Convergence of Bayesian learning to general equilibrium in mis-specified models

A central unanswered question in economic theory is that of price formation in disequilibrium. This paper lays the groundwork for a model that has been suggested as an answer to this question in, particularly, Arrow [Toward a theory of price adjustment, in: M. Abramovitz, et al. (Ed.), The Allocation of Economic Resources, Stanford University Press, Stanford, 1959], Fisher [Disequilibrium Foundations of Equilibrium Economics, Cambridge University Press, Cambridge, 1983] and Hahn [Information dynamics and equilibrium, in: F. Hahn (Ed.), The Economics of Missing Markets, Information, and Games, Clarendon Press, Oxford, 1989]. We consider sellers that monopolistically compete in prices but have incomplete information about the structure of the market they face. They each entertain a simple demand conjecture in which sales are perceived to depend on the own price only, and set prices to maximize expected profits. Prior beliefs on the parameters of conjectured demand are updated into posterior beliefs upon each observation of sales at proposed prices, using Bayes’ rule. The rational learning process, thus, constructed drives the price dynamics of the model. Its properties are analysed. Moreover, a sufficient condition is provided, relating objectively possible events and subjective beliefs, under which the price process is globally stable on a conjectural equilibrium for almost all objectively possible developments of history.     

Dynamic Competition with Experience Goods

This paper considers dynamic competition in the case in which consumers are only able to learn about their preferences for a certain product after experiencing it. After trying a product a consumer has more information about that product than about untried products. When competing in such a market firms with more sales in the past have an informational advantage because more consumers know their products. If products provide a better-than-expected fit with greater likelihood, taking advantage of that informational advantage may lead to an informational disadvantage in the future. This paper considers this competition with an infinite horizon model in a duopoly market with overlapping generations of consumers. Two effects are identified: On one hand marginal forward-looking consumers realize that by purchasing a product in the current period will be charged a higher expected price in the future. This effect results in reduced price sensitivity and higher equilibrium prices. On the other hand, forward-looking firms realize that they gain in the future from having a greater market share in the current period and compete more aggressively in prices. For similar discount factors for consumers and firms, the former effect is more important, and prices are higher the greater the informational advantages. The paper also characterizes oscillating market share dynamics, and comparative statics of the equilibrium with respect to consumer and firm patience, and the importance of the experience in the ex post valuation of the product.     

Disequilibrium models of single family housing prices and transactions: The case of Chicago, 1972–1976

This paper reports a first application of Fair-Jaffee type short-side models of disequilibrium to the intraurban single family housing market in which the housing stock is divided into distinct geographic community areas. Data on single family dwelling transactions and prices in the city of Chicago between 1972–1976 is used to estimate four versions of the Fair-Jaffee type model. The approach allows the simultaneous estimation of the price elasticity of the demand for and offer of existing single family dwellings. The demand elasticity estimate of about −0.5 agrees with other estimates in the literature obtained from equilibrium models. The price elasticity of offer has not been previously estimated for single family dwellings. It is found to be around 2.1. Elasticities are also computed with respect to the mortgage interest rate and the intensity of transactions in the dwelling's community area. The disequilibrium models appear substantially superior to equilibrium specifications. Simulations with the estimated models predict that, in the absence of external shocks, transaction prices and quantities stabilize within 2 years.     

The Price Evolution in China's Automobile Market

The automobile market in China has seen unprecedented expansion during the past decade with rapid model turnover and dramatic price decline. This paper aims to document the evolution of price and investigate the sources of price decline, paying attention to both market structure and cost factors. We estimate a market equilibrium model with differentiated multiproduct oligopoly using market‐level sales data in China together with information from household surveys. Our counterfactual simulations show that (quality‐adjusted) vehicle prices have dropped by 33% from 2004 to 2009. The decrease in markup from intensified competition accounts for about one third of this change and the rest comes from cost reductions through learning by doing and other channels. In addition, our simulations show that the price decline would have been larger had it not been for the growth of household income during this period.     

The stochastic implications of rent maximization: an application to stumpage rates for timber in British Columbia

We construct a model of rent‐maximizing behaviour by a single seller of timber in the absence of a formal market, deriving the stochastic implications of rent maximization for timber prices (stumpage rates) when other input and output (lumber) prices are random. Subsequently, we examine the model's ability to describe monthly, time‐series, stumpage‐rate data from British Columbia, Canada between January 1979 and October 1999. Deviations of stumpage rates from their long‐run trend are also structured by an error‐correction model which suggests that between 13 and 20% of period‐to‐period changes in stumpage rates can be explained by an equilibrium adjustment term. Copyright © 2004 John Wiley & Sons, Ltd.     

Earnings announcements and the variability of stock returns

This article is concerned with the dissemination process of firm-specific annual earnings information in the Norwegian capital market. We find a significant reduction in stock price volatility in the post-announcement period relative to the pre-announcement period for companies traded on the Oslo Stock Exchange in the period 1990–1995. Potential explanations for this phenomenon are tested by relating the observed return volatility to changes in the volatility of the underlying business, the speed at which information is incorporated into stock prices, and the amount of noise in the price process. The empirical analyses reveal no significant changes in either the underlying business variance or the price adjustment coefficients. However, we find a significant decline in the noise term for the largest companies after the earnings release date, supporting the hypothesis that earnings announcements reduce informational asymmetries among investors.     

The lag structure of option price

The price of common stock warrants do not adjust immediately to changes in common stock prices. This lag is inconsistent with the ‘efficient market’ hypothesis. Based on daily closing prices this lag was measured and found to be a combination of the adjustment to stock price and to the adjustment of ‘other’ variables, i.e., positive serially correlated disturbance terms. A single equation model simultaneously estimating the parameters of the serial correlation and the coefficients of the lagged stock price indicate a substantial deviation from efficiency. Various simple strategies designed to exploit this lag are then tested.     

ECONOMETRIC MODELS OF ASYMMETRIC PRICE TRANSMISSION

Abstract In this paper, we review the existing empirical literature on price asymmetries in commodities, providing a way to classify and compare different studies that are highly heterogeneous in terms of econometric models, type of asymmetries and empirical findings. Relative to the previous literature, this paper is novel in several respects. First, it presents a detailed and updated survey of the existing empirical contributions on price asymmetries in the transmission mechanism linking input prices to output prices. Second, this paper presents an extension of the traditional distinction between long‐run and short‐run asymmetries to new categories of asymmetries, such as: contemporaneous impact, distributed lag effect, cumulated impact, reaction time, equilibrium and momentum equilibrium adjustment path, regime effect, regime equilibrium adjustment path. Each empirical study is then critically discussed in the light of this new classification of asymmetries. Third, this paper evaluates the relative merits of the most popular econometric models for price asymmetries, namely autoregressive distributed lags, partial adjustments, error correction models, regime switching and vector autoregressive models. Finally, we use the meta‐regression analysis to investigate whether the results of asymmetry tests are not model‐invariant and find which additional factors systematically influence the rejection of the null hypothesis of symmetric price adjustment. The main results of our survey can be summarized as follows: (i) each econometric model is specialized to capture a subset of asymmetries; (ii) each asymmetry is better investigated by a subset of econometric models; (iii) the general significance of the F test for asymmetric price transmission depends mainly on characteristics of the data, dynamic specification of the econometric model, and market characteristics. Overall, our empirical findings confirm that asymmetry, in all its forms, is very likely to occur in a wide range of markets and econometric models.     

The Auction Price of Apartments in Moscow: Hedonic Estimation in Disequilibrium1

The purpose of this paper is to see how economic factors determine prices in the previously communist countries undergoing privatization. This does not concern the auctions of big state enterprises where the prices are found to be rigged. In this paper we estimate hedonic price functions based on a unique data set on auction prices of apartments in Moscow. We collected the data ourselves by attending the auctions and gathered data on the characteristics. We estimated the hedonic equations using a disequilibrium approach because no equilibrium prices were observed for large number of apartments that were withdrawn from the auction. We found that, as the privatization of residential housing was carried out, the hedonic price equations fit the data remarkably well.     

Self-reinforcing effects between housing prices and credit

The financial crisis has brought the interaction between housing prices and household borrowing into the limelight of the economic policy debate. This paper examines the nexus of housing prices and credit in Norway within a structural vector equilibrium correction model (SVECM) over the period 1986q2–2008q4. The results establish a two way interaction in the long-run, so that higher housing prices lead to a credit expansion, which in turn puts an upward pressure on prices. Interest rates influence housing prices indirectly through the credit channel. Furthermore, households’ expectations about the future development of their own income as well as in the Norwegian economy have a significant impact on housing price growth. Dynamic simulations show how shocks are propagated and amplified. When we augment the model to include the supply side of the housing market, these effects are dampened.     

Hedonic prices, price indices and housing markets

This paper extends hedonic price analysis to the formation of housing price indices measuring variation within a metropolitan area. In forming these indices fifteen submarkets, heterogeneous across time and space, are described within a short-run equilibrium model. Linear functional forms are generally rejected using a method proposed by Box and Cox. Aggregation of hedonic price coefficients into standardized units yields significantly higher housing prices in the central city than in its suburbs, as well as differential effects of structural and neighborhood improvements among submarkets.     

CHINESE EXPERIENCE IN THE INTRODUCTION OF A MARKET MECHANISM INTO A PLANNED ECONOMY: THE ROLE OF PRICING

Abstract. A brief review is first presented of the changes in pricing institutions in China since 1949, with particular emphasis on the shift from an equilibrium price system to a distorted price system. The authors argue that distorted prices are harmful to economic growth even in a planned economy, since even an experienced economic planner can never escape from the full implications of a distorted price system. Examples are given showing the detrimental results of such a system. The central point of China's economic reform is the extension of decision-making power to enterprises and the introduction of a market mechanism so as to improve microeconomic efficiency. But such a goal cannot easily be achieved due to the false information provided by the distorted price system. So price adjustment becomes an issue of primary importance, and the authors discuss the difficulties for price adjustment posed by various interest groups.     

钢材期货价格发现功能研究——基于印度市场信息共享模型的分析

本文借助Johansen协整检验、Granger因果检验、信息共享模型、方差分解等方法进行多层次实证研究,定量地刻画出期货市场在价格发现中作用的大小。研究结果显示：印度板材期货价格和现货价格之间存在长期均衡关系,在价格引导上仅存在现货对期货价格的单向引导关系,期货对现货没有引导关系;通过方差分解发现,现货市场在价格发现功能中处于主导地位,说明印度钢材期货市场效率有待提高,板材期货没有实现其应有的价格发现功能。     

Equilibrium price and advertisement distributions

We consider an economy where many sellers sell identical goods to many buyers. Each seller has a unit supply and each buyer has a unit demand. The only possible information flow about prices is through costly advertising. We show that in equilibrium the sellers use mixed strategies in pricing which leads to price and advertisement distributions. With convex advertising costs each seller sends only one advertisement in the market. We also delineate a class of advertising costs which ensures that sellers may send multiple advertisements in equilibrium. Higher prices are advertised more than lower prices.     

Spatial competition under uniform delivered pricing

A Hotelling-type model of spatial competition is considered, in which two firms compete in uniform delivered prices. First, it is shown that there exists no uniform delivered price–location equilibrium when the product sold by the firms is perfectly homogeneous andwhen consumers buy from the firm quoting the lower delivered price. Second, when the product is heterogeneous and when preferences are identically, independently Weibull-distributed with standard deviation μ, we prove that there exists a single uniform delivered price–location equilibrium iff μ≧1/8 times the transportation rate times the size of the market. In equilibrium, firms are located at the center of the market and charge the same uniform delivered price, which equals their average transportation cost, plus a mark-up of 2μ. Finally, we discuss how our result extends to the case of n firms and proceed to a comparison of equilibria under uniform mill and delivered pricing.     

On the existence,uniqueness and stability of spatial equilibrium in an open city with externalities

This paper deals with the existence, uniqueness and stability of a spatial equilibrium in an open city with external diseconomies like air pollution generated by manufacturing activities. First, assuming that both production functions and utility functions are Cobb-Douglas, we prove the existence of a spatial equilibrium under some reasonable assumptions. It is shown, however, that the uniqueness and stability of the equilibrium may not be obtained, unless the degree of externality is sufficiently small. In fact, none of the equilibria will be stable for a certain set of speeds of adjustment in the labor market and the land market, if the degree of externality is relatively large. Finally, some implications of our results are derived in regard to the application of the hedonic price concept within the context of a spatial equilibrium model.     

A dymimic model of housing price determination

This paper presents and estimates a model of the resale housing market. The data are a cross-section of monthly time series obtained from the multiple-listing service for a suburb of San Diego. The model is specified and estimated as a dynamic multiple indicator multiple cause system of equations where the capitalization rate is taken to be an unobservable time series to be estimated jointly with the unknown parameters. These are estimated by maximum likelihood using an EM algorithm based upon Kalman filtering and smoothing.The specification of the model features hedonic equations for each house sale and a dynamic equation for the capitalization rate which is constrained to make the expectation of prices equal the present value of the net returns to home ownership whenever the economic variables stabilize at steady state values. Out of steady state, the capitalization rate slowly adapts to new information.The model attributes a large portion of housing price increases of the 1970's to a fall in the capitalization rate which in turn was driven by rental inflation, tax rates and mortgage rates. Post-sample simulations indicate an initial flattening of housing inflation rates and later a fall brought on by the increase in steady state capitalization rates. In-sample simulations show that although both Proposition 13 and the inflation induced rise in the marginal income tax rates provided partial explanations for the fall in capitalization rates, the single most important factor was the acceleration in price of housing services which interacted with the tax treatment of home ownership to produce an amazing 18% average annual rate of price increase over the last seven years of the 1970's.     

Measuring the Value of Product Characteristics in the Presence of Price Dispersion

Modeling the price of multi‐attribute products generally requires an assessment of each attributes' market value. In the presence of price dispersion, when similar products are sold at different prices, hedonic pricing models provide users with biased estimates of attribute value. This paper develops the hedonic pricing literature by proposing data envelopment analysis as a prior means of identifying a sub‐sample of products which, after adjusting for attribute provision, display no price dispersion. These products then display a homogenous link between attributes and price, which can be modeled using hedonic pricing. This paper implements and evaluates this two‐stage approach using 1000 observations from the UK mortgage market. Copyright © 2014 John Wiley & Sons, Ltd.     

Modeling regional electric power markets and market power

This paper develops a nonlinear, mathematical programming model for estimating production decisions in an open access, regional power market. Our approach allows one to estimate competitive power market equilibrium prices, which in turn offers empirical conclusions about marginal generation facilities, transmission interconnection congestion, and most importantly, load pockets and market power. Sensitivity analyses are conducted by subjecting the model to changes in production costs, peak hour demand, power imports, and transmission interconnection price assumptions. We then consider the issue of a firm's ability to exercise market power and the implications it may have on regional equilibrium power prices. The Louisiana power market is used as a case study for our work. Copyright © 2001 John Wiley & Sons, Ltd.     

The role of the list price in housing markets: Theory and an econometric model

Houses are routinely sold at prices below, but rarely sold at prices above, their list prices. List prices appear to be price ceilings that preclude the possibility of sales at higher prices. This paper presents a theory of sellers' behaviour that explains why there are list prices in housing markets and why list prices are distinct from sellers' reservation prices. The theory forms the basis of an econometric model that has been estimated using data from the Baltimore, MD, area. The estimated model predicts sale and reservation prices conditional on list prices. The predictions of sale prices are considerably more accurate than those obtained from a standard hedonic price regression. The estimated model also explains why sellers may not be willing to reduce their list prices even after their houses have remained unsold for long periods of time.