agricultural markets. We then implement a multinomial logit model to investigate which factors are associated with the propagation of extreme events. Specifically, we disentangle three transmission conduits. (1) The macroeconomic conduit captures the possibility that the synchronized extreme price events are generated by business-cycle driven demand shifts mainly in emerging economies. (2) The financial conduit refers to potential links between extreme returns and the increasing flow of money from financial participants into agricultural futures markets. (3) Finally, the energy conduit accounts for possible spillover effects due to oil price shocks. Our results indicate an important role of managed money positions and oil prices while the real demand channel remains mostly insignificant.     

On the Nature of Self‐Assessed House Prices

In models of optimal household behavior, the value of housing affects consumption, savings and other variables. But homeowners do not know the value of their house for certain until they sell, so while they live in their home they must rely on local house price data to estimate its value. This article uses data from the recent housing boom and bust to demonstrate that changes in households' self‐assessed home values are strongly consistent with the predictions of a model in which households optimally filter available house price data. Specifically, we show that self‐assessed house prices did not increase as rapidly as house price indexes during the boom and did not decline as severely during the bust. A Kalman filter model nearly perfectly replicates these data. These findings have direct implications for economists studying asking prices during booms and busts, optimal default decisions and other key housing‐related phenomena.     

ENDOGENOUS COSTS AND PRICE‐COST MARGINS: AN APPLICATION TO THE EUROPEAN AIRLINE INDUSTRY*

This paper allows for endogenous costs in the estimation of price cost margins. In particular, we estimate price‐cost margins when firms bargain over wages. We extent the standard two‐equation set‐up (demand and first‐order condition in the product market) to include a third equation, which is derived from bargaining over wages. In this way, price‐cost margins are determined by wages and vice versa. We implement the model using data for eight European airlines from 1976–1994, and show that the treatment of endogenous costs has important implications for the measurement of price‐cost margins and the assessment of market power. Our main result is that observed prices in Europe are virtually identical to monopoly prices, even though observed margins are consistent with Nash behavior. Apparently, costs had been inflated to the point that the European consumers were faced with a de facto monopoly prices.     

Closed-form solutions for Wee’s and Martin’s EOQ models with a temporary price discount

In this article, we use closed-form solutions to solve Wee and Yu (1997) deteriorating inventory model with a temporary price discount and Martin’s (1994) EOQ model with a temporary sale price. In Wee and Yu (1997) and Martin’s (1994), the benefits during the temporary price discount purchase cycle are represented by their objective functions. Wee and Yu (1997) and Martin (1994) only used search methods to find approximate solutions. Following the theorems we suggested, you can find closed-form solution directly when there are integer operators involve in an objective function. Using the data of Wee and Yu (1997) and Martin (1994), we can find the results are more quick and more accurate.     

Appraisal-Based Real Estate Returns under Alternative Market Regimes

In this article we use Monte Carlo simulation to study the statistical properties of real estate returns. We set up a model where transactions prices are noisy signals of true prices. We then consider a number of appraisal rules, derived from Bayesian and non-Bayesian theory, to estimate the current true price and rate of return. The class of exponential smoothing and Kalman filter rules perform well at both the disaggregate (returns on an individual property) and aggregate (returns on a real property portfolio) levels. A special case of exponential smoothing (α= 1.0) places all weight on current market data. Since this case eliminates smoothing, our results suggest that appraisers should place all weight on current data (no weight on past data) provided that they want to estimate returns rather than values. However, these results should be used with caution if sales prices are very noisy.     

The Ethiopian Commodity Exchange and spatial price dispersion

In this article, we study the impact of an institutional intervention on market efficiency in Ethiopia. More specifically, we analyze to what extent the Ethiopian Commodity Exchange (ECX) in combination with regional warehouses have contributed to a reduction in price spreads between regional markets. Our hypothesis is that warehouses connected to the ECX reduce the dispersion between export prices and local retail prices in different coffee growing areas, as well as the dispersion between export prices and local retail prices in different coffee growing areas. By doing so, the ECX has the potential to improve the market efficiency. To identify the causal effect, we combine retail price data with information on the gradual rollout of warehouses connected to the ECX from 2007 to 2012. Our results suggest that, when two markets both have access to an operating warehouse, the average price spread is 0.86–1.78 ETB lower than it is for markets where at least one part lacks warehouse access. This is a substantial reduction considering that the average price spread over the full period is 3.33 ETB. The main results are robust to various econometric specifications, and our analysis thus suggests that local warehouses connected to the ECX have indeed improved market efficiency.     

Can Tightness in the Housing Market Help Predict Subsequent Home Price Appreciation? Evidence from the United States and the Netherlands

This article assesses the predictive power of variables that measure market tightness, such as seller's bargaining power and sale probabilities, on future home prices. Theoretical insights from a stylized search‐and‐matching model illustrate that such indicators can be associated with subsequent home price appreciation. The empirical analysis employs listings data on residential units offered for sale through a real estate broker in the Netherlands and for certain U.S. regions. Individual records are used to construct quarterly home price indices, an index that measures seller's bargaining power and (quality‐adjusted) home sale probabilities. Using conventional time‐series models we show that current sale probabilities and bargaining power can significantly reduce home price appreciation forecast errors and help to predict turning points in local area housing markets. The measures and approaches in this article help to demonstrate ways in which researchers and practitioners can leverage listings data to gain knowledge about the current and future state of the housing market.     

Market Mechanism Choice and Real Estate Disposition: Search Versus Auction

We propose a model of mechanism choice in the disposition of real estate assets where we consider two alternatives: a search market and an auction. Within the search framework, we derive an equilibrium whereby buyers incur search costs and sellers incur holding costs for the period during which the property is not sold. In the auction alternative, the seller joins an existing pool of sellers in undertaking a multiple–object auction and pays a commission upon sale. Buyers and sellers freely choose their mechanisms, which in equilibrium are optimal given each group's conjectures about the mechanism choice of their counterpart. In equilibrium, an agent cannot benefit from deviating from his choice and each agent's beliefs are consistent with the equilibrium outcome. It is shown that (a) buyers with high search costs will choose auctions because the auction payoff imposes an upper bound on buyers' gains from search, and (b) prices at auctions will be higher. Using vacant lot sales data and a method–of–moment estimator which accounts for the presence of an endogenous discrete mechanism choice variable, we estimated a hedonic regression to detect the price effect. It was determined that, on average, lots sold for $1.44 per square foot more in auctions than in the search market, as predicted by our model.