Pricing over the Cycle

In recent studies, the cyclical behavior of markups is examined, but the role of costs in determining markups is ignored. Here, a pricing equation is estimated that implicitly measures the rate of change in markup as a function of aggregate demand growth, aggregate inflation and industry cost inflation. Results for 21 two-digit SIC industries in the U.S. over 1948 to 1979 show incomplete pass-through from cost into price, implying a negative relationship between cost and the markup. Aggregate inflation positively influences prices and markups. Aggregate demand negatively influences prices and markups in highly concentrated industries, but not otherwise.     

Recovering markups from production data

In this paper, I discuss, what I call, the Production-Approach to recovering markups. In contrast to the most popular approach in empirical IO, which relies on demand estimation, this approach requires standard production data while allowing for various price-setting models and puts no restrictions on underlying consumer demand. Using production data together with standard cost minimization allows a researcher to obtain markups in a flexible way. After presenting a brief and selective overview of the literature I contrast the production approach to that of the more popular demand estimation approach. This discussion makes it clear that both approaches face important trade-offs and at a minimum empirical economist should have both techniques as part of their toolbox. The hope is that the use of both methods will only depend on the data at hand and the relevant institutional knowledge, paired with the actual research question we are trying to answer.     

Heavily skewed pricing in two-sided markets

A common feature in two-sided markets is the prevalence of heavily skewed pricing strategies in which price markups are much higher on one side of the market than the other. We show that maximal skewed pricing is profit maximizing under constant elasticity of demand. The most elastic side of the market is used to generate maximum demand by providing it with platform services at the lowest possible price. Full participation of the high-elasticity, low-price side of the market attracts the other side. As this side is less price elastic, the platform is able to extract high prices.     

Markups in a dual labour market: The case of the Netherlands

We follow the production function approach to assess markups, which requires the estimation of the output elasticity of a flexible input. In the basic setup we estimate a structural value added production function, using temporary contract hours as flexible input. We find rather stable markups in the Netherlands in the period 2006–2016. We show that extending the flexible input incorrectly with fixed contract hours results in an increasing markup. Findings are robust to an alternative setup, in which a gross output production function is specified and materials are used as flexible input. Implications for applied work and policy are discussed.     

MARKET STRUCTURE AND PRICING STRATEGY OF CHINA'S AUTOMOBILE INDUSTRY*

In this study, using market‐level data on quantities, prices' and automobile characteristics from 1995 to 2001, we conduct a market analysis of the Chinese automobile industry under imperfect competition. On the demand side, we apply a nested multinomial logit model to the national market share data in order to ascertain the demand features of China's automobile market. On the supply side, we assume Bertrand behavior to uncover the markups set by automobile manufacturers. Our empirical results suggest that some large automobile manufacturers set high markups, indicating their strong market power in China's automobile market. However, their declining markups in the late 1990's imply a reduction in market control by the major producers.     

A note on the excess entry theorem in spatial models with elastic demand

This paper revisits the excess entry theorem in spatial models according to Vickrey [Vickrey, W.S., 1964. Microstatics. Harcourt, Brace and World, New York] and Salop [Salop, S., 1979. Monopolistic competition with outside goods. Bell Journal of Economics 10, 141–156] while relaxing the assumption of inelastic demand. Using a demand function with a constant demand elasticity, we show that the number of firms that enter a market decreases with the degree of demand elasticity. We find that the excess entry theorem does only hold when the demand elasticity is sufficiently small. Otherwise, there is insufficient entry. In the limiting case of unit elastic demand, the market is monopolized. We broaden our results with a more general transportation cost function.     

Computing welfare losses from data under imperfect competition with heterogeneous goods

We study the percentage of welfare losses (PWL) yielded by imperfect competition under product differentiation. When demand is linear, even if prices, outputs, costs and the number of firms can be observed, PWL is arbitrary in both Cournot and Bertrand equilibria. If in addition the elasticity of demand (resp. cross elasticity of demand) is known, we can calculate PWL in a Cournot (resp. Bertrand) equilibrium. When demand is isoelastic and there are many firms, PWL can be computed from prices, outputs, costs and the number of firms. We find that price–marginal cost margins and demand elasticities may influence PWL in a counterintuitive way. We also provide conditions under which PWL increases or decreases with concentration.     

Input market definition under department of Justice Merger Guidelines

This paper applies the Justice Department's Merger Guidelines to define a relevant antitrust market for an input. An expression for the elasticity of the residual demand facing a monopoly supplier of a factor of production is derived. It is shown that proper input market definition depends on the elasticity of residual demand confronting the downstream input users, on the supply elasticity in the downstream market (which, in turn, depends on the rate of capital depreciation there), on the cost of the input as a percentage of downstream sales, and on the extent to which the monopolist is integrated downstream.     

Evidence of directional price discrimination in the U.S. airline industry

This paper explores possible determinants that may affect an airline’s decision to charge passengers different roundtrip fares depending on trip origin, a case of directional price discrimination. Such fare differences cannot be the result of differences in cost, as the cost of flying a roundtrip passenger does not significantly differ depending on direction. It is argued that directional fare differences result from airlines recognizing that passenger price elasticities differ between route endpoints. A price discriminating airline will then charge a higher roundtrip fare at the endpoint where the passenger price elasticity of demand is comparatively lower. Evidence is found suggesting that airlines do use differences in income to price discriminate when setting roundtrip fares. Fares are found to be $0.18-$0.43 higher on average for each $1000 difference in average per capita income between origin and destination metro areas. This finding is sensible assuming that higher incomes reduce the price elasticity of demand for air travel, with richer passengers being less sensitive to the cost of travel.     

Demand for coffee in Sweden: The role of prices, preferences and market power

There is a widespread belief that consumer coffee prices are high relative to bean prices and that lower consumer prices would lead to substantial increases in bean exports from Third-World countries. This issue is evaluated by analysing how retail prices, preferences and market power influence coffee demand in Sweden. A demand function is estimated for the period 1968–2002 and used, together with information on import prices of coffee beans, to simulate an oligopoly model. This approach gives estimates of the maximum average degree of market power and shows how coffee demand would react to reductions in marginal cost to its minimum level. The maximum level of market power is found to be low, but it generates large spreads between consumer and bean prices because the price elasticity has low absolute values. Moreover, the impact of a price decrease would be small because long-run coffee demand is dominated by changes in the population structure in combination with different preferences across age groups. Hence, a change to perfect competition would only have a negligible effect on bean imports.     

On the comparative statics of the dominant-firm model

This paper examines the effect of a change in demand upon a dominant firm's share of the market. The direction of change in market share is not readily determined in the general form of the model. It depends upon the values of a number of parameters. In the linear and log-linear forms of the model, however, the number of crucial parameters reduces to two. The market share of the dominant firm varies directly (inversely) with demand when the y-intercept of its marginal cost curve is greater (less) than the y-intercept of the supply curve of the fringe in the linear model and, in the log-linear model, when the elasticity of marginal cost with respect to output is less (greater) for the dominant firm than it is for the fringe.     

Multiproduct Price Regulation Under Asymmetric Information

We discuss the regulation of a multiproduct monopolist when the firm has private information about cost or demand conditions. The regulator offers the firm a set of prices from which to choose. When there is private information only about costs, the firm should always have a degree of discretion over its pricing policy. When uncertainty concerns demand, whether discretion is desirable depends on how demand elasticities vary with the scale of demands. If a positive demand shock is associated with a reduction in the market elasticity, discretion is good for overall welfare; otherwise it is not.     

MARKET POWER AND PRICE MOVEMENTS OVER THE BUSINESS CYCLE*

This paper develops and tests implications of an oligopoly‐pricing model. The model predicts that during a demand expansion, the short run competitive price is a pure strategy Nash equilibrium but in a recession, firms set prices above the competitive price. Thus, price markups over the competitive price are countercyclical. Prices set during a recession are more variable than prices set in expansions because firms employ mixed strategy pricing in recessions. The empirical analysis utilizes Hamilton's time series switching regime filter to test the predictions of the model. Fourteen out of fifteen industries have fluctuations consistent with this oligopoly‐pricing model.     

考虑营销成本的库存与运输联合优化三阶段决策模型研究

一般来说,个体最优和整体最优是不一致的,二者之间存在着偏差,这一偏差就是分散优化带来的效率损失。库存与运输联合优化（ITIO）将物流系统中的库存控制和运输管理融合到一个大问题中,去寻求这一联合问题而非单个问题的最优解决方案,可以最优化整个配送系统的运营成本。本文在考虑营销成本条件下,建立ITIO三阶段决策模型,并求解分析模型性质。研究表明：ITIO零售价和营销成本与需求的营销成本弹性、零售商订购成本、供应商生产启动成本、供应商生产成本、运输固定成本和运输可变成本正相关;与需求函数的价格弹性和订货批量负相关;当订购数量相同时,零售商单独优化的营销成本大于ITIO联合优化的营销成本。     

Using the Hicks formula to evaluate an estimate of the elasticity of derived demand for toll-free numbers

Duffy-Deno & Parsons D-D & P (2012) estimated the coefficient for the price elasticity of demand for toll-free numbers (TFNs) at between −0.04 and −0.05. Here, the Hicks formula for derived demand is used to check the range of likely demand elasticity for TFNs given the special characteristics of this market. This approach suggests that the demand for TFNs is likely not more elastic than estimated by D-D & P. Therefore, the premise is sound for D-D & P's discussion of the public policy implications of highly inelastic demand for TFNs. The use of industry information for all four parameters of the Hicks formula to check a derived demand elasticity is the first of its kind in the published literature.     

Residual demand estimation for market delineation: Complications and limitations

To shed some light on market delineation in an antitrust context, many economists are turning to estimates of residual demand elasticities. Recent papers have drawn attention to the importance of demand curve in market delineation and explained how they can be estimated. This paper shows that there are many complications and limitations of the approach. The relationship between the residual demand elasticity and the scope of the relevant market is complicated and depends on behavioral assumptions. The residual demand elasticity that can be estimated is not the one on which market delineation turns. The estimation of residual demand elasticities can be very difficult because of the complex dynamics of consumer behavior. Finally, residual demand estimators are likely to have a high variance because of instrument problems and this is likely to lead to widely varying estimates depending on specification choices.     

Wage councils,product markups and wage markdowns: Evidence from Uruguay

In 2005, after a leftist coalition won the national election for the first time, Uruguay returned to sector-level wage bargaining councils with active government participation. We estimate product markups and wage markdowns using firm-level data for the period 2002–2016, and report decreasing wage markdowns and increasing -to a lesser extent- firm-level product markups. We find statistically significant impacts of minimum mandated wages on product markups and wage markdowns, and additional effects of unions on wage markdowns. The evidence suggests that firms operate in monopsonistic labor markets. Though their bargaining power in the labor market was reduced over time as a result of wage councils, firms were able to pass a sizable part of the increases in labor costs to consumers.     

Unimodality of price-setting newsvendor's objective function with multiplicative demand and its applications

We present a general solution framework for the price-setting newsvendor problem with a multiplicative stochastic demand. Under mild assumptions, such as increasing price elasticity on the mean demand function and increasing generalized failure rate on the distribution of the random factor, we first prove that both the profit function with respect to price and its derived function with respect to order quantity are quasi-concave. Three applications are then studied under our solution framework: (1) We consider a wholesale price only contract by which a manufacturer sets a wholesale price and a newsvendor determines an order quantity and the retail price, and show that the manufacturer's profit function is unimodal with respect to retailing price or stocking factor under certain conditions. (2) We consider a newsvendor problem in which the demand depends on both the retail price and the level of sales effort, and the cost exerting the sales effort is proportional to the order quantity; we prove that there exists a unique pair of price and sales-effort levels that maximize the total profit. This result is established under a set of mild assumptions on the demand and cost functions. (3) We identify a property in the single-period profit function that satisfies Condition 1 of Huh and Janakiraman (2008), which in turn guarantees the optimality of (s, S) policy for an infinite stationary dynamic inventory-price control system with lost sales and fixed order costs. Finally, the unimodality of the newsvendor problem with a general stochastic and price-sensitive demand is studied.     

Rising markups,common ownership,and technological capacities

This paper analyses the impact of common ownership on markups and innovation and adds to the discussion of the recently observed patterns of a long term rise in market power. Using a panel of European manufacturing firms from 2005 to 2016, we structurally infer markups and construct a measure of common ownership. We use a propensity score reweighting estimator to eliminate biases due to observational characteristics and find an increase of firm markups ranging up to 3.3% on average in industries with high technological spillovers after the first exposure to common ownership. For companies directly held by common institutional investors, we also measure a positive effect on citation-weighted patents of up to 9.6% in high-spillover industries on average. Both findings are consistent with recent theoretical findings in López and Vives (2019).     

Elasticity of demand and behaviour-based price discrimination

Behaviour-based price discrimination (BBPD) is typically analysed in a framework characterised by perfectly inelastic demand. This paper provides a first assessment of the role of demand elasticity on the profit, consumer and welfare effects of BBPD. We show that the demand expansion effect, that is obviously overlooked by the standard framework with unit demand, plays a relevant role. In comparison to uniform pricing, we show that firms are worse off under BBPD, however, as demand elasticity increases the negative impact of BBPD on profits gets smaller. Despite a possible slight increase in the average prices charged over the two periods in comparison to uniform pricing, we show that BBPD boosts consumer surplus and that this benefit is independent of elasticity. In contrast to the welfare results derived under the unit demand assumption, where BBPD is always bad for welfare, the paper shows that BBPD can be welfare enhancing if demand elasticity is sufficiently high.