Optimal cartel trigger price strategies

A dynamical model of industry equilibrium is described in which a cartel deters deviations from collusive output levels by threatening to produce at Cournot quantities for a period of fixed duration whenever the market price falls below some trigger price. In this model firms can observe only their own production level and a common market price. The market demand curve is assumed to have a stochastic component, so that an unexpectedly low price may signal either deviations from collusive output levels or a “downward” demand shock.     

Markups and fiscal transmission in a panel of OECD countries

This paper studies the role of the markup of price over marginal cost for the transmission of fiscal policy shocks. We construct time series of markups allowing for fluctuations in capacity utilization and total factor productivity and use an aggregate production function that is more general than Cobb–Douglas. Including the constructed markup series in a bias-corrected panel vector autoregression with annual OECD data, we find that a positive shock to government spending tends to lower markups while raising output. The positive output response appears to result less from increases in hours worked than from the positive reaction of capital utilization.     

Asymmetries in price and quantity adjustments by the competitive firm

Focusing on the crucial role of inventory carry-overs in the production and sales decision, we describe the profit maximizing behavior of a dynamic competitive firm facing random prices. Each firm's behavior is incorporated into a stochastic equilibrium model of the competitive industry with uncertain demand. The industry model exhibits asymmetric cyclical fluctuations of the “Keynesian” sort: when demand is weak, output contracts while price holds at a fixed floor; when demand is strong, price increases as output is constrained by a ceiling. Even in a pure world of constant returns, without increasing costs, the inability to instantaneously coordinate production and sales along with the existence of inventories is sufficient to yield a “backward L” shaped supply curve for the short run.     

On the Effects of Entry in Cournot Markets

In the framework of symmetric Cournot oligopoly, this paper provides two minimal sets of assumptions on the demand and cost functions that imply respectively that, as the number of firms increases, the minimal and maximal equilibria lead to (i) decreasing industry price and increasing or decreasing per-firm output; and (ii) increasing industry price (and decreasing per firm output.) In both cases, per-firm profits are decreasing.
The analysis relies crucially on lattice-theoretic methods and yields general, unambiguous and easily interpretable conclusions of a global nature. As a byproduct of independent interest, new insight into the existence of Cournot equilibrium is developed.     

Taxes,intermediate goods,and relative prices: The case of variable coefficients

Price effects of an output tax in sector 1 and an equivalent production subsidy in the second industry are analyzed in a general equilibrium model. Each commodity satisfies final demand and uses two primary inputs and the other good as an intermediate product. Production coefficients are variable and demand is elastic. In a Leontief model with fixed coefficients, Metzler showed that price of the taxed good will rise and price of the subsidized good will fall. This result generally holds under less restrictive conditions also although it is sometimes reversed. How the topic relates to the tax-incidence literature is also discussed.     

Accounting for Growth in the Australian Wine Industry, 1987 to 2003

A computable general equilibrium model of the Australian economy is used to account for the dramatic growth in Australia's wine industry between 1987 and 1999, and to project grape and wine volumes and prices to 2003. Export demand growth has made a major contribution to total output growth in premium wines, and accounts for most of the increase in the producer price of premium red wine. Domestic consumer preferences have shifted, mainly towards premium red wine, but there is also some evidence of growing demand for premium white wine since the mid 1990s. From the perspective of producers, productivity growth, while being less important than growth in domestic demand, appears to have more than offset the negative effects on suppliers of wine consumer tax increases. From the domestic consumers' perspective, however, tax hikes have raised retail prices much more than productivity gains have lowered them. The high and sustained levels of profitability resulting from export demand growth have led to a massive supply response in Australia. Even so, by 2003 Australian wine output will still be less than 5 per cent of global production.     

OIL PRICE VOLATILITY AND U.S. MACROECONOMIC PERFORMANCE

This study uses a model with explicit energy sector linkages to estimate the macroeconomic impacts of the 1986 collapse in energy prices. The model combines features of neoclassical macroeconomics to estimate final demand spending and of general equilibrium analysis to estimate substitution possibilities. The model allows price and wage rigidities yet permits interfuel and input substitutions. The simulation results suggest three conclusions. First, the most significant macroeconomic impact of the 1986 oil price reduction is the sharp drop in inflation. Second, output and employment gains are relatively small due to the sharp drop in energy sector output. Finally, the estimated gain in real output due to lower energy prices is close to the output loss resulting from the trade deficit increase during 1986. This may be one reason why no substantial increase in economic growth occurred following the 1986 collapse in energy prices.     

More on tariffs and non-traded goods

The general equilibrium effects of a small tariff on relative prices are analysed within a demand and supply model which provides further insights into Dornbusch's (1974) results. It is shown that the elasticity of the price of non-traded goods with respect to the tariff is a weighted average of the degree of substitutability between non-traded goods and importables on the supply side and that on the demand side. When complementarity is ruled out, the price of non-traded goods increases with the tariff, but less than proportionally.     

REAL BALANCES, RELATIVE PRICES AND AN OPEN MODEL TEMPORARY EQUILIBRIUM WITH RATIONING THE MARSHALL-LERNER CONDITIONS IN

The model is of an open economy producing a single output, the demand for which depends on its price, the price of foreign output, real incomes and government spending. We thereby extend the rationed equilibrium model of Malinvaud to the simplest open economy. Residents hold foreign assets as well as domestic assets, hence exchange rate movements have real balance effects as well as relative price effects. The Marshall Lerner conditions are sufficient, but not necessary, for either an exchange rate depreciation or a fall in the domestic price level, to increase demand for domestic output. They are necessary, but not sufficient, for a depreciation or fall in the domestic price level, to improve the trade balance under Keynesian Unemployment.     

Should Commodity Exporters Peg to the Export Price?

To account for the specific situation of commodity exporters, pegging to export prices (PEP) has been proposed elsewhere as an alternative to other conventional monetary regimes such as an exchange rate peg or inflation targeting. PEP is supposed to deliver automatic accommodation to terms‐of‐trade shocks, while retaining the credibility gain from a nominal anchor. This paper analyzes the PEP proposal in a dynamic general‐equilibrium model and compares it with a standard Taylor rule, consumer price index (CPI)‐level targeting and a nominal exchange rate peg. Judged by the degree of output stabilization, PEP performs very similar to CPI targeting for export demand as well as domestic demand shocks and underperforms in the case of shocks to the export price. The results suggest that PEP is not superior to conventional CPI targeting from a macroeconomic stabilization perspective.     

Savings, Volume of Trade, and Growth

This paper develops a two-country dynamic general equilibrium model with endogenous growth to analyze the effects of international trade on steady-stage growth. The two countries differ both in preferences and in technologies. It is shown first that both countries cannot simultaneously experience increases in consumption growth from trade. It is then shown that trade can increase output growth for both countries if the attitude towards saving matches the change in the terms of trade in each country. A country facing a decline (rise) in its output price grows faster if its intertemporal elasticity of substitution is sufficiently low (high).     

均衡价格--动态市场价格的形成与变化趋势

本介绍了用来模拟动态市场价格的微分方程模型，此模型反映了价格对需求与供给的影响，而需求与供给反过来又影响价格确定的过程，并说明了均衡价格是市场价格的最终变化趋势，并用蛛网理论对产量和价格的波动进行了分析。     

Resource Rights and Markets in a General Equilibrium Model of Production

Rights to a free resource lead to distributional deadweight losses in partial equilibrium. The present paper examines related distortions in a general equilibrium model of production with output prices constant for the small open economy. The free resource can result in lower output than a market with weak substitution in the other sector. The free resource also leads to a convex production frontier implying a price increase lowers output in the sector. Regarding policy, an import tariff, export subsidy, or price support would lower sector output. These general equilibrium distortions increase the incentives to favor resource markets over rights.     

Optimal monetary policy for a small open economy

This paper focuses on the design of monetary policy rules for a small open economy. The model features optimizing behavior, general equilibrium and price stickiness. The real exchange rate is shown to affect the firm's real marginal cost, aggregate supply and aggregate demand. The welfare objective depends on the openness of the economy, and the optimal policy rule differs from that which obtains in a closed economy. The inflation versus output gap stabilization trade-off is caused by the real exchange rate. The implied optimal monetary policy regime is domestic inflation target coupled with controlled floating of the real exchange rate.     

Aggregate supply management in a small open economy

For a closed economy a cut in either payroll or income taxes stimulates output, but they influence the price level in different directions. In a two-sector, small open economy these conclusions are much more tenuous. Using a model that maintains equilibrium in the only two purely domestic markets, labor and nontradeables, it is established that a payroll-tax cut increases the size of the labor force, but does not guarantee higher real income. For either tax cut, prices and output move in opposite directions. In the short run when wages are “sticky,” an income-tax cut has the undesirable effect of increasing unemployment. In the face of a supply shock that reduces demand for labor, a payroll-tax cut can reestablish the original equilibrium.     

COMPETITIVE LONG RUN INDUSTRY EQUILIBRIUM AND FACTOR-PRICE UNCERTAINTY*

In this paper we have considered competitive long run industry equilibrium with factor-price uncertainty. We discussed the long run equilibrium output of firms with risk neutrality, output price and their responses to changes in uncertainty, factor price and industry demand. In the first part of this paper we have derived a result that, given risk neutrality, the firms operate at proper capacity, i.e. where expected long run marginal cost is equal to expected long run average cost, as shown in the case of output-price uncertainty. This result is, however, different from that obtained from Sheshinski and Dréze (1976). From the comparative static analysis we first discovered that even under risk neutrality factor-price uncertainty affects the long run industry equilibrium: that is, a mean preserving increase in uncertainty leads firm's to enter the industry, because they can decrease expected long run costs as the variability of factor price increases. Consequently, output price goes down. In contrast, firm size is kept invariable in response to its increase as long as the cost function is separable, i.e. the separability of the cost function holds when production functions are the Cobb-Douglas and CES types used commonly in empirical work, although firm size might, generally, be affected by the increase. It is an interesting fact that firm size and industry size will express different responses to a change in risk. The result that the long run industry equilibrium with cost uncertainty is explicitly affected is a sharp contrast to the result under output-price uncertainty and provides a new aspect for understanding about the behaviour of the industry with uncertainty. Secondly, increased factor-price causes the number of firms in the industry to decline and output price to rise. In addition, firm's size will expand with its increase if that factor is inferior, while the effect on firm size is ambiguous if it is normal. The firm's output, i.e. firm size, is, however, kept constant if the cost function is separable. Thirdly, the long run equilibrium output of the firm remains intact but the number of firms increases as industry demand rises. This result holds, regardless of the firm's attitude towards risk. Finally, we find throughout the paper that the functional form of the cost function plays a significant role in determining the behaviour of the industry with factor-price uncertainty.     

Wage and price controls in the equilibrium sequential search model

In this paper, we study the effects of wage and price controls on employment, output, and welfare in a simplified version of the Bénabou (J. Econom. Theory 60 (1993) 140) equilibrium sequential search model with bilateral heterogeneity. We show that a price ceiling increases output but the change in welfare depends on three effects: the reduction in aggregate search costs, the increase in surplus due to increased output, and the transfer of production to the least efficient firm. The model is formally identical to a standard equilibrium search model of the labor market so analogous results hold for the minimum wage.     

Strategic saving decisions in the infinite-horizon model

We study a mechanism that prevents the long-run distribution of wealth from becoming degenerate in the Ramsey–Cass–Koopmans model when households have different time-preference rates. This mechanism is based on the observation that price-taking behavior is no longer justified when all wealth is owned by a single household. Formalizing this observation, we obtain a model with a unique stationary equilibrium in which, depending on the parameter constellation, any number of households can own positive stocks of capital. We characterize this equilibrium and show for example that an increase in the dispersion of the time-preference rates across households unambiguously increases aggregate output. Whereas the main results are derived for a rather general class of production functions, we devote a separate section to the special case of the Cobb–Douglas technology for which the equilibrium conditions are particularly simple. The research reported in this paper forms part of the project “Economic Growth with Strategic Saving Decisions” supported by the Austrian Science Fund (FWF) under project number P17886. Comments from Robert Becker, Edward Green, Takashi Kamihigashi, David Levine, Fabrizio Zilibotti, anonymous referees, and participants at various conferences and seminars are gratefully acknowledged.     

The concept of equilibrium and its use in demand forecasting

Forecasts of the future price and quantity of a service or commodity often ignore the dynamic interaction between demand and supply, perhaps because the economic meaning of these concepts is often rather fuzzily defined. This paper attempts to remove some of the fuzziness, and shows that the equilibrium point where supply and demand are equal has a clear interpretation. Further it argues that forecasts of the movement of the equilibrium point over time are meaningful and useful. Using the notion of equilibrium a model is constructed which forecasts simultaneously the rates of change of price and output. This model shows how a forecast is biased when the interaction between demand and supply is not included and what special assumptions are implicitly made by a forecaster who ignores it. Finally, the paper shows how uncertainty about the parameters of the model affects the estimates of the rates of change, providing uncertain estimates of price and quantity.     

Dynamic factor demands and adjustment costs: An analysis of bell Canada's Technology

In this paper a dynamic model of production is estimated for Bell Canada. The dynamics arise from the costs of adjustment associated with capital expansion. Estimation results showed that there are significant adjustment costs. Thus, the hypothesis of long-run cost minimization is rejected. As Bell Canada increases its capital stock by $1, there are additional adjustment costs of $0.36. This result implies that Bell Canada minimizes the present value of production and adjustment costs which results in a short-run equilibrium position. Price, substitution and output elasticities are estimated. In the short-run the inputs are substitutes and the price effects are highly inelastic. Overshooting occurs with respect to labour and material demands in the short-run since the demand for capital responds very little to output expansion. Returns to scale are also estimated in this cost of adjustment model. Bell Canada exhibits increasing returns to scale initially and then decreasing returns such that on average there are constant returns to scale with a scale elasticity of 1.08.