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%.     

Time,Arbitrage, and the Law of One Price: The Case for a Paradigm Shift

Consider a Competitive, Efficient, and Frictionless Economy (CEFE) where resources are scarce at any date, and hence money as a valid claim against scarce resources is also scarce. In this economy, there is always price competition, which can at any date generate an unlimited number of arbitrage opportunities. For example, at any date, opportunities can exist to buy and sell each one of the contracts for delivery of the same good or asset at multiple prices currently as well as on an infinite number of future dates. I prove all arbitrage transactions, including “spot” transactions, tie up arbitrageurs’ capital representing money, good or asset such that this capital cannot be used for any other purpose for a non-zero quantity of time. This makes it impossible to exploit all arbitrage opportunities with the scarce capital available at any date and leads to an infinite number of unexploited opportunities and a non-negligible opportunity cost of the capital tied-up in arbitrage transactions, represented by each arbitrageur’s best missed arbitrage opportunity, if no better opportunity exits, hence the breakdown of the law of one price in its standard sense. This helps construct a new paradigm of CEFE which resolves long-standing theoretical, empirical, and experimental puzzles.     

Repeated price competition between individuals and between teams

We conducted an experimental study of price competition in a duopolistic market. The market was operationalized as a repeated game between two “teams” with one, two, or three players in each team. We found that asking (and winning) prices were significantly higher in competition between individuals than in competition between two- or three-person teams. There were no general effects of team size, but prices increased with time when each team member was paid his or her own asking price and decreased when the team's profits were divided equally. This result is consistent with a simple model of individual learning.     

The “Dark Side” of Deregulation: How Competition Affects the Size of the Shadow Economy

This paper builds a theory that explains the dramatic expansion of the underground economy in the late 1990s by the sharp increase in market competition worldwide. I model an oligopoly game where firms first decide on entry and sector, and then compete in price. Operating in the underground sector reduces variable costs, but comes at the risk of being detected and fined. As competition intensifies (i.e., as consumers become more and more price‐sensitive), underground firms attract more demand, thus stealing business and profits from official firms. As a consequence, more firms enter the underground economy. A lenient policy toward the underground economy may increase welfare when markups are high, but will be welfare‐detrimental when markups are low.     

Average-cost pricing: Some evidence and implications

We present new survey evidence on pricing behavior for more than 14,000 European firms, and study its macroeconomic implications. Among firms that are price setters, roughly 75% respond that their prices are set as a markup on total costs, a business practice termed “full cost pricing”. Only 25% set prices as markups over variable or marginal costs. Moreover, using industry data for the U.S., we find that the correlation between changes in output prices and changes in variable input prices is significantly lower when fixed costs are likely to be more important.Since our results are similar to the findings in the classic and controversial paper of Hall and Hitch (1939) and subsequent survey evidence, we believe it worth studying the implications of full cost pricing for macroeconomics. We first propose a problem for the firm where full cost pricing can arise as optimizing behavior. We embed this problem, featuring an occasionally binding constraint, into a simple general equilibrium model. We show that when the model is hit by a shock that makes the constraint binding, the response of endogenous variables is amplified significantly more than it would be under the unconstrained regime.     

The elasticity of demand for wagering in an unregulated market

The literature estimating the take-out rate (price) elasticity of horse race wagering has consistently found values far above one. The persistence of these apparently inefficiently high prices can be attributed to institutional factors of the US market where federal taxes are imposed on the total amount wagered, and not on the bookmakers’ revenue. By investigating all horse races in New Zealand from August 1993 to April 2009, our article is the first one to consider price setting for wagering in an unregulated market where taxes for a monopolistic betting agency are based on revenues. In such a setting, one would expect elasticities close to one, but in all econometric specifications, we find values well below one. We identify two reasons why higher prices could nevertheless reduce profits: cross price elasticities are negative and, due to the specific features of parimutuel betting, international competitors may only be attracted when take-out rates are above a critical threshold.     

An experimental study of price dispersion

We report an experiment examining a simple clearinghouse model that generates price dispersion. According to this model, price dispersion arises because of consumer heterogeneity—some consumers are “informed” and simply buy from the firm offering the lowest price, while the remaining consumers are “captive” and shop based on considerations other than price. In our experiment we observe substantial and persistent price dispersion. We find that, as predicted, an increase in the fraction of informed consumers leads to more competitive pricing for all consumers. We also find, as predicted, that when more firms enter the market, prices to informed consumers become more competitive while prices to captive customers become less competitive. Thus, our experiment provides strong support for the model's comparative static predictions about how changes in market structure affect pricing.     

Price mimicking under cost-of-service regulation: the Swedish water sector

This study provides an empirical test of price mimicking among publicly owned water utilities. Using a fixed effects spatial Durbin model with data from Swedish municipalities during 2002–2012, I estimate the elasticity of the own relative to neighbors’ average price to 0.14. This behavior can be explained in terms of an informal yardstick competition: when consumers use neighboring municipalities’ prices as benchmarks for costs or as behaviorally based reference prices, policy makers will face the risk of consumer complaints and reduced voter support if deviating too much from neighboring municipalities’ prices. Further, I find some evidence that price mimicking is more pronounced in municipalities where voter support for the ruling coalition is weak.     

On the role of liquidity in emerging markets stock prices

This paper investigates the impact of liquidity on emerging markets' stock prices. Particular attention is given to the estimation of Jensen's alpha and the quantity of risk. Our empirical analysis gives rise to two main issues. The first is related to the presence of an extra premium, i.e. “alpha puzzle”. The second is the time-varying component of the quantity of risk, i.e. “beta puzzle”. We find that local liquidity factors do not explain the presence of positive and statistically significant alphas. This puzzle is solved by means of transaction costs. In addition, we show that global liquidity factors, such as VIX and Open Interest, statistically affect the market price of risk. Our empirical finding proves the time varying nature of the global risk factors. Finally, we argue that standard asset pricing models cannot solve the two puzzles simultaneously.     

金融资产定价异常现象研究综述及其对新资产定价理论的启示

论文首先通过建立模型分析了在不同知情消费者比例下价格离散的结构形式,理论剖析了在搜索成本明显下降的电子商务市场,价格离散仍然持续存在的客观原因;进而运用在北京地区的93家电子商务零售网站、9大类535款商品、6313个价格样本数据检验了中国电子商务市场价格离散的情况,研究了其价格离散成因。结果表明在电子商务市场上,价格离散将持续存在,知情消费者比例与价格离散指标之间并不是一个单调关系;零售商特征,尤其是市场特征影响价格离散,各类零售商的定价依据不同。     

Quality uncertainty and time inconsistency in a durable good market

In a durable good monopoly where consumers cannot observe quality prior to purchase and product improvement occurs exogenously over time, I show that uncertainty in quality may resolve the time inconsistency problem (even for low levels of product improvement). Higher dispersion in quality creates greater demand for future product by increasing the incentive of buyers with inferior quality realizations to repeat purchase and this, in turn, reduces the incentive of the seller to cut future price. For various levels of product improvement, I characterize the range of quality uncertainty for which the market equilibrium is identical to one where the monopolist can credibly precommit to future prices. I also show that the presence of quality uncertainty can lead to no trading in the primary good market. Further, in contrast to the literature on the Coase conjecture, inability to precommit to future prices can reduce social welfare as a result of the market closure.     

Heterogeneous beliefs, price dispersion, and welfare-improving price controls

Summary. We consider a search market model where agents have heterogeneous beliefs about the distribution of prices. A suggestive example shows that Jevon's Law of One Price and standard welfare results are not robust to small heterogeneous errors in beliefs. In particular we show that a price ceiling above marginal cost can reduce price dispersion and improve welfare (by lowering aggregate search costs) without decreasing quantity supplied. These results are broadly consistent with the empirical evidence. Received: July 27, 1999; revised version: May 24, 2000     

The Dynamics of Markups and Inventories in Retailing Firms

This paper is concerned with the interaction between price and inventory decisions in retailing firms and its implications for the dynamics of markups and the existence of sales promotions. We consider a model where a monopolistically competitive retailer decides price and inventories, and assumes lump-sum costs when placing orders or changing nominal prices. In this model, the existence of stockout probabilities and fixed ordering costs generate a cyclical price behaviour characterized by long periods without nominal price changes and short periods with very low prices ( i.e. sales promotions). We estimate this model using a unique longitudinal dataset with information about retail and wholesale prices, inventories, orders, and sales for several brands in a supermarket chain. Based on the estimated model we perform several counterfactual experiments that show the important role that inventories and fixed ordering costs play in the dynamics of retail prices and the frequency of sales promotions in this dataset.     

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.     

Perfect versus imperfect direct advertising,and market performance

We present a model of economic growth driven by horizontal innovation in which, unlike the existing literature, the final output sector employs a non-specified, non-CES, additive production function. Our motivation in conducting such analysis is based on the recognition that the use of a CES aggregate production function in the final output sector leads to the unrealistic conclusion that the gross markup of price over marginal costs set in the monopolistically-competitive intermediate sector is constant. We derive necessary and sufficient conditions for an equilibrium with perfect competition in the final output market to exist even in the presence of a non-CES technology. These conditions generalize the usual properties of the CES case. We also analyze the long-run relation between economic growth and variable markups.     

What Collusion? Unilateral Market Power as a Catalyst for Countercyclical Markups

This paper presents and tests a simple model of competitive and unilateral market power regimes that yields countercyclical markups. Following a decrease in demand in the short run, capacity-constrained firms may have a strong incentive not to lower their prices to the new competitive price. Demand shocks may introduce market power into a previously competitive market. Experimental posted offer markets support this conjecture with complete information on the market structure. With only private information, there appears to be a hysteresis effect concerning supracompetitive prices, i.e., markets with a history of supracompetitive pricing continue to generate supracompetitive prices following demand shocks. However, competitive markets also remain competitive following demand shocks when firms only have private information on costs and capacities.     

Price discrimination and price dispersion in a duopoly

This paper analyses the problem of price discrimination in a market where consumers have heterogeneous preferences both over a horizontal parameter (brand) and a vertical one (quality). Discriminatory contracts are characterized for different market structures. It is shown that price dispersion, i.e. the observed range of prices for each class of customers, increases almost everywhere as competition is introduced in the market.     

Analysis of price competition and strategic implications for heterogeneous market structure

This paper examines strategic competition behavior in heterogeneous market structure where both conventional offline and online firms coexist in equilibrium and draws strategic implications with some remarks on welfare. Research on the price competition between conventional offline and online firms has been done through empirical approaches; however, the results are conflicting. This paper reconciles the existing conflicting empirical findings on price levels between conventional offline and online firms through a theoretical approach. We find that as the online market matures, prices in both conventional and online firms drop, and the price in the online firm can be higher than that in a conventional offline firm. Furthermore, if convenience associated with the online increases, the online price tends to exceed the conventional offline price.     

Multi‐product exporters,variable markups and exchange rate fluctuations

In this paper we investigate how firms adjust markups across products in response to fluctuations in the real exchange rate. We estimate markups at the market–product–plant level using detailed panel production and cost data from Mexican manufacturing between 1994 and 2007. Exploiting variation in the real exchange rate in the aftermath of the peso crisis in December 1994, we provide robust empirical evidence that plants increase their markups and producer prices in response to a real depreciation and that this increase is greater for products with higher productivity. Thus, we provide direct evidence for the theoretical mechanism of variable markup response behind incomplete and heterogeneous exchange rate pass‐through on producer prices. Our empirical methodology allows us to decompose the producer price response to exchange rate shocks into a markup and a marginal cost component using our markup estimates. Using these estimates, we establish that marginal cost at the product–plant level increases more in response to real exchange rate depreciation if the plant has higher share of imported inputs.     

Strategic Pricing, Consumer Search and the Number of Firms

We examine an oligopoly model where some consumers engage in costly non-sequential search to discover prices. There are three distinct price-dispersed equilibria characterized by low, moderate and high search intensity. The effects of an increase in the number of firms on search behaviour, expected prices, price dispersion and welfare are sensitive (i) to the equilibrium consumers' search intensity, and (ii) to the status quo number of firms. For instance, when consumers search with low intensity, an increase in the number of firms reduces search, does not affect expected price, leads to greater price dispersion and reduces welfare. In contrast, when consumers search with high intensity, increased competition results in more search and lower prices when the number of competitors in the market is low to begin with, but in less search and higher prices when the number of competitors is large. Duopoly yields identical expected price and price dispersion but higher welfare than an infinite number of firms.