INTERNATIONAL DEVIATIONS FROM THE LAW OF ONE PRICE: THE ROLE OF SEARCH FRICTIONS AND MARKET SHARE*

This article examines the size and persistence of international deviations from the law of one price in an industry with search frictions. Cost differences lead foreign and domestic firms to price differently within countries. When local firms are more common in each country, there are large and persistent price differences across countries. Large and persistent changes in international relative costs lead to large and persistent changes in international relative prices. Dynamic considerations imply that the amount of a cost shock firms pass through to prices is U‐shaped in the market share of firms receiving the shock.     

Import sensitive products and perverse tariff‐rate quota liberalization

Abstract This paper shows that a Tariff‐Rate‐Quota's (TRQ) minimum access expansion can perversely trigger domestic price increases. Often, TRQs have prohibitive over‐quota tariffs to mimic import quotas in providing minimum market access. In the WTO's Doha Round, it is likely that countries using TRQs will avoid aggressive tariff reductions if they increase the quota portion of TRQs. We show that when the import price lies between the unit cost of production and the price received by domestic upstream firms, an increase in import quota as a share of domestic production may cause an increase in the domestic retail price.     

Fuel Prices,Sales Taxes and Passenger Car Market Shares in New Zealand, 1963–1978*

This paper estimates a set of market share equations for new passenger cars in New Zealand over the period 1963 to 1978. These equations are then used to determine the effects on market shares of the fuel price increases and tax rate changes that occurred in the 1970s. The results indicate that the fuel price increases had a major impact on market shares, but that the tax changes probably did not.     

Product differentiation,prices, and market structure

We examine the effect of cost reductions and advertising on equilibrium prices and the equilibrium market shares. Our equilibrium has the following characteristics; the aggregate demand is the integral of individual demand over consumers, goods are differentiated in the sense of Novshek and Sonnenschein (1979), production functions are constant returns to scale.Cost reductions of a firm, which are due to R&D activity of the firm, lead to declines of equilibrium prices. Advertising of a firm, which is supposed to influence consumers' preferences in favor of the firm, cannot necessarily cause equilibrium prices to go up; one firm can raise its prices, but the other cannot. Contrary to our intuition, cost reductions cannot always enable a firm to capture a larger share.     

Determinants of price elasticities for private labels and national brands of cheese

An Almost Ideal Demand System model is developed and used to estimate price elasticities for US cheese sold at retail. Growing consumption of cheese coupled with fierce competition between private labels and national brands serves as motivating factors for this study. Per capita consumption of cheese grew by 75% during 1980–2004 and private labels captured a rising share of this growth. Private labels today account for 35% of market share; national brands, for the remaining 65%. Kraft accounts for 45% of national brands, but price increases for Kraft brands led to a sizeable price gap between its brands and private labels. This gap helped to stimulate growth of private labels. Marketing managers seek to capitalize on both growing cheese sales and price gaps for brands. Relevant information for marketing managers is consumer sensitivity to price changes. This study uses 69 weeks of scanner data, with consumers segmented by income levels to derive price elasticities for both lower-and higher-income consumers. Results show lower-income consumers to be more price sensitive. If large price gaps are maintained, the results suggest continued growth of private labels. Yet, meta-analyses for this study suggest that Kraft could lower the price gap and regain market share.     

PRICE SETTING PRACTICES IN GREECE: EVIDENCE FROM A SMALL‐SCALE FIRM‐LEVEL SURVEY

The paper documents the price setting practices followed by some 400 or so firms operating in Greece. Survey replies reveal a low percentage of firms changing prices with frequency higher than annual and staggering of price changes during the year. As to firms’ reactions to unexpected shocks, prices appear to adjust sluggishly to cost shocks with asymmetries in price adjustment across positive and negative shocks. Adjustments to increases in costs appear speedier than those to reductions in demand. The data confirm a result found for other countries: the existence of cross‐sectional variations in price setting strategies and in the extent to which prices are adjusted in reaction to unexpected shocks. The results suggest a positive association between, on the one hand, product market competition and, on the other hand, state‐dependent pricing, frequent price changes and the likelihood of a price adjustment following an adverse demand shock.     

The impact of electricity prices on foreign direct investment: evidence from the European Union

We examine the impact of electricity price variation on net FDI (%GDP) inflows in countries of the European Union. We use panel data of 27 EU countries for a period of 2003 – 2013. We show that electricity prices of south-western and north-eastern EU countries did not converge to one price until now. Dynamic panel data analysis using system GMM shows that besides unit labour costs, tax rates and competitive disadvantage in secondary education, also higher electricity prices reduce countries’ ability to attract FDI. The immediate effects are statistically significant across both sub-regions analysed: in the short run, a 10% increase in electricity prices leads to a decrease in net FDI inflows as a share of GDP by 0.4 percentage points for the south-western and 0.33 for the north-eastern region. In the long run, the response is 0.60 percentage points for south-western and 0.48 for north-eastern regions. Policies should aim at reducing electricity market price differences on the European level through investment in transborder transmission capacity; reductions in FDI, when environmental policy increases after-tax electricity prices, should be countered by other tax reductions as well as harmonization of property rights, absence of corruption and labour market regulations at best-practice level.     

Oligopoly and the redistribution of market share under commodity taxation

This paper examines the effect of ad valorem and specific commodity taxation on firm market share in a duopoly where firms have different costs. Two reasons suggested for these cost asymmetries are inter-firm differences in efficiency and differences in product quality. When cost differences are efficiency-based, then specific and ad valorem commodity taxation increases the market share of the lower-cost firm and decreases the market share of the higher-cost firm. If the cost difference results from differing product quality, the specific tax increases the market share of the high quality (higher-cost) firm and decreases the market share of the low quality (lower-cost) firm, whereas, the ad valorem tax has just the opposite effect.     

Responses of international stock markets to oil price surges: a regime-switching perspective

We propose an enhanced regime-switching model to investigate the relationships between oil price surges and stock market cycles in five oil-dependent countries. Our model accounts for the joint effects of the West Texas Intermediate (WTI) and Brent oil markets and simultaneously captures asymmetry, volatility persistence and regime shifts contained in the underlying financial data. We find that stock market returns strongly exhibit a regime-switching behaviour, but they react differently to the increases in the price of oil. More precisely, the conditional volatility of studied stock markets during the bear market phases is found to be less affected by oil price surges than during the bull market phases. Whether the effects of oil shocks are positive or negative depends greatly on the degree of reliance on imported oil, the share of the cost of oil in the national income and the degree of improvement in energy efficiency of a given country. Finally, the relatively opposite effects of the WTI and Brent oil markets suggest the potential of substitution between them as well as the necessity of a diversification strategy of oil supply sources.     

Entry, Prices, and Investment in Regulated Industries

The paper studies how the optimal regulatory policy is affected by the possibility of unregulated firms entering the market. In such cases, the regulator may prefer to limit price and cost reductions in the regulated incumbent. The extent to which this happens is shown to depend on the extent of the regulator's commitment: if it commits to a chosen policy, then the market outcome following entry is less competitive than it would be without commitment: price and production costs are both higher. We also show that, unlike the natural monopoly case, incentives for cost reducing investment are stronger when the regulatory policy has a short regulatory interval.     

Forecasting future demand for large-screen television sets using conjoint analysis with diffusion model

The methodological framework proposed in this paper addresses two limitations of the basic Bass diffusion model: that it does not reflect competition among products nor does it forecast demand for products that do not exist in the marketplace. The model consists of four steps. First, to investigate consumer preferences for product attributes, we use conjoint analysis to estimate the utility function of consumers. Next we estimate the dynamic price function of each competing product to reflect technological changes and the evolving market environment. Then we derive dynamic utility function by combining the static utility function and the price function. Finally, we forecast the sales of each product using estimated market share and sales data for each period, which are derived from the dynamic utility function and from the Bass diffusion model, respectively.We apply this model to South Korea's market for large-screen televisions. The results show that (1) consumers are sensitive to picture resolution and cost and (2) in the near future, should the market see the introduction of liquid crystal display (LCD) TVs with screens larger than 50 inches, the high resolution and steep price drop of LCD will lead LCD TVs to capture a larger market share than TVs with other display types. Finally, our results show that TVs with 40-inch screens are preferred over TVs with larger screens.     

Code Sharing and Merger: Continental,Delta and Northwest

When Delta joined the code share between Continental and Northwest in 2003, these three legacy carriers formed the only three-way U.S. domestic code sharing partnership. In 2008, Delta and Northwest announced their intention to merge. The merger was granted by the Department of Justice six months later. This paper analyzes the effects of the three-way code share and the effects of the merger between these two previous code sharing partners. I find both competitive effects and anti-competitive effects of code sharing, i.e., mean market price decrease in non-hub markets and price increase in hub-to-hub markets. Meanwhile, passenger volume increases significantly. Moreover, rivals’ responses are to move price in the same direction as code sharing partners. I find an increase in Herfindahl-Hirschman Index (HHI) and a reduction in traffic after the merger. Specifically, HHI increases for over 1,000 points in markets where merging airlines were either duopolistic or with a third carrier. Pre-merger code sharing markets experience an increase in HHI due to the disappearance of the code sharing contract. Low cost carrier entry mitigates merger effects.     

Payout and asymmetric information

This article investigates the effects of payout policy on the level of asymmetric information in the market for common equity shares. The results suggest that higher dividend levels are associated with lower price impact, both as a percentage of economic value and as a percentage of the spread. And greater share repurchase ratios are associated with lower price impacts as a percentage of the spread. Overall, the results suggest that managers may have more than the choice of market settings as a means to improve the quality of the market for their stock and the efficiency of price.     

Implications of CO<Subscript>2</Subscript> emissions trading for short-run electricity market outcomes in northwest Europe

We examine the short-run implications of CO₂ trading for power production, prices, emissions, and generator profits in northwest Europe in 2005. Simulation results from a transmission-constrained oligopoly model are compared with theoretical analyses to quantify price increases and windfall profits earned by generators. The analyses indicate that the rates at which CO₂ costs are passed through to wholesale prices are affected by market competitiveness, merit order changes, and elasticities of demand and supply. Emissions trading results in large windfall profits, much but not all of which is due to free allocation of allowances. Profits also increase for some generators because their generation mix has low emissions, and so they benefit from electricity price increases. Most emission reductions appear to be due to demand response not generation redispatch.      

Using Engel curves to estimate bias in the Canadian CPI as a cost of living index

Abstract.  Semiparametric Engel curves are used to infer bias in the Canadian CPI as a Cost of Living Index. The budget share of food has long been used as an indicator of welfare. We compare households with the same levels of CPI deflated total expenditure over the period 1978–2000. Differences in the expenditure share of food are attributed to the CPI failing to capture changes in costs of living. We employ a novel econometric approach using a single index penalized linear spline model. Over the period, we find that the CPI overstated changes in the cost of living between 1.33 and 1.86% for the four household types considered. JEL classification: D1, C1     

Accounting and the formation of share market prices over time: a mathematical institutional economic analysis through simulation and experiment

This article develops a heterogeneous agents-based model to examine the emergent dynamic properties of share market price formation over time, with a view on financial market stability under alternative accounting regimes. In the model, individual heterogeneous investors interact with each other and with institutional devices which are an accounting system (related to the business firm) and a price system (related to the Share Exchange). These interactions provide mechanisms for transmission through which firm-specific (accounting signal) and market-driven (aggregate price) factors can act. A baseline simulation analysis assesses the financial market stability under three alternative accounting designs, namely two kinds of historical cost accounting regime and one kind of fair-value (mark-to-market) accounting regime. The former prove to better stabilize the financial system in terms of market volatility and exuberance in perfectly balanced conditions between speculative and fundamentalist beliefs and intentions. An evolutionary analysis is then developed by varying the relative degree of speculative attitudes between the two sides of the market. Historical cost accounting regimes further prove to make the financial system more resilient to speculative waves occurring at inter-individual level. Baseline findings are further corroborated through experimental analysis in twelve artificial financial systems. This mathematical institutional economic analysis has general implications for both designing accounting systems aimed at enhancing financial market stability and preventing procyclicality, and the study of accounting information process in the formation of share market prices over time.     

Exchange rates,market structure and price-cost margins: evidence from a developing country

This paper analyses the sensitivity of firm performance to exchange rate fluctuations. In a two-country world, consisting of a developing domestic country and a developed foreign country, we show that this sensitivity is closely related with market structure and the share of imported inputs in total cost. When the share of imported inputs is low, depreciation leads to an increase in price cost margin. This increase intensifies in more competitive industries. When the imported input share is high, the price cost margin may decrease as a result of depreciation, and this effect becomes pronounced in more competitive industries. The empirical test where we used 3-digit Turkish Manufacturing industry data support most of the findings of our model.     

The automobile industry and new trade theory: A classroom experiment

In this study, the author describes a classroom experiment on new trade theory appropriate for undergraduate international economics and trade courses. Students portray U.S. and Japanese automobile manufacturers with different average cost schedules. There are five rounds in the experiment, starting with autarky in the 1960s and ending with the Great Recession of 2008–9. In each round, the instructor announces a market price and quantity and then each producer calculates its market share, average cost and profit; and makes its shutdown decision. By varying the market price and size, the experiment illustrates the gains from intra-industry trade and also how efficiency gains and economic recession impact individual firm performance.     

Pricing to Firm: an Analysis of Firm‐ and Product‐level Import Prices*

We use Hungarian Customs data on product‐level imports of manufacturing firms to document that the import price of a particular product varies substantially across buying firms. We relate the level of import prices to firm characteristics such as size, foreign ownership, and market power. We develop a theory of “pricing to firm” (PTF), where markups depend on the technology and competitive environment of the buyer. The predictions of the model are confirmed by the data: import prices are higher for firms with greater market power, and for more essential intermediate inputs (with a high share in material costs). We take account of the endogeneity of the buyer’s market power with respect to higher import prices and unobserved cost heterogeneity within product categories. The magnitude of PTF is big: the standard deviation of price predicted by PTF is 21.5%.     

MARKET POWER,PRICE ADJUSTMENT,AND INFLATION*

We study a monetary search economy in which endogenous fluctuations in market power driven by changes in consumers' search intensity determine the extent of price adjustment to movements in productivity and the money growth rate. A calibrated version of the economy exhibits countercyclical fluctuations in markups and is consistent with the observed incomplete response of nominal prices to cost movements associated with productivity fluctuations and to changes in the money growth rate. Furthermore, a higher average rate of inflation results in a lower average markup and increases the sensitivity of prices to fluctuations in either productivity or money growth.