Do Edgeworth price cycles lead to higher or lower prices?

A recent literature seeks to understand the causes of the high-frequency, asymmetric retail price cycles observed in many retail gasoline markets. However, much less attention has been given to the effects of the cycles, in particular, whether the cycles lead to higher or lower prices and margins. The leading theory for the underlying cause of the price cycles, Edgeworth price cycles, is silent on the issue. The challenge in addressing this most important question has been the difficulty in isolating cycle effects from other confounding factors, especially market structure. In this article, I exploit a unique natural experiment to isolate the effect of cycles — a refinery fire that, in a matter of days, halted cycles that had previously persisted for decades. I find that Edgeworth price cycles lead to lower prices and lower margins. I conclude with implications for competition policy.     

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.     

Price Dispersion Over the Business Cycle: Evidence from the Airline Industry

This study provides empirical evidence documenting how price dispersion moves with the business cycle in the airline industry. Performing a fixed‐effects panel analysis on seventeen years of data covering two business cycles, we find that price dispersion is highly pro‐cyclical. This effect is especially pronounced for legacy carriers relative to low‐cost carriers. We show that our empirical result is consistent with firms' implementing second‐degree price‐discrimination tactics.     

The Long‐Run Relationship Between House Prices and Rents

I use standard error‐correction models and long‐horizon regression models to examine how well the rent–price ratio predicts future changes in real rents and prices. I find evidence that the rent–price ratio helps predict changes in real prices over 4‐year periods, but that the rent–price ratio has little predictive power for changes in real rents over the same period. I show that a long‐horizon regression approach can yield biased estimates of the degree of error correction if prices have a unit root but do not follow a random walk, and I construct bootstrap distributions to conduct appropriate inference in the presence of this bias. The results lend empirical support to the view that the rent–price ratio is an indicator of valuation in the housing market.     

Do Low‐Price Guarantees Guarantee Low Prices? Evidence from Competition between Amazon and Big‐Box Stores

It has long been understood in theory that price‐match guarantees can be anticompetitive, but to date, scant empirical evidence is available outside of some narrow markets. This paper broadens the scope of empirical analysis, studying a wide range of products sold on a national online market. Using an algorithm that extracts data from charts, I obtain a novel source of data from online price trackers. I examine prices of goods sold on Amazon before and after two big‐box stores (Target and Best Buy) announced a guarantee to match Amazon's prices. Employing both difference‐in‐difference and regression‐discontinuity approaches, I robustly estimate a positive causal effect of six percentage points. The effect was heterogeneous, with larger price increases for initially lower‐priced items. My results support anticompetitive theories which predict price increases for Amazon, a firm that did not adopt the guarantee, and are consistent with plausible mechanisms for the heterogeneous impact.     

基于Hotelling模型变体的双寡头研究

对艾奇沃斯模型得出的不稳定价格和产出的结论,霍特林(Hotelling)建立一个空间模型并提出,在运输成本存在的情况下,价格和产出都是唯一确定的。Hotelling模型为研究空间竞争问题提供一个经典的范式,但是模型本身不能解释两厂商的串谋。本文将放松原模型中消费者的刚性需求假定,引入需求密度函数,弱化区位竞争,重点考察单位运输成本,把研究角度锁定在价格博弈层面上,有效的解释双寡头之间的串谋,并认为模型结论取决于单位运输成本。     

The effects of mergers in markets for differentiated products

Several authors have studied conditions in which price-increasing forces associated with mergers in ahomogenous oligopoly might be offset by price-decreasing forces associated with rationalization of production. Analogously, in the case of mergers between producers ofdifferentiated products, economies of scope are a possible price-decreasing force. The interrelationship of demands can be another one. Edgeworth showed the possible strength of this latter force in demonstrating that the imposition of taxes on substitute products can cause the prices of all of them to fall. That paradoxical result is directly relevant since effects of mergers are shown to be equivalent to those of properly chosen taxes. Nevertheless, it is shown that the Edgeworth phenomenon does not carry over to mergers i.e., demand forces on their own are not sufficient for mergers to lead to reductions in all prices — although some price reductions are possible. The paper also develops conditions for all prices to rise after a merger. General conjectural variation models in both price and quantity are considered. Finally, it is shown that mergers cannot increase welfare in linear models with Bertrand or Cournot competition. The implications of the results for merger policy are briefly discussed.     

List pricing and discounting in a Bertrand–Edgeworth duopoly

List, or retail, pricing is a widely used trading institution where firms announce a price that may be discounted at a later stage. Competition authorities view list pricing and discounting as a procompetitive practice. We modify the standard Bertrand–Edgeworth duopoly model to include list pricing and a subsequent discounting stage. Both firms first simultaneously choose a maximum list price and then decide whether to discount, or not, in a subsequent stage. We show that list pricing works as a credible commitment device that induces a pure strategy outcome. This is true for a general class of rationing rules. Further unlike the dominant firm interpretation of a price leader, the low capacity firm may have incentives to commit to a low price and in this sense assume the role of a leader.     

ESTIMATING MARK‐UPS FROM PLANT‐LEVEL DATA*

Typical plant‐level data sets do not report quantities. This paper shows that estimating mark‐ups (price‐cost ratio) in product‐differentiated industries using deflated sales to proxy quantity is not appropriate due to unobserved price heterogeneity. This paper presents an econometric model for estimating mark‐ups that controls for unobserved prices. The model shows that ignoring price heterogeneity results in mark‐up estimates that converge to one, whatever the value of the true price‐cost ratio. Estimates obtained using real data are consistent with this result, as they reveal that ignoring price heterogeneity leads to spurious evidence of firms with little or no market power.     

House Price Expectations: Unbiasedness and Efficiency of Forecasters

The understanding of house price expectations formation is quite limited in the housing literature. This is the first article to rigorously test the rationality of expectations of house price change using survey data. Using a panel data set of the Wall Street Journal economic forecasting survey from 2007 through 2012, I test for unbiasedness and efficiency by implementing the econometric methodology proposed in Davies and Lahiri (1995) in the setting of a three‐dimensional panel data set. I find that, after controlling for aggregate shocks, nine of the 47 forecasters have statistically significant biases, and their biases are all negative, indicating that they persistently predict too high of a change in house prices. The hypothesis of efficiency cannot be rejected, suggesting lack of evidence for inefficient use of information. When the year 2012 is excluded, the unbiasedness test shows that 25 of the 47 forecasters systematically overpredicted house price changes. Again, the hypothesis of efficiency cannot be rejected.     

Common Values and Low Reserve Prices

I show that the benefit of a high reserve price in a common‐values ascending auction is lower than in the observationally equivalent private values setting. Put another way, when bidders have common values, empirical estimation based on a private‐values model will overstate the value of a high reserve price. Via numerical examples, I show this same ranking typically applies to the level of the optimal reserve price as well, and often to the benefit of any reserve price, not just high ones. With common values, the optimal reserve can even be below the seller's valuation, which is impossible with private values.     

House Prices and Rents: Microevidence from a Matched Data Set in Central London

I analyze a real estate agency's proprietary dataset containing tens of thousands of housing sale and rental transactions in Central London during the 2006–2012 period. I isolate 1,922 properties that were both sold and rented out within six months and measure their rent‐price ratios. I find that rent‐price ratios are lower for bigger and more central units. These stylized facts are consistent with the user cost formula and reflect differences in maintenance costs, vacancy rates, growth expectations and risk premia.     

Risk Segmentation of American Homes: Evidence from Denver

This article empirically examines the segmentation of house price risk across 99 ZIP‐code‐delineated neighborhoods in metropolitan Denver. The house price risk in each neighborhood is measured with the temporal variation of quarterly appreciation rates of the neighborhood house price index over the 2002–2007 period. Cross‐sectional regressions of neighborhood house price risk on the median household income and the percentage of population in poverty from the 2000 census data for the same neighborhoods provide strong evidence that the house price risk is significantly higher in low‐income/poor neighborhoods. Subperiod analyses further indicate that the risk segmentation exists in both a booming period (pre 2005:2) and a busting period (post 2005:3). The results indicate that homeownership can be a much riskier investment for low‐income/poor households.     

Consumer Search in Retail Gasoline Markets

This paper develops direct tests for search behavior in retail gasoline markets. We exploit a unique market‐level dataset that allows us to directly measure search intensity with daily web traffic data from a gasoline price reporting website and perfectly measure daily changes in price levels and dispersion. Our simple yet powerful tests provide strong evidence of both cross‐sectional and intertemporal price search.     

High Leverage and Willingness to Pay: Evidence from the Residential Housing Market

I document a strong correlation between paying the full listing price on homes and borrowing 100% loan‐to‐value. Homebuyers who do both overpay by 2.8% to 3.9% ($4,800 to $6,700) and are 22.7% more likely to have their properties foreclosed within one year. The correlation is not mechanical: there is a discontinuity in the average leverage around the full listing price. The correlation is stronger in areas with a high fraction of financially constrained and unsophisticated residents, and in areas of high past price growth (potentially indicative of buyer optimism).     

Merger Policy at the Margin: Western Refining’s Acquisition of Giant Industries

In May 2007, a United States District Court declined to grant the Federal Trade Commission a preliminary injunction that would have blocked the merger of two petroleum refiners that served Albuquerque, New Mexico, and surrounding areas. This study compares estimates of the post-merger price effect to the price effects that were predicted by economic experts on both sides of the case. I find little scope to interpret the evidence as consistent with an anticompetitive post-merger price effect. I also highlight the difficulties that are involved in econometrically identifying small effects even with an abundance of pricing data.     

Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market

Reverse mortgages allow elderly homeowners to tap into their housing wealth without having to sell or move out of their homes. However, very few eligible homeowners used reverse mortgages to achieve consumption smoothing until recently, when the reverse mortgage market in the United States witnessed substantial growth. In this article, I examine 1989–2007 loan‐level reverse mortgage data and conduct three sets of analyses to better understand the demand for reverse mortgages among elderly homeowners. First, I study the ZIP code characteristics correlated with reverse mortgage originations. Second, I show that recent reverse mortgage borrowers are significantly different from earlier borrowers in many respects. Third, I investigate the reasons why the reverse mortgage market experienced substantial growth in the mid‐2000s. Combining the reverse mortgage data with county‐level house price data, I find that higher house prices lead to more reverse mortgage originations. Specifically, the increases in house prices account for about one‐third of the overall growth in the reverse mortgage market from 2003 to 2007.     

Anchoring under Currency Substitution: A Ratchet Price Mechanism in the Housing Market

The currency substitution experienced by the Israeli real estate market in the past decades serves as a unique case for studying the effect of the anchoring heuristic on prices. We hypothesize that players utilize current and past exchange rates between the old and new currency to affect the closing price in their favor. Results of micro‐ and macro‐level estimations indicate that exchange rate fluctuations associate with an upward ratchet price effect. Furthermore, we find that the ratchet price mechanism disappears once the currency substitution is completed. These findings provide new evidence of the effect of anchoring on a market whose transactions involve substantial, long‐term economic consequences.     

The effect of competition on eBay

I examine the effect of competition on eBay Motors. I specify a simple model of auction choice and show that the expected transaction price falls with an increase in the number of competitors. I then test for this effect using data from 5,500 auctions for Chevrolet Corvettes. To address potential endogeneity of the level of competition, I introduce an instrument which takes advantage of the unique features of eBay. Results indicate that an additional competitor leads to a 6% reduction in the final transacted price ($960 for the average car). Further, I provide evidence that this effect is due to the thinning of the bidder market rather than dynamic bidding.     

CUT‐THROAT FRINGE COMPETITION IN AN EMERGING COUNTRY MARKET: TAX EVASION OR THE ABSENCE OF MARKET POWER?*

Brazil's established soft‐drink firms recently lost ground to multiple low‐price entrants, with small‐scale operations and minimal advertising. While incumbents attributed such undercutting to entrants' lower costs from non‐compliance with the law, ‘generics’ counterargued that incumbents' high prices stemmed from unilateral market power rather than cost heterogeneity. By estimating a structural model, I can single‐handedly explain established brands' high prices through low equilibrium price elasticities of demand. Tax evasion in the fringe, while plausible, appears to be offset by higher procurement costs or less efficient scale. More generally, a competitive informal sector can alleviate the allocative distortions in certain concentrated industries.