Monopoly Price Dispersion Under Demand Uncertainty

When a monopolist sets its price before its demand is known, then it may set more than one price and limit the availability of its output at lower prices. This article adds demand uncertainty and price rigidities to the standard model of monopoly pricing. When there are two states of demand and the ex post monopoly price is greater when demand is high then the monopolist's optimal ex ante pricing strategy is to set two prices and limit purchases at the lower price.     

Valuation and Management of Fishing Resources Under Price Uncertainty

The traditional expected-net-present-value methods cannot properly capture the management flexibility and strategic value aspects of a fishery, and may understate its value. Instead, this paper develops a Real Options model to conceptualize and evaluate fishery exploitation flexibility. Specifically, general models to value the opportunity to either exploit or invest in a fishery are presented. They suffice to determine not only these values, but also the optimal policy for opening, closing, delaying and setting its harvest rate. The sustainable case in which the harvest rate equals the natural net growth function is also considered. Concerning the exploitation decision, it is found that, as could be expected, the higher the resource price the higher the value of this opportunity in both models (general and sustainable). However, the resource stock affects both models differently. As to the investment opportunity, its value is always lower than the exploitation opportunity because of investment costs. Finally, numerical simulations are run in order to illustrate the nature of the solution. Sensitivity analysis concerning the influence of the tax rate, convenience yield, risk-free interest rate and price volatility on the value of the fishery is also reported. Earlier versions of this paper have benefited from conference participants at the Young Economists Conference 2000 (Oxford University), Tenth Biennial Conference of the International Institute of Fisheries Economics and Trade (Oregon State University), XXV Simposio de Análisis Económico (Universidad Autónoma de Barcelona, Spain) and Seminar at the Dpt. Fundamentos del Análisis Económico (Universidad del País Vasco, Spain). We especially thank Prof. Ian Bateman and two anonymous referees whose insightful comments have enabled us to eliminate several errors and to improve the presentation. Murillas gratefully acknowledges doctoral fellowship from Ministerio de Educación y Ciencia (AP96), and financial support from the Xunta de Galicia (PGIDT01PXI30004PR) and from the Ministerio de Ciencia y Teconología (SEC 2001-3700). The usual disclaimer applies.     

On Sustained Growth Under Uncertainty

We analyze a stochastic one‐sector model of economic growth and investigate the conditions under which long‐run growth occurs almost surely. In contrast to the deterministic version of the model, the utility function plays a crucial role in determining the long‐run behavior of output.     

On Endogenous Growth Under Uncertainty

This paper incorporates uncertainty in two distinct models of endogenous growth. In both models the representative agent is uncertain about the productivity of knowledge creation, as represented by a probability measure over the relevant parameter. The main purpose of this paper is to analyze the effects of risk or volatility in productivity of knowledge creation on the decision variables and the expected long-run growth rate. Both the first and the second models may explain part of the observed negative link between volatility and growth.     

Returns on Investments in Energy-saving Technologies Under Energy Price Uncertainty in Dutch Greenhouse Horticulture

Conventional net presentvalue calculations evaluating the profitabilityof investments in energy-saving technologies inDutch horticultural outlays predict a muchhigher rate of adoption of these technologiesthan is actually observed. This paper tries toexplain this gap by applying a real optionsframework. Hurdle rates for investments in twotypes of energy-saving technology are estimatedusing simulated future revenue streams, givenuncertainty regarding energy prices and energytax policies. Hurdle rates found in this wayare on average about 1.76 times the hurdlerates that result from net present valuecalculations. Furthermore, this paper tests thepredictive value of the theory by estimating alogit model. This model relates the incidenceof having invested in an energy-savingtechnology to the difference between the returnon investment and the hurdle rate. Thepredictive power turns out to be encouraging,as the statistical tests indicate that higherhurdle rates tend to reduce rates of technologyadoption.     

Price Caps,Rate of Return Constraints and Universal Service Obligations

This paper evaluates the effects of modifying price cap regulation when firms are allowed to use non-linear tariffs. We consider a stylized network industry and analyze price cap regulation combined with rate of return regulation and with a universal service obligation. While both modifications can increase aggregate welfare by reducing the pricing distortions under price cap regulation, a universal service obligation is welfare superior if the firms profits and the size of its network are held constant.     

Price Caps and Output Floors: A Comparison of Simple Regulatory Rules

We study in this paper a simple alternative to price cap regulation. The mechanism, which we label 'output floor' regulation, requires the regulated firm to supply a given level of output. This rule is as simple as price cap regulation, and performs identically when the regulated firm is a natural monopoly; however, we show that, in the presence of a competitive fringe, output floor regulation yields lower prices and stronger incentives for cost reduction. Its introduction, however, is likely to be resisted by the industry, since it lowers managerial utility and shareholders' profits.     

Money and Prices Under Uncertainty

We study whether monetary economies display nominal indeterminacy: equivalently, whether monetary policy determines the path of prices under uncertainty. In a simple, stochastic, cash-in-advance economy, we find that indeterminacy arises and is characterized by the initial price level and a probability measure associated with state-contingent nominal bonds: equivalently, monetary policy determines an average, but not the distribution of inflation across realizations of uncertainty. The result does not derive from the stability of the deterministic steady state and is not affected essentially by price stickiness. Nominal indeterminacy may affect real allocations in cases we identify. Our characterization applies to stochastic monetary models in general, and it permits a unified treatment of the determinants of paths of inflation.     

Updating Beliefs Under Risk and Uncertainty

It is possible to represent decision makers’ beliefs on the algebra , rather than alone. Doing so allows us to represent decision makers’ perceptions of risk on one part of the algebra, and their perceptions of uncertainty on the other. This paper shows that such beliefs can be updated in a ‘Bayesian’ manner and that the resulting representation of beliefs is reasonable relative to some other approaches. The model of belief formation and decision making is then used to explain some instances of anomalous economic behaviour.     

Strategic Trade Policy Under Uncertainty*

This paper extends the Brander-Spencer (1985) model by considering market uncertainty, exploring nonlinear policy, and examining firms' choices of strategic variables. By investigating the interrelationship between trade policy and market conduct, we find that unlike the often-studied linear policy, a nonlinear policy can influence the domestic firm's choice of strategic variables and hence alter the market conduct in favor of the domestic country. Therefore, a nonlinear policy proves strictly superior to a linear one.     

Bargaining In International Trade Under Exchange-Rate Uncertainty

This paper examines the implications of various contracting alternatives between exporting and importing firms on the volume of international transactions. the contracts that we study are determined in a bargaining situation under exchange-rate uncertainty. First we look at contracts which entail an ex ante commitment on price and quantity of exports without the possibility of renegotiation ex post. Second, spot contracts, i.e., the price and the quantity of exports are negotiated after the exchange the rate is known. A third type of contracts consists of ex ante commitment and ex post renegotiation.     

Monetary Policy Under Commodity Price Fluctuations

This paper discusses monetary policy in a New Keynesian open economy subject to commodity price fluctuations. We review theoretical results that imply that stabilizing the producer price index (PPI) is optimal only under special circumstances. In a calibrated version of the model, PPI targeting is compared against a policy that stabilizes a forecast of the consumer price index. The results depend on model specifics, especially elasticities of substitution and the structure of international asset markets.     

Exchange Rate Uncertainty and the Law of One Price

This paper develops a framework for analyzing the impact of exchange rate uncertainty on the Law of One Price. Using the prices of very disaggregated, homogeneous products in a very open economy, Chile, where no institutions exist for hedging exchange risk, it then tests the model in a bivariate GARCH in mean context. Little evidence is found that short-run exchange rate uncertainty consititutes a barrier to goods arbitrage.     

Endogenous Choice of Trade Instrument Under Uncertainty *

This Paper endogenizes the choice between import tariffs and quotas of two policy active countries in a duopsonistic world market. Without uncertainty, import quotas are welfare superior to import tariffs in equilibrium. If two importers can precommit to a type of instrument before deciding the level of the instrument to use in a future period, an import quota equilibrium emerges. We introduce asymmetric risk in the import demand schedule of the two importers. There exists a range of parameters in which a mixed equilibrium emerges, i.e. one country uses a tariff while the other restricts trade with an import quota. The likelihood that both importers choose a different trade instrument in equilibrium is increasing with the correlation coefficient of the two random shocks. [F13]     

Intertemporal Emission Permits Trading Under Uncertainty and Irreversibility

This paper analyzes the effect of emission permit banking on clean technology investment and abatement under conditions where the stringency of the future cap is uncertain. We examine the problem of heterogeneous firms minimizing the cost of intertemporal emission control in the presence of stochastic future pollution standards and emission permits that are tradable across firms and through time. A firm can invest in clean capital (an improved pollution abatement technology) to reduce its abatement cost. We consider two possibilities: that investment is reversible or irreversible. Uncertainty is captured within a two period model: only the current period cap is known. We show that if banking is positive and marginal abatement costs are sufficiently convex, there will be more abatement and investment in clean technology under uncertainty than there would be under certainty and no banking. These results are at odds with the common belief that uncertainty on future environmental policy is a barrier to investment in clean capital. Moreover, under uncertainty and irreversibility, we find that there are cases where banking enables firms to invest more in clean capital.     

Inflation, Price Level and Hybrid Rules under Inflation Uncertainty

The performance and robustness of optimised interest rate rules are analysed in a New Keynesian model estimated for the euro area economy. In particular, we examine the properties of rules responding to inflation, the price level, or a combination of the two (a hybrid rule). All the rules also respond to the output gap. The optimal hybrid rule is only marginally superior when there is no model uncertainty. When there is uncertainty about the degree of inflation persistence, the inflation rule is the most robust rule and the performance of the other two rules deteriorates. However, all the rules perform well if the true degree of inflation persistence turns out to be less than policymakers’ estimate.     

Pro‐Consumer Price Ceilings under Regulatory Uncertainty*

We examine optimal price ceilings when the regulator is uncertain about demand and maximizes expected consumer surplus. With perfect competition, if regulatory uncertainty is large enough, then softer intervention is called for, with the price ceiling set at a relatively high level compared with a full information scenario. In an imperfectly competitive setting where symmetric firms compete in supply functions, with large enough uncertainty, the optimal ceiling increases with the degree of competition, so greater competitive pressure justifies less restrictive regulation. Under perfect competition, we also determine a cut‐off level of rationing efficiency below which a price ceiling should not be used.     

Strategic Choice of the Price Structure and Entry Deterrence Under Price Cap Regulation

This paper shows that a price‐capped firm under the threat of entry in some of the markets it serves can strategically manipulate its price structure to deter entry. In doing so, the regulated firm uses the price cap constraint as a commitment device to an aggressive pricing behaviour in case of entry. A (dynamic) price cap generally entails that the prices allowed today are a function of the previous‐period prices and that the tighter is the constraint on each price, the larger is the quantity sold of this good in the previous period. Hence, the regulated firm may strategically choose its price structure before entry to place a tighter regulatory control on the prices set in the (potentially) competitive markets and to make it optimal to charge in these markets – in case of entry – prices so low that entry is unprofitable.