Labor market search, sticky prices, and interest rate policies

What accounts for the significant real effects of monetary policy shocks? And what accounts for the persistent and hump shaped responses of output and inflation in response to such shocks? These questions are investigated in a model that incorporates labor market search, habit persistence, sticky prices, and policy inertia. While habit persistence and price stickiness are important for the hump shaped output response and the long, drawn out inflation response, respectively, labor market frictions increase the output response and reduce the inflation response relative to an otherwise similar model based on a Walrasian labor market. Significantly, policy inertia itself is found to be the most important factor in accounting for the magnitude of the output effects of policy shocks in the model.     

Ethnic divisions,contract choice,and search costs in the Guatemalan land rental market

This paper shows how ethnic diversity in a context of weak property rights enforcement can result in market segmentation. The paper analyzes how contract enforcement problems affect the joint decision of partner and contract choice by landlords in the land rental market in Guatemala. The empirical method allows partner choice to be determined not only by the characteristics and relative scarcity of the specific landowner and tenant, but also by the characteristics of other potential tenants. The results show that landowners without formal title are more likely to restrict their partners to tenants from the same ethnic group. Partner choice is found to be less important for renting with interlinked land–labor contracts.     

Auction prices, market share, and a common agent

The primary pro-competitive justification for multiple principals to hire a common bidding agent is efficiency. The efficiency gained by doing so increases the advantage of the common bidding agent. Almost common value auction theory predicts that an advantaged bidder is able to reduce competition by credibly enhancing the ‘winner's curse’ of disadvantaged rivals. The credible threat results in disadvantaged rivals exiting the bidding process early, leaving the advantaged bidder to purchase most, if not all, units at lower prices than when rivals have common values. The results of our empirical study of a common bidding agent are consistent with this theory.     

Exchange market pressure,stock prices,and commodity prices in West Africa

As Africa continues its decade of rapid economic growth, the continent also faces the risk of becoming more susceptible to financial ‘contagion.’ Capital flows and trade linkages might cause one country’s currency market to influence those of its neighbors. Likewise, shocks to global commodity or asset markets might induce a crisis in one or more countries in the region. This study generates monthly measures of exchange market pressure (EMP) for four individual West African countries, as well as for the WAEMU franc zone, from 2002 to 2012. Vector Autoregressive (VAR) methods are then used to test for linkages among them, as well as to analyze the effects of various external price shocks. A number of spillovers are uncovered. More importantly, local connections dominate global ones in the case of stock- and commodity-price declines. Ghana, for example, is shown to be a ‘commodity currency’ when West African commodity prices are included in the VAR, but not when a global index is used.     

Asymmetric search and prospect theory: choice experiment on consumer willingness to search in the gasoline retail market

We use an internet survey conducted among a representative random sample of drivers in the State of Ohio consisting of a choice experiment designed to examine the mechanism driving asymmetric search. The internet survey affords us the opportunity to overcome endogeneity difficulties by imposing exogenous price changes on gasoline consumers to examine the decision-making process behind intended search decisions. We randomly assigned participants to one of five price treatments (either 2.5 or 5% above or below their reported expected price, or no change). We provide a simple empirical model to derive testable implications under prospect theory and use the internet survey to test them. Results indicate that among the respondents who faced prices below their expected price, only 12% chose to search, whereas 45% searched when prices were above. Further, we find results consistent with asymmetric search being driven by prospect theory. The change in consumers’ willingness to search is twice as large when prices exceed expectations by 2.5% relative to when prices exceed them by 5% suggesting that consumers derive utility of finding a good deal evaluated relative to a reference price. We show that this result is inconsistent with standard utility theory or consumers using alternative reference prices.     

Stand-alone costs,Ramsey prices,and postal rates

This paper discusses two external benchmarks for assessing the results of the 1990 postal rate proceeding. First, we generate stand-alone cost estimates for third-class bulk advertising mail, based on market data from private mail carriers. Second, we derive Ramsey optimal prices for all classes of mail. Private delivery costs for bulk advertising are significantly below the third-class bulk regular rates adopted by the U.S. Postal Rate Commission, indicating that the new third-class rates are well above stand-alone costs for an efficient enterprise. Moreover, the Ramsey price analysis suggests that the rate structure adopted reflects, at least implicitly, considerations other than economic efficiency.     

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.     

Switching costs, consumer heterogeneity and price discrimination

In a duopoly with price discrimination and switching costs, we analyse the evolution of market structure, when an incumbent and a new entrant compete, and a new class of users with lower willingness to pay appears in the market. We find that the market share of the new entrant depends on the degree of heterogeneity and the level of switching costs. In particular, if the degree of heterogeneity is intermediate, the evolution of market structure is similar for high and null switching costs. Since consumer surplus and social welfare are unambiguously lower under high switching costs, this result points at the risk of inferring the degree of market competitiveness from the convergence in market shares.     

Niche products, generic products, and consumer search

We endogenize product design in a model of sequential search with random firm-consumer match value à la Wolinsky (Quart J Econ 96:493–511, 1986) and Anderson and Renault (RAND J Econ 30:719–735, 1999). We focus on a product design choice by which a firm can control the dispersion of consumer valuations for its product; we interpret low-dispersion products as “generic” and high-dispersion products as “nichy.” Equilibrium product design depends on a feedback loop: when reservation utility is high (low), the marginal customer’s match improves (worsens) with more nichy products, encouraging high (low) differentiation by firms. In turn, when firms offer more nichy products, this induces more intense search; depending on search costs, this could raise or lower consumers’ reservation utility. Remarkably, when the match distribution satisfies a hazard rate condition, firm and consumer interests align: equilibrium product design always adjusts to the level that maximizes utility. When this condition is not met, either multiple equilibria (one nichy, the other generic) or one asymmetric equilibrium (generic and nichy firms coexist) can arise; we argue that the former is more likely for common specifications of consumer preferences.     

Return policies, market outcomes, and consumer welfare

Abstract.  The effect of return policies on market outcomes is studied in a model where consumers differ in their valuations of time. Product reliability is identified with defect rates. Producers first choose reliability levels and then compete in prices. For given defect rates, allowing returns makes products closer substitutes, enhancing competition and reducing prices. Being closer substitutes makes higher reliability less worthwhile, which reduces reliability. While the decrease in reliability reduces consumer welfare, the decrease in prices raises it. The latter dominates, so that aggregate consumer welfare increases with return policy.     

On Choquet prices in a GEI-model with intermediation costs

This article analyses whether the representation of asset prices by Choquet integration can be justified from a general equilibrium point of view. We demonstrate that if transaction costs functionals are increasing in the volume of trade, positive homogeneous and satisfy an additivity condition, the equilibrium price functional typically does not satisfy all the Choquet properties. Whereas subadditivity and positive homogeneity can be shown to hold for the equilibrium price functional, this is generally not the case for monotonicity and additivity of prices for comonotone income streams.     

Internal rationality, imperfect market knowledge and asset prices

We present a decision theoretic framework in which agents are learning about market behavior and that provides microfoundations for models of adaptive learning. Agents are ‘internally rational’, i.e., maximize discounted expected utility under uncertainty given dynamically consistent subjective beliefs about the future, but agents may not be ‘externally rational’, i.e., may not know the true stochastic process for payoff relevant variables beyond their control. This includes future market outcomes and fundamentals. We apply this approach to a simple asset pricing model and show that the equilibrium stock price is then determined by investors? expectations of the price and dividend in the next period, rather than by expectations of the discounted sum of dividends. As a result, learning about price behavior affects market outcomes, while learning about the discounted sum of dividends is irrelevant for equilibrium prices. Stock prices equal the discounted sum of dividends only after making very strong assumptions about agents? market knowledge.     

Relative price and inflation variability in a simple consumer search model

There is a large empirical literature on the effect of aggregate inflation on both price-level dispersion (relative price variability, RPV) and inflation rate dispersion (relative inflation variability, RIV) across goods or locations. Early empirical work of RIV has an explicit theoretical foundation in signal-extraction models. However, recent empirical work on RPV has produced results inconsistent with signal-extraction models. In particular, while RIV is increasing in the absolute value of inflation shocks, RPV is a negative monotonic function of inflation shocks. We show that consumer search theory offers a potential explanation for these apparently contradictory observations.     

House prices,land prices,the housing market and house purchase debt in the UK and other countries

This paper brings together information about house prices, land prices, housing market transactions, house purchase debt and personal savings for a number of countries and compares them with those in the UK to see to what extent conditions in the UK are unique and how far something similar is to be observed in the countries of Europe and North America     

Advertising and search engines. A model of leadership in search advertising

We analyze the role of leadership in a multi-sided market as search advertising, assuming quantity competition and different entry conditions (with barriers to entry or endogenous entry). The model can be microfounded taking into account network effects, multi-homing on the advertising side and scale in search. If there are barriers to entry and the network effects are strong, there is an incentive for the leader to exploit them and attract more consumers to monopolize advertising. Under barriers to entry, the leading platform has also a strategic incentive to exploit scale in search, to manipulate search results to divert search traffic from other platforms, and to introduce limits to multi-homing, with the aim of expanding its market share and deny scale to competitors.     

Efficiency in a search and matching model with training costs

This paper studies the efficiency of the search and matching model with training costs. I incorporate productivity enhancing firm-specific skill training into the search and matching model of Pissarides (2000). I demonstrate that while the decentralized economy can be efficient if training costs are not sunk at the time of wage determination, the decentralized economy is not efficient due to a hold-up problem if training costs are sunk.     

Lumpy consumer durables, market power, and endogenous business cycles

Abstract.  In this paper we show that lumpy consumer durables and market power can generate endogenous cycles consistent with the facts. Past sales determine the current market size of durable goods. Larger past sales, ceteris paribus, thus naturally result in a smaller current market size and income. In this manner, the seeds of a downturn are sown in an upturn. JEL Classification: E32, E13     

Entrepreneurship,search costs,and ecological rationality in an agent-based economy

Since Coase’s paper on the firm, transaction costs have occupied much attention as a field of economic inquiry. Yet, with few exceptions, neoclassical theory has failed to integrate transaction costs into its core. The dominant mode of theorizing depends upon Brouwer fixed points which cannot integrate transaction costs in more than a superficial manner. Agent-based modeling presents an opportunity for researchers to investigate the nature of transaction costs and integrate them into the core of economic theory. To the extent that transaction costs reduce economic efficiency, they provide opportunities for entrepreneurs to earn a profit by reducing these costs. We employ an extension of Epstein and Axtell’s (1996) Sugarscape to demonstrate this point one type of transaction costs: search costs. When agents do not face the cost of finding a trading partner, the system quickly reaches a steady state with tightly constrained prices regardless of agent production strategies. When search costs are present, entrepreneurs may use competing strategies for production and exchange that allow them to earn higher revenues than they would earn otherwise. These cost reducing innovations tend to promote concatenate coordination (Klein 2012). The agent’s production strategies represent technology in the form of mental models (Denzau and North 1994) that shape agent action with regard to the agent’s environment. The success of these are dependent on their ability to overcome search costs. The average profit, market rate of return, earned by each of these mental structures tends to equalize as a result of competition.     

Optimal search behaviour in a model with increasing costs

A search model incorporating increasing search costs and limited duration of price offers is investigated. It is shown that optimal behaviour is characterized by increasing reserve prices.     

Deregulation, competition and consumer welfare in a banking market: evidence from Hong Kong

This paper examines competition among commercial banks following deregulation in a small open economy. I jointly estimate a system of differentiated product demand and pricing equations, and use conduct parameters to identify market structure. Overall, I find positive outcomes for the banking deregulation, which suggest that the benefits of deregulation understood in large industrialized economies indeed apply to a small open economy. Encouragingly, the industry becomes more competitive and the consumers are better-off after the deregulation. Empirical results also indicate that the banking sector is characterized by non-cooperative competitive behavior. Bank size is an important determinant of consumer’s bank choice.