Product Downsizing and Hidden Price Increases: Evidence from Japan's Deflationary Period

In this paper, we empirically examine the extent to which product downsizing occurred during the deflationary period in Japan, as well as the effects of product downsizing on prices and quantities sold. Using scanner data on prices and quantities for all products sold at about 200 supermarkets over the last 10 years, we find that about one third of product replacements were accompanied by a size/weight reduction. We also find that a 1‐percentage point larger size/weight reduction is associated with a 0.45‐percentage point larger price decline, resulting in an effective price increase. Finally, we show that the quantities sold decline with product downsizing, and that the responsiveness of the quantity sold to size/weight changes is almost the same as the price elasticity, indicating that consumers are as sensitive to size/weight changes as they are to price changes. Our results suggest that the Japanese consumer price index may be downwardly biased rather than upwardly biased.     

Pricing to Firm: an Analysis of Firm‐ and Product‐level Import Prices*

We use Hungarian Customs data on product‐level imports of manufacturing firms to document that the import price of a particular product varies substantially across buying firms. We relate the level of import prices to firm characteristics such as size, foreign ownership, and market power. We develop a theory of “pricing to firm” (PTF), where markups depend on the technology and competitive environment of the buyer. The predictions of the model are confirmed by the data: import prices are higher for firms with greater market power, and for more essential intermediate inputs (with a high share in material costs). We take account of the endogeneity of the buyer’s market power with respect to higher import prices and unobserved cost heterogeneity within product categories. The magnitude of PTF is big: the standard deviation of price predicted by PTF is 21.5%.     

A laboratory study of advertising and price competition

We use a laboratory experiment to study advertising and pricing behavior in a market where consumers differ in price sensitivity. Equilibrium in this market entails variation in the number of firms advertising and price dispersion in advertised prices. We vary the cost to advertise as well as varying the number of competing firms. Theory predicts that advertising costs act as a facilitating device: higher costs increase firm profits at the expense of consumers. We find that higher advertising costs decrease demand for advertising and raise advertised prices, as predicted. Further, this comes at the expense of consumers. However, advertising strategies are more aggressive than theory predicts with the result that firm profits do not increase.     

Cointegration relationships and hedonic pricing of differentiated commodities: an application to price dynamics in the US dairy sector

This study investigates the implications of hedonic pricing for price dynamics of differentiated commodities. A conceptual model of hedonic pricing is developed under a Leontief technology, showing how commodity prices reflect the underlying value of their components. Implications for the existence of cointegration relationships among commodity prices are derived. An application to the pricing and dynamics of selected US dairy commodities is presented. It provides evidence on the role of component valuation in the dynamics of dairy commodity prices in the short run as well as in the long run. Distinguishing between market regime and government regime (when the government price support is active), the analysis finds significant differences in dairy price dynamics between the two regimes.     

PRICE SETTING PRACTICES IN GREECE: EVIDENCE FROM A SMALL‐SCALE FIRM‐LEVEL SURVEY

The paper documents the price setting practices followed by some 400 or so firms operating in Greece. Survey replies reveal a low percentage of firms changing prices with frequency higher than annual and staggering of price changes during the year. As to firms’ reactions to unexpected shocks, prices appear to adjust sluggishly to cost shocks with asymmetries in price adjustment across positive and negative shocks. Adjustments to increases in costs appear speedier than those to reductions in demand. The data confirm a result found for other countries: the existence of cross‐sectional variations in price setting strategies and in the extent to which prices are adjusted in reaction to unexpected shocks. The results suggest a positive association between, on the one hand, product market competition and, on the other hand, state‐dependent pricing, frequent price changes and the likelihood of a price adjustment following an adverse demand shock.     

A mark-up pricing model for price simulations

This paper develops an input/output model of pricing using a mark-up pricing formula. The connection between mark-up pricing and competitive pricing is analyzed through the determination of sectoral equilibrium profit mark-up rates as a function of the profit rate and the capital intensity of each sector. The model is used to analyze the effects on relative prices and the aggregate price level of exogenous changes in the nominal wage rate, tax rates, the exchange rate and world prices. Exogenous changes in the prices of domestically produced commodities are modelled via the imposition of ad valorem tax rates, which yield a measure of the net effect of the exogenous changes. Simulations are carried out under passive price adjustment as well as adjustment with price ceilings. In this last instance the model calculates the endogenously determined reduction in profit mark-ups. Lastly, empirical results of various simulations are presented using data from the Mexican economy.     

What to show on the wine labels: a hedonic analysis of price drivers of Sicilian wines

Unlike previous literature, we construct a hedonic model of wine price that incorporates all the main categories of variables simultaneously to enable a better evaluation of their importance on wine price formation. A comprehensive model has the advantage of providing more reliable estimates of the attributes' implicit prices thereby facilitating firms' pricing and improving effectiveness of wine production and marketing decisions. We utilize two different datasets of Sicilian wines collecting data from influential wine guides. Our results suggest that wine price strongly depends on objective features such as vintage, alcoholic content, geographical origin, grape variety, producer size and cellaring potential. In addition, use of containers like tonneaux and barrique positively affects prices, whereas use of concrete containers has a negative influence. No univocal indications emerge with regard to the effect of the type of company, type of viticulture and firm age. As for sensorial characteristics, our analysis provides novel evidence of the importance of olfactory variables such as aroma intensity and the presence of particular smells in the wine. Finally, current guides’ grades and firm reputation play a crucial role in determining wine prices as well.     

Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition*

We consider a duopoly pricing game with a unique Bertrand–Nashequilibrium. The high‐price firm has a nonvanishing market share, however, and intuition suggests that observed prices may be positively related to this market share. This relationship is implied by a model in which players make noisy (logit) best responses to expected payoff differences. The resulting logit equilibrium model was used to design an experiment in which the high‐price firm's market share varies. The model accurately predicts the final‐period price averages. A naive learning model predicts the observed differences in the time paths of average prices.     

AN OPEN-ECONOMY NEW KEYNESIAN PHILLIPS CURVE: EVIDENCE FROM HONG KONG

Abstract. This paper extends the new hybrid Keynesian Phillips Curve (NKPC) to the open‐economy context. We hypothesize that pricing decisions depend on both labour costs and intermediate imported input prices. The results for Hong Kong are consistent with the theory if import prices are given substantial weight in measuring marginal cost, rejecting the labour costs model. We find that forward‐looking behaviour is dominant, and that price stickiness is smaller in Hong Kong than in the USA. The results are sensitive to the choice of instruments, and a model using the output gap instead of marginal cost as the forcing variable also performs well.     

Rockets and feathers behaviour in the Spanish gasoline and diesel market: New evidence

In this paper we analyse the potential asymmetric response of retail prices for gasoline and diesel‐fuel to changes in oil prices for the Spanish economy and its relation with the so‐called ‘rockets and feathers’ behaviour. We show that the assumption made by previous studies, which use as the key explanatory variable the sign –positive or negative‐ of the change in international oil prices, is inadequate for the Spanish case and the magnitude of the change in international oil prices is also relevant. For small changes in international oil prices there is neither price asymmetry nor rockets and feathers behavior in the retail markets. However, price asymmetries in line with rockets and feathers behavior in retail gasoline and gasoil markets are present when these changes exceed a certain threshold. Following Martín‐Moreno et al. (2018) we first apply an Auto‐regressive Error Correction Model and endogenously estimate the threshold triggering the rockets and feathers behaviour. A time‐varying nature for the dynamic response of retail prices to oil price shocks is revealed when we estimate the TAR‐ECM model using rolling windows. Hence, in a second stage, we use a Markov‐switching estimation of the model to test the robustness of the results given its suitability to changing environments. This study could have relevant policy implications for the Spanish gasoline and gasoil retail markets due to the ongoing debate on the existence of a rockets and feathers behavior in gasoline and gasoil retail markets between the Spanish regulatory body and the oil companies.     

The Speed and Stability of Price Adjustment in Australian Manufacturing*

A model of industry speed of price adjustment is derived from firm pricing behaviour. The model is applied to quarterly two‐digit Australian manufacturing data for the period 1985 (Q3) to 2002 (Q3). The results suggest that the industry speed of price adjustment is positively related to the average size of large firms within the industry and is negatively related to industry concentration. We also find that import share has a role in attenuating the effects of industry concentration and that growth in a moving average of real gross domestic product reduces the speed of price adjustment. Calculated industry speeds of price adjustment are both stable across the period of examination and small, suggesting that manufacturing prices are sticky.     

Asset pricing theory and the valuation of Canadian paintings

Abstract.  The valuation of Canadian paintings is analysed empirically. Using a sample of auction prices for major Canadian painters for the period 1968–2001, we run hedonic regressions to analyse the influence of various factors, including painter identity, on auction prices, as well as to construct a market price index. This index is used in a second‐stage analysis in which we analyse the properties of Canadian art viewed as an investment asset. We apply standard asset pricing theory, as incorporated in the capital asset pricing model (CAPM), to the analysis of price movements in the market for Canadian paintings.     

Beyond Balassa–Samuelson: Real appreciation in tradables in transition countries1

We decompose real appreciation in tradables derived from producer price indexes in three Central European countries between the pricing‐to‐market component (disparity) and the local relative price component (the substitution ratio). Appreciation is only partially explained by local relative prices. The rest is absorbed by disparity, depending on the size of the no‐arbitrage band. The observed disparity fluctuates in a wider band for differentiated products than for commodity like goods.     

PANEL DATA ANALYSIS OF JAPANESE RESIDENTIAL WATER DEMAND USING A DISCRETE/CONTINUOUS CHOICE APPROACH*

Block rate pricing is often applied to income taxation, telecommunication services, and brand marketing, in addition to its best‐known application in public utility services. Under block rate pricing, consumers face piecewise‐linear budget constraints. A discrete/continuous choice approach is usually used to account for piecewise‐linear budget constraints in demand and price endogeneity. A recent study proposed a method to incorporate a separability condition ignored by previous studies, by implementing a Markov chain Monte Carlo simulation based on a hierarchical Bayesian approach. To extend this approach to panel data, our study proposes Bayesian hierarchical models incorporating random and fixed individual effects.     

A nonparametric kernel regression approach for pricing options on stock market index

Previous options studies typically assume that the dynamics of the underlying asset price follow a geometric Brownian motion (GBM) when pricing options on stocks, stock indices, currencies or futures. However, there is mounting empirical evidence that the volatility of asset price or return is far from constant. This article, in contrast to studies that use parametric approach for option pricing, employs nonparametric kernel regression to deal with changing volatility and, accordingly, prices options on stock index. Specifically, we first estimate nonparametrically the volatility of asset return in the GBM based on the Nadaraya–Watson (N–W) kernel estimator. Then, based on the N–W estimates for the volatility, we use Monte Carlo simulation to compute option prices under different settings. Finally, we compare the index option prices under our nonparametric model with those under the Black–Scholes model and the Stein–Stein model.     

Bubbles in UK house prices: evidence from ESTR models

Recent movements in stock and house prices have led to an examination of the presence of bubbles. Whilst, there is extensive research on stock price data, there is relatively less for house prices. This paper uses a present‐value model for house prices to test for the presence of bubbles. The results support the presence of a non‐fundamental component within UK national and regional house prices. In particular, for the majority of series considered, evidence is presented of linear non‐stationarity within the fundamental present‐value relationship, and of non‐linear stationarity, implying the presence of a non‐fundamental, or bubble, component. Furthermore, evidence is presented that prices adjust quicker when they are below fundamental equilibrium, than when they are above fundamental equilibrium, i.e. there is downward price stickiness. These results support the hypothesis that house price dynamics can be characterised by price‐to‐price momentum. Finally, forecast evidence suggests that real prices are likely to adjust downwards and converge with fundamental value.     

The product life cycle and sample representativity bias in price indexes

Official price indexes are usually calculated using matched samples of products. If products exhibit systematic price trends at different points in their life cycle then matched sample methods may introduce bias if the life cycle movement in the sample does not adequately reflect that in the population. This article explores the extent of these life cycle pricing effects and then examines the bias it can introduce in measured inflation. A large US supermarket scanner data set for six cities and six products over 12 years is used. Using hedonic methods we find that the life cycle component of price change is important across a range of products and cities. To explore the bias introduced by these movements, we use simulations that construct indexes with different sample update frequency. For indexes that are never completely resampled, we find an annual absolute bias of 0.88 and 0.59 percentage points depending upon whether we use the actual prices or prices imputed from our hedonic model. This compares with absolute biases of 0.34 and 0.10 percentage points for the corresponding cases for samples, which are re-selected annually. Thus our results provide strong support for more frequently updating index samples.     

Strategic Choice of the Price Structure and Entry Deterrence Under Price Cap Regulation

This paper shows that a price‐capped firm under the threat of entry in some of the markets it serves can strategically manipulate its price structure to deter entry. In doing so, the regulated firm uses the price cap constraint as a commitment device to an aggressive pricing behaviour in case of entry. A (dynamic) price cap generally entails that the prices allowed today are a function of the previous‐period prices and that the tighter is the constraint on each price, the larger is the quantity sold of this good in the previous period. Hence, the regulated firm may strategically choose its price structure before entry to place a tighter regulatory control on the prices set in the (potentially) competitive markets and to make it optimal to charge in these markets – in case of entry – prices so low that entry is unprofitable.     

Why Do Prices Remain Stable in the Bubble and Bust Period?

In spite of a large swing in real output growth in the bubble and bust period, aggregate prices remained relatively stable in Japan. Empirical results show that such price rigidity can be explained by the customer market model combined with financial constraints. The degree of financial constraints that firms face in the bubble and bust period fluctuates significantly, and the impact of financial positions on firms’ prices is counter-cyclical. In booms, liquidity-abundant firms invest in market share by keeping prices down, while in a recession financially constrained firms charge a high price to locked-in customers who remain loyal. Such counter-cyclicality is clearly observed in the pricing behavior of large firms that produce differentiated goods. In contrast, small firms whose product brand is not well established in the market cannot lock in customers, and hence financial constraints do not affect their pricing decisions.     

House price dynamics,conditional higher-order moments,and density forecasts

Most studies on housing price dynamics are only concerned with the conditional mean and variance, but overlook other higher-order conditional moments and the structural change characteristics inherent in housing prices. In order to take into account these two important issues, this study utilizes the generalized Markov switching GARCH model to explore house price dynamics and conditional distribution for US market over 1975Q1–2007Q4. The housing return follows two distinct dynamics: the bust regime and the boom regime. The volatility pattern is different in the bust and boom regimes. In addition, the conditional densities derived by the regime-switching model change dramatically over time and are significantly different from normal distribution. More importantly, the regime-switching model can detect in advance a weak US housing market such as the one that occurred in the middle of 2007. The in-sample fitting ability of regime-switching model, which incorporates higher-order moments, has significant improvements compared to the single-regime AR and AR-GARCH models. For the out-of-sample Value-at-Risk forecasting performance, the ability of regime-switching AR-GARCH model to forecast one-step-ahead density is better compared to the single-regime AR-GARCH model.