Price discrimination in input markets

We analyze the short‐ and long‐run implications of third‐degree price discrimination in input markets. In contrast to the extant literature, which typically assumes that the supplier is an unconstrained monopolist, in our model input prices are constrained by the threat of demand‐side substitution. In our model, the more efficient buyer receives a discount. A ban on price discrimination thus benefits smaller but hurts more efficient, larger firms. It also stifles incentives to invest and innovate. With linear demand, a ban on price discrimination benefits consumers in the short run but reduces consumer surplus in the long run, which is once again the opposite of what is found without the threat of demand‐side substitution.     

人民币汇率波动与中国股票价格报酬之间的相关性——基于2005年至2007年的实证分析

本文以2005年7月21日至2007年9月18日的中国股价与人民币兑美元的名义汇率数据,利用GARCH模型来探讨在这段时间内人民币汇率波动对中国股票价格报酬的影响。实证结果得知,在这段时间内人民币兑美元名义汇率波动是负向影响中国股票价格报酬的,也符合有价证券余额理论的主张;汇率市场对股票市场的影响在宏观决策中应予以高度重视。     

Market power,price discrimination,and allocative efficiency in intermediate‐goods markets

We consider a monopolistic supplier's optimal choice of two‐part tariff contracts when downstream firms are asymmetric. We find that the optimal discriminatory contracts amplify differences in downstream firms' competitiveness. Firms that are larger—either because they are more efficient or because they sell a superior product—obtain a lower wholesale price than their rivals. This increases allocative efficiency by favoring the more productive firms. In contrast, we show that a ban on price discrimination reduces allocative efficiency and can lead to higher wholesale prices for all firms. As a result, consumer surplus, industry profits, and welfare are lower.     

The price of power: The valuation of power and weather derivatives

Pricing contingent claims on power presents numerous challenges due to (1) the unique behavior of power prices, and (2) time-dependent variations in prices. We propose and implement a model in which the spot price of power is a function of two state variables: demand (load) and fuel price. In this model, any power derivative price must satisfy a PDE with boundary conditions that reflect capacity limits and the non-linear relation between load and the spot price of power. Moreover, since power is non-storable and demand is not a traded asset, the power derivative price embeds a market price of risk. Using inverse problem techniques and power forward prices from the PJM market, we solve for this market price of risk function. During 1999–2001, the upward bias in the forward price was as large as $50/MWh for some days in July. By 2005, the largest estimated upward bias had fallen to $19/MWh. These large biases are plausibly due to the extreme right skewness of power prices; this induces left skewness in the payoff to short forward positions, and a large risk premium is required to induce traders to sell power forwards. This risk premium suggests that the power market is not fully integrated with the broader financial markets.     

Strategic Price Discrimination in Compulsory Insurance Markets

This paper considers price discrimination when competing firms do not observe a customer’s type but only some other variable correlated to it. This is a typical situation in many insurance markets—such as motor insurance—where it is also often the case that insurance is compulsory. We characterise the equilibria and their welfare properties under various price regimes. We show that discrimination based on immutable characteristics such as gender is a dominant strategy, either when firms offer policies at a fixed price or when they charge according to some consumption variable that is correlated to costs. In the latter case, gender discrimination can be an outcome of strategic interaction alone in situations where it would not be adopted by a monopolist. Strategic price discrimination may also increase cross subsidies between types, contrary to expectations.JEL Classification No.: L13, G22     

Modeling and measuring intraday overreaction of stock prices

We introduce a model for stock prices consisting of a fundamental price process and a news impact curve, which allows for either overreaction, underreaction, or correct response to changes of the fundamental value. We further develop statistics based on OHLC data, which separately measure upside and downside overreaction. The distribution of these statistics under the hypothesis of correct response and fundamental prices following Brownian motions is used to derive tests for upside and downside overreaction. We show that more realistic and frequently used fundamental price processes with correct response leave the distribution of the test statistics widely unaffected or lead to conservative tests. Empirical application to different stock markets provides strong evidence for intraday overreaction, particularly to bad news. The economic significance of the discrimination induced by the proposed statistics is further illustrated by analyzing the performance of a simple buy on bad news strategy.     

Price Stickiness and Sectoral Inflation Persistence: Additional Evidence

In this paper, using U.S. as well as French sectoral data and indicators of price rigidity, we reexamine the (lack of) relation between price stickiness and inflation persistence. This has recently been put forward by Bils and Klenow (2004) as evidence against time‐dependent price setting models. We obtain that, when filtering out sector‐specific shocks along the lines of Boivin, Giannoni, and Mihov (2009), and allowing for an alternative assumption on the marginal cost process, the case against the time‐dependent Calvo model is substantially weakened.     

Reverse Stock Splits,Institutional Holdings,and Share Value

We show that both the number of institutional investors and the percentage of shares that are held by institutional investors increase significantly after reverse splits with a presplit price lower than $5 and a target price higher than $5. This effect is larger than for other comparable reverse splits. These results suggest institutional holdings are affected by the prudent‐person rule and reverse splits are used by firms to alleviate this constraint. We also show that an increase in institutional holdings that results from reverse splits is associated with an increase in share price.     

Quantifying the benefits of entry into local phone service

Local telecommunications competition was an important goal of the 1996 Telecommunications Act. We evaluate the consumer welfare effects of entry into residential local telephone service in New York State using household‐level data from September 1999 to March 2003. We address the prevalence of nonlinear tariffs by developing a discrete/continuous demand model that allows for service bundling and unobservable provider quality. We find that the average subscriber to the entrants' services gains a monthly equivalent of $2.33, or 6.2% of her bill, in welfare from competition. These gains accrue primarily from firm differentiation and new plan introductions rather than from price effects.     

An empirical investigation of the welfare effects of banning wholesale price discrimination

Economic theory does not provide sharp predictions on the welfare effects of banning wholesale price discrimination: if downstream cost differences exist, then discrimination shifts production inefficiently, toward high‐cost retailers, so a ban increases welfare; if differences in price elasticity of demand across retailers exist, discrimination may increase welfare if quantity sold increases, so a ban reduces welfare. Using retail prices and quantities of coffee brands sold by German retailers, I estimate a model of demand and supply and separate cost and demand differences. Simulating a ban on wholesale price discrimination has positive welfare effects in this market, and less if downstream cost differences shrink, or with less competition.     

Estimating Transaction-Based Price Indices of Local Commercial Real Estate Markets Using Public Assessment Data

This study examines the feasibility of constructing reliable commercial property price indices using property tax records. We employ the Clapp and Giacotto (Journal of American Statistical Association, 87(418), 300–306, 1992) assessed-value method to estimate price indices for commercial properties in Florida. The estimated Florida commercial property price index is compared to the Moody’s/REAL Commercial Property Price Index (CPPI) and to the transaction-based index (TBI) produced at MIT. Our results are promising, suggesting that this widely-available data source can be used to produce commercial property price indices for a variety of precise market locations and specific investor segments. A secondary but interesting objective of this paper is to use our rich and comprehensive database to examine the price performance of two specific subsets of properties in more detail. First, we narrow our range to focus on just the office sector for Florida. We compare price movements for the Florida office sector with the comparable CPPI. Estimates produce very similar price movements providing support to both methods. Second, we contrast the price performance of higher- and lower-valued properties and reject the hypothesis that their periodic price index levels are equal. The mean price changes of Florida commercial properties assessed at $2.5 million and above are observed to be slightly higher than for properties assessed below $2.5 million, although not statistically different. In particular, higher-valued properties had higher mean price changes relative to lower-valued properties during periods of economic expansion. This economic difference represents an important contribution toward beginning to understand the relative performance of smaller and investment-grade commercial properties.     

Information bundling and securities litigation

We exploit the exogenous shock of a 2005?U.S. Supreme Court decision on securities class action loss causation requirements to examine two ways that firms bundle information with restatements: “positive bundling” of good news and “noise bundling” of additional bad news. We find that positive bundling offsets price declines and results in less litigation. In contrast, noise bundling magnifies price declines, but nevertheless deters litigation by confounding which bad news caused a decline. Non-bundled restatements are 5.94 times more likely to result in litigation. Bundled restatements have 8.17 times higher dismissal rates and $21.17 to $23.45 million lower settlement amounts.     

Dynamic efficiencies of the 1997 Boeing‐McDonnell Douglas merger

We evaluate the welfare effects of the 1997 Boeing‐McDonnell Douglas merger in the medium‐sized, wide‐body aircraft industry. We find that the merger led to lower prices. To explain the price drop, we develop a dynamic oligopoly game with learning‐by‐doing. We quantify the welfare effects of the merger by incorporating both increased market power and merger efficiencies from accelerated learning‐by‐doing. Our dynamic analysis indicates that net consumer surplus increased by as much as $5.14 billion, whereas a static model ignoring efficiencies of learning‐by‐doing predicts a $0.92 billion loss.     

Energy price uncertainty and the value premium

This paper examines the impact of energy price uncertainty on a range of value anomalies. We demonstrate that the value premium is substantially stronger in periods of heightened energy price uncertainty. Energy price uncertainty exerts an asymmetric effect on the value anomalies, whereby downside energy price uncertainty accentuates the return differences between value and growth stocks compared to upside energy uncertainty. These findings are consistent with the argument that value firms possess a larger amount of inflexible assets than growth firms. Therefore, they struggle more to adjust in periods of elevated energy price uncertainty. We also demonstrate that energy price uncertainty has predictive power on the value premium one-month ahead. Using the Feasible Generalized Least Squares predictive model, energy price uncertainty can help mean-variance investors to obtain a positive annual utility gain across the value anomalies for up to 16.71%.     

Search and Wholesale Price Discrimination

Firms often choose not to post prices in wholesale markets, and buyers must incur costs to discover prices. Inspired by evidence of customized pricing (e.g., some customers pay up to 70% more than others) and search costs, I estimate a search model to study how personalized pricing impacts efficiency in a wholesale market. I find that price discrimination decreases total surplus by 11.6% and increases the sellers' profits by up to 52.1%. These effects are partially explained by price discrimination softening competition through a decrease in search incentives, illustrating how price discrimination may magnify the efficiency costs of search frictions.     

Volatility estimation on the basis of price intensities

This paper investigates the use of price intensities, i.e. the time between price changes of a given size, to estimate volatilities based on high-frequency data. We interpret the conditional probability for the occurrence of a price event within a certain time horizon as a risk measure which allows us to obtain an estimator of the conditional volatility per time. To consider censoring effects caused by nontrading periods, we use a proportional hazard model. Seasonalities are taken into account by including regressors based on a flexible Fourier form capturing intraday and time-to-maturity seasonalities. Testing for serial correlation and controlling for unobservable heterogeneity permits us to check for misspecification on different aggregation levels. Empirical results are based on intraday transaction data of Bund future trading at the LIFFE, London.     

On the price of risk in a mean-risk optimization model

We investigate a mean-risk model for portfolio optimization where the risk quantifier is selected as a semi-deviation or as a standard deviation of the portfolio return. We analyse the existence of solutions to the problem under general assumptions. When the short positions are not constrained, we establish a lower bound on the cost of risk associated with optimizing the mean–standard deviation model and show that optimal solutions do not exist for any positive price of risk which is smaller than that bound. If the investment allocations are constrained, then we obtain a lower bound on the price of risk in terms of the shadow prices of said constraints and the data of the problem. A Value-at-Risk constraint in the model implies an upper bound on the price of risk for all feasible portfolios. Furthermore, we provide conditions under which using this upper bound as the cost of risk parameter in the model provides a non-dominated optimal portfolio with respect to the second-order stochastic dominance. Additionally, we study the relationship between minimizing the mean–standard deviation objective and maximizing the coefficient of variation and show that both problems are equivalent when the upper bound is used as the cost of risk. Additional relations between the Value-at-Risk constraint and the coefficient of variation are discussed as well. We illustrate the results numerically.     

Audit Firm Ranking,Audit Quality and Audit Fees: Examining Conflicting Price Discrimination Views

In this study, we examine whether highly ranked audit firms in Iran, as determined by the Securities and Exchange Organization (SEO), earn a fee premium, firstly, by providing superior quality audit services or, secondly, due to reputation created by the ranking system implemented by the SEO. We employ price discrimination theory, and we test quality discrimination versus brand reputation explanations in the context of a unique institutional setting (where international audit firms are not allowed to operate). The data are derived from firms listed on the Tehran Stock Exchange (TSE) for the period 2006 to 2015. Our results show that the quality of audit services (using all of our measures) provided by the highest ranked audit firms is not superior to that of the non-highest ranked firms. In addition, the audit fee models suggest that the highest ranked firms charge significantly more audit fees compared to lower ranked firms. We employ several sensitivity tests and the results do not change materially. Such findings go against the “quality-based price discrimination” view but support the reputation-based view, and make a significant contribution towards understanding the economic consequences of state-determined ranking of audit firms rather than allowing the market to determine quality differentiation.     

Market Segmentation and Foreign Share Discount in China

In this paper, I formulate and test a one-period capital asset pricing model under ownership restrictions to explain the price differentials between the classes of shares that can be bought by Chinese citizens and by foreign investors, respectively. I find that time-series variability in the spread between domestic and foreign share returns is consistent with differences in risk exposures and expected risk premium, thus supporting the hypothesis of effective market segmentation and price discrimination. I also find that cross-sectional differences between domestic and foreign share returns are correlated with individual shares'; market betas. The result further supports the price discrimination hypothesis.