Price transmission and local market power: empirical evidence from the Austrian gasoline market

We analyse the impact of local market power on price margins and different dimensions of price adjustment dynamics (speed and asymmetry of price transmission) using data for a large number of individual gasoline stations in Austria. Specific attention is paid to threshold effects in price adjustment. Our results clearly suggest that the speed of price transmission between the Brent crude oil index and retail diesel prices is higher in a more competitive environment. While evidence on the relationship between local market power and asymmetries in the speed of price adjustment is mixed, our findings regarding asymmetries in price thresholds are clear: in regions where competition from neighbouring rivals is weak and/or consumers’ price elasticity of demand is low (stations located on the highway), positive thresholds significantly exceed negative ones, which corresponds to the ‘rockets and feathers phenomenon’. As expected, we observe that prices are lower in more competitive local markets.     

The determinants of retail petrol prices in Greece

The purpose of this article is to examine the relationship between retail prices of petrol, international oil prices and tax rates in Greece. We examine not only the hypothesis that retail prices act asymmetrically to crude oil price changes and the pass-through rates of tax increases, but also use the cross-sectional dimension of the data to explore whether the existence or otherwise of market power affects retail prices. Our results provide little evidence for asymmetric behaviour. However, the degree to which prices overreact to tax changes and the significance of market power across the different regions suggests that the market for petrol/diesel is not very competitive.     

The asymmetric impacts of monetary policy on housing prices: A viewpoint of housing price rigidity

Previous studies have discovered the defensive characteristics of housing prices, which is also known as downward price rigidity. This paper discusses whether this feature would result in an asymmetric relationship between housing prices and monetary policy. This paper first uses the loss aversion behavior of traders to assess the viability of housing price rigidity in the housing market and to deduce further that if downward housing price rigidity actually existed, then the impact of monetary policy on housing prices should be asymmetric. For empirical tests, this paper uses data from the UK housing market and then uses the money supply as the proxy variable of monetary policy. The relationships between these two variables are observed. This paper performs estimation using both traditional and threshold error correction models by comparing the coefficients of both models. The results indicate that housing price is indeed asymmetrically adjusted to money supply. When housing prices increase to reflect a loose monetary policy, a modification behavior is evident. Conversely, housing prices cannot easily reflect a tight monetary policy. This result indicates that housing prices tend to overreact in upturn and underreact in downturn. The results imply that when implementing relevant policies for the housing market, the government should consider the asymmetry of housing price changes. Otherwise, the situation can easily result in the creation of a bubble or the collapse of the housing market because of incorrect policies.     

OPEC and the monopoly price of world oil

The paper presents a dynamic model of the behavior of OPEC viewed as a monopolist sharing the oil market with a competitive sector. The main conclusion is that the recent increase in the price of oil was a once and for all phenomenon due to the formation of the cartel and that prices should remain approximately constant during the next twenty years.     

The effects of rent asymmetries in experimental auction markets

We report the results of twelve ‘double-auction’ market experiments designed to analyze the effects of asymmetric induced supply and demand configurations on the price convergence path toward a competitive equilibrium. The proposition (convergence bias) that prices tend to approach the competitive equilibrium from above (below) when consumer surplus is greater (less) than producer surplus cannot be rejected. We do, however, reject the proposition (convergence symmetry) that these convergence biases are of equal absolute magnitude. Excesses of producer over consumer surplus are found to have a more pronounced effect on the sequence of contract prices.     

Cooperative oligopolistic pricing

The main purpose of the present paper is to show that the equilibrium price in an oligopolistic market with cooperative pricing but noncooperative production as a rule approaches neither the monopoly price (when there are few firms) nor the competitive price (when there are many firms). Instead it is equal to that price which maximizes collective sales revenues if the industry's demand curve is inelastic, while it is “almost” competitive if demand is elastic.     

Rockets and feathers behaviour in the Spanish gasoline and diesel market: New evidence

In this paper we analyse the potential asymmetric response of retail prices for gasoline and diesel‐fuel to changes in oil prices for the Spanish economy and its relation with the so‐called ‘rockets and feathers’ behaviour. We show that the assumption made by previous studies, which use as the key explanatory variable the sign –positive or negative‐ of the change in international oil prices, is inadequate for the Spanish case and the magnitude of the change in international oil prices is also relevant. For small changes in international oil prices there is neither price asymmetry nor rockets and feathers behavior in the retail markets. However, price asymmetries in line with rockets and feathers behavior in retail gasoline and gasoil markets are present when these changes exceed a certain threshold. Following Martín‐Moreno et al. (2018) we first apply an Auto‐regressive Error Correction Model and endogenously estimate the threshold triggering the rockets and feathers behaviour. A time‐varying nature for the dynamic response of retail prices to oil price shocks is revealed when we estimate the TAR‐ECM model using rolling windows. Hence, in a second stage, we use a Markov‐switching estimation of the model to test the robustness of the results given its suitability to changing environments. This study could have relevant policy implications for the Spanish gasoline and gasoil retail markets due to the ongoing debate on the existence of a rockets and feathers behavior in gasoline and gasoil retail markets between the Spanish regulatory body and the oil companies.     

A DYNAMIC ENTRY AND PRICE GAME WITH CAPACITY INDIVISIBILITY

Strategic market interaction is here modelled as a two‐stage game in which potential entrants choose capacities and next active firms compete in prices. Due to capital indivisibility, the capacity choice is made from a finite grid and there are economies of scale. In the simplest version of the model with a single production technique, the equilibrium turns out to depend on the ratio between the level of total output at the long‐run competitive equilibrium and the firm's minimum efficient scale: if that ratio is sufficiently large (the market is sufficiently ‘large’), then the competitive price emerges at a subgame‐perfect equilibrium of the capacity and price game; if not, then the firms randomize in prices on the equilibrium path. The role of the market size for the competitive outcome is shown to be even more important if there are several available production techniques.     

Oil price shocks and stock market activities: Evidence from oil-importing and oil-exporting countries

While the relationship between oil prices and stock markets is of great interest to economists, previous studies do not differentiate oil-exporting countries from oil-importing countries when they investigate the effects of oil price shocks on stock market returns. In this paper, we address this limitation using a structural VAR analysis. Our main findings can be summarized as follows: First, the magnitude, duration, and even direction of response by stock market in a country to oil price shocks highly depend on whether the country is a net importer or exporter in the world oil market, and whether changes in oil price are driven by supply or aggregate demand. Second, the relative contribution of each type of oil price shocks depends on the level of importance of oil to national economy, as well as the net position in oil market and the driving forces of oil price changes. Third, the effects of aggregate demand uncertainty on stock markets in oil-exporting countries are much stronger and more persistent than in oil-importing countries. Finally, positive aggregate and precautionary demand shocks are shown to result in a higher degree of co-movement among the stock markets in oil-exporting countries, but not among those in oil-importing countries.     

Currency diversification and export competitiveness: A model of the ‘Dutch disease’ in Egypt

The paper presents a dynamic portfolio model under currency inconvertibility which rationalizes the recent Egyptian experience of real exchange rate appreciation and currency diversification following the increase in oil exports and the partial financial liberalization that took place after 1976. The two shocks are linked because the relative price of manufacturing exports in terms of oil is also the premium of the ‘gray’ market rate over the official exchange rate. The effects of various official exchange rate policies on the temporary equilibrium values of the premium and the real wage and on the steady-state values of asset stocks are examined. A review of the Egyptian experience in light of the model results suggests that the unification of 1979 was ineffective against this variant of the ‘Dutch disease’ but that the restoration in 1981 of a parallel rate closer to the ‘gray’ market rate applicable to competitive exports may be more effective.     

The Dixit–Stiglitz economy with a ‘small group’ of firms: A simple and robust equilibrium markup formula

In a general version of Dixit–Stiglitz two-sector economy, we present three variants of the concept of oligopolistic equilibrium in price-quantity pairs (d’Aspremont and Dos Santos Ferreira, 2016) integrating income feedback effects in three different ways. For the first two variants (Ford effects ignored or restricted to profits), a single and simple equilibrium markup formula is derived involving, for each firm, a conduct parameter indicating its degree of competitive toughness. Different specifications of these conduct parameters lead to different oligopolistic equilibria in prices and/or in quantities. In particular in the standard Dixit–Stiglitz economy, we show, that the first order conditions of a symmetric oligopolistic price equilibrium correspond to a unique degree of competitive toughness in the general markup formula, This degree is decreasing (and the markup increasing) as more feedback effects are taken into account by firms. On the contrary, for the third variant, introducing full Ford effects leads to lower markups and higher competitive toughness in the standard Dixit–Stiglitz economy and under conditions ensuring the equilibrium markup to remain in tne right interval,     

The price normalization problem in imperfect competition and the objective of the firm

Summary. General equilibrium models of oligopolistic competition give rise to relative prices only without determining the price level. It is well known that the choice of a numéraire or, more generally, of a normalization rule converting relative prices into absolute prices entails drastic consequences for the resulting set of Nash equilibria when firms are assumed to maximize profits. This is due to the fact that changing the price normalization amounts to altering the objective functions of the firms. Clearly, the objective of a firm must not be based on price normalization rules void of any economic content. In this paper we propose a definition of the objective of a firm, called maximization of shareholders' real wealth, which takes shareholders' demand explicitly into account. This objective depends on relative prices only. Real wealth maxima are shown to exist under certain conditions. Moreover, we consider an oligopolistic market and prove the existence of a Nash equilibrium in which each firm maximizes the real wealth of its shareholders. Received: July 10, 1997; revised version: July 27, 1998     

How Much Did Oil Market Developments Contribute to the 2009 Recession in Germany?

In this paper, we use a structural vector autoregressive model to study the effects of oil market developments on the German economy. We find that higher oil prices are always associated with a decline in private consumption expenditures, but the response of gross domestic product (GDP) crucially depends on the underlying shock. While a disruption in oil supply provokes a recession, positive world demand shocks prompt a temporary increase in exports and investment, which initially outweigh the cutback on consumption. In a counterfactual analysis, we show that the world demand shocks that led to the 2007/2008 oil price rise triggered a delayed 0.8 percent decrease in German GDP in 2009, and therefore notably contributed to the recession of that year.     

COMPETITION FOR MARKET SHARE OR FOR MARKET SIZE: OLIGOPOLISTIC EQUILIBRIA WITH VARYING COMPETITIVE TOUGHNESS*

For an industry producing a composite commodity, we propose a comprehensive concept of oligopolistic equilibrium, allowing for a parameterized continuum of regimes varying in competitive toughness. Each firm sets simultaneously its price and its quantity under two constraints, relative to its market share and to market size. The price and the quantity equilibrium outcomes always belong to the set of oligopolistic equilibria. When firms are identical and we let their number increase, any sequence of symmetric oligopolistic equilibria converges to the monopolistic competition outcome. Further results are derived in the symmetric CES case, concerning in particular the collusive solution enforceability.     

AN OLIGOPOLISTIC HECKSCHER–OHLIN MODEL OF FOREIGN DIRECT INVESTMENT*

We develop a 2 × 2 × 2 trade model in which one of the two sectors is perfectly competitive and the other is oligopolistic. The oligopoly sector consists of a given number of identical firms for each country, but they are free to locate in either country. The allocation of the firms between the two countries is endogenously determined, and changes in factor prices play a crucial role in establishing this equilibrium. Under this framework we examine the validity of factor price equalization, patterns of trade and gains from trade. Effects of technological progress and preference changes on firm locations are also analysed.     

U.S. industry-level returns and oil prices

This paper empirically investigates and provides further support for the oil price effect documented in Driesprong et al. (2008) in the U.S. industry-level returns. We find that oil price predictability is concentrated in a relatively small number of industry-level returns, the relevant measure for a study of the oil effect is percentage change in oil spot prices, and changes in oil futures prices have virtually no prediction power for industry-level returns. With percentage changes in oil spot prices as the predictor, approximately one fifth of industry returns are oil-predictable. We detect a two trading weeks delay in reaction to oil price changes which is consistent with the Hong and Stein (1996) underreaction hypothesis. These results are robust to various alternative specifications, and are shown to be unrelated to time-varying risk premia. Moreover, we demonstrate that trading strategies based on the oil effect generate superior gains in comparison with buy-and-hold strategy in the presence of reasonable trading costs.     

Price Expectations and International Quota Trading: An Experimental Evaluation

This paper reports a preliminary experimental test of international quota trading on a market characterized by several dominant traders. Uncertain quota demand and supply imply true market-clearing prices that in general differ from an expected competitive quota price. However, in the experiment the expected price level emerges as a focal point on which the bulk of quota trade contracts are keyed. Thus, incomplete price discovery occurs.     

Multi-Sector Model of Tradable Emission Permits

This paper presents a multi-sector model of tradable emission permits, which includes oligopolistic and perfectly competitive industries. The firms in oligopolistic industries are assumed to exercise market power in the tradable permit market as well as in the product market. Specifically, we examine the effects of the initial permit allocation on the equilibrium outcomes, focusing on the interaction among these product and permit markets. It is shown that raising the number of initial permits allocated to one firm in an oligopolistic industry increases the output produced by that firm. Under certain conditions, raising a “clean” (less-polluting) firm’s share of the initial permits can lead to reductions in both the product and permit prices. We discuss criteria for the socially optimal allocation of initial permits, considering the trade-off between production inefficiency and consumer benefit.     

Oil price risk in the Spanish stock market: An industry perspective

This study examines the sensitivity of the Spanish stock market at the industry level to movements in oil prices over the period 1993–2010, paying special attention to the presence of endogenously determined structural changes in the relationship between oil price changes and industry equity returns. The empirical results show that the degree of oil price exposure of Spanish industries is rather limited, although significant differences are found across industries. The oil price sensitivity is very weak in the 1990s, a period of fairly stable and low oil prices. Instead, the link between crude oil and stock prices seems to have increased during the 2000s, becoming primarily positive. This evidence highlights the key role played by aggregate demand-side oil price shocks associated with the global real economic activity in the link between oil price fluctuations and the Spanish stock market.     

Anticipated Fiscal Policy Changes and Goods Market Adjustments

Abstract. Government policies are frequently known to be temporary and thus their termination is perfectly anticipated. These foreseen policy changes must be consistent with equilibrium in both the goods market and asset markets. Potential problems arise because prices often play dual roles, both as final goods prices, and as asset prices, as components of rates of return. We show how the economy accommodates an anticipated policy change depends upon its production flexibility and its structure. With flexible investment, an anticipated reduction in government expenditure is fully accommodated by capital accumulation. When investment involves adjustment costs, the marginal utility of wealth and the price of capital both jump so as to maintain equality among rates of return. Goods market clearance is maintained by a combination of increases in consumption and investment. Extensions of the model to include inventories and to a small open economy are also considered and contrasted.