Price signaling and the strategic benefits of price rigidities

We analyze trade between a perfectly informed price setting party (seller) and an imperfectly informed price taker (buyer). Differently from most of the literature, we focus on the case in which, under full information, it would be inefficient to trade goods of sufficiently poor quality. We show that the unique equilibrium surviving D1 is characterized by market breakdown, although trade would be mutually beneficial in some state of nature. This occurs independently of the precision of the information available to the buyer. The model thus implies that signaling through prices may exacerbate the effect of adverse selection rather than mitigate it. Under D1, the seller would always benefit from committing to prices that do not reveal her information. We develop this intuition by analyzing the strategic advantages of price rigidities. We show that price rigidities help restore trade and could even enhance effectiveness of prices as signals of quality.     

Simultaneous technologies and demand and supply conditions in international trade

If a country is not small enough to behave as a price taker in its export market, foreign demand conditions must be taken into account when estimating export supply functions. Also, when estimating demand or supply functions, it is desirable to use all prior theoretical knowledge and to estimate these functions jointly with the other demand and supply functions derived from the same technology. This calls for the simultaneous estimation of the technologies of all trading partners. For Canadian exports to the United States, we find that the simultaneous and joint estimation procedures bear heavily on the estimated price elasticities.     

Price taking behavior and trading in options

Equilibrium prices of options are arbitrage prices in economies in which prices are determined endogenously and all agents are price takers. This paper shows that the price taking assumption in options' markets is unreasonable because a small agent can make huge gains by not being a price taker.     

A Note on the Ultimatum Paradox, Bounded Rationality, and Uncertainty

The ultimatum game is a sequential-move bargaining game in which a giver offers a taker a share of a monetary pie. The predicted subgame perfect equilibrium in the ultimatum game is for purely rational givers who act in their own narrow self-interest to offer the smallest possible share of a monetary price, and for purely rational takers to accept. Experimental trials suggest, however, that givers make generous offers because they have a taste for fairness. The analysis presented in this paper argues that it is in the best interest of givers of any type to make offers that will not be rejected, and that offers become more generous as a giver’s uncertainty about the taker’s reservation offer increases.     

PATTERNS OF TRADE AND GROWTH UNDER INCREASING RETURNS: ESCAPE FROM THE POVERTY TRAP*

We consider a two-sector model of intertemporal resource allocation in which the investment good sector exhibits an initial phase of increasing returns in production. The economy maximizes a discounted sum of one period utilities derived from the consumption good. If it is autarkic, it may face a poverty trap from which it cannot escape even if it follows an optimal policy. If it engages in trade with the outside world as a price taker, it may escape from the trap. The optimal patterns of production and trade are analysed for such an economy.     

中国外贸产业层面的"贫困化增长"及其矫正

通过对"贫困化增长"模型及其相关实证的分析,我们可以发现,比巴格瓦蒂所描述的现象更严重的是,中国的出口贫困化增长隐患不仅存在于国家层面,而且更多地发生在产业层面。因此,我国必须加快外贸增长方式的转变,实现从"价格接受者"到"价格制定者"的角色转变,以合法正当的手段,绕开甚至最终填平"贫困化增长"陷阱。     

Information structure and equilibrium asset prices

In a continuous trading economy, it is shown that if information is revealed continuously and if agents' preferences are continuous in a certain topology, then equilibrium asset price processes must have continuous sample paths. Except for uninteresting cases, the sample paths of price processes will be of unbounded variation. In particular, if the information is generated by a Brownian motion,then equilibrium asset price processes are Ito integrals. When information is not revealed continuously, the times (which may be random) at which prices can have jumps are identified.     

International capital and nontraded goods in the long run

The present paper develops the comparative static properties of a small open economy which produces both traded goods and nontraded goods, and is a price taker in the international market for productive capital. Assumptions of full employment, competitive markets, and international mobility of productive cap ital input capture a long run horizon. Comparative static results associated with the wage, labor, and the price of the nontraded good are independent of factor intensity, factor substitution, and demand for the nontraded good. A tax on the traded good and a capital subsidy together raise national income and the real wage.     

On price taking behavior in a nonrenewable resource cartel–fringe game

We consider a nonrenewable resource game with one cartel and a set of fringe members. We show that (i) the outcomes of the closed-loop and the open-loop nonrenewable resource game with the fringe members as price takers (the cartel–fringe game à la Salant, 1976) coincide and (ii) when the number of fringe firms becomes arbitrarily large, the equilibrium outcome of the closed-loop Nash game does not coincide with the equilibrium outcome of the closed-loop cartel–fringe game. Thus, the outcome of the cartel–fringe open-loop equilibrium can be supported as an outcome of a subgame-perfect equilibrium. However the interpretation of the cartel–fringe model, where from the outset the fringe is assumed to be price taker, as a limit case of an asymmetric oligopoly with the agents playing Nash–Cournot, does not extend to the case where firms can use closed-loop strategies.     

PRICE‐LEVEL DETERMINATION UNDER DISPERSED INFORMATION AND MONETARY POLICY*

This paper considers the determination of aggregate price level under dispersed information. A Central Bank sets policy in response to its noisy measure of the price level, and each agent makes its decisions by observing a subset of data. Information revealed to the agents and the bank is determined endogenously. It is shown that the aggregate state of the economy is not revealed perfectly to anybody but this economy behaves as if it is a representative‐agent economy in which the representative agent has perfect information while the Bank has partial information. The Bank's information set affects fluctuations in the price level through its effect on policy.     

The European Union's potential for strategic emissions trading through permit sales contracts

Strategic market behavior by permit sellers will harm the European Union (EU) as it is expected to become a large net buyer of permits in a follow-up agreement to the Kyoto Protocol. In this paper, we explore how the EU could benefit from making permit trade agreements with non-EU countries. These trade agreements involve permit sales requirement, complemented by a financial transfer from the EU to the other contract party. Such agreements would enable the EU to act strategically in the permit market on behalf of its member states, although each member state is assumed to behave as a price taker in the permit market. Using a stylized numerical simulation model, we show that an appropriately designed permit trade agreement between the EU and China could significantly cut the EU's total compliance cost. This result is robust for a wide range of parameterizations of the simulation model.     

Market manipulation with sentiment traders

This article offers a new perspective for traders’ sentiment by bridging the relationship between feedback effect and market manipulation. Allowing access to information regarding manipulated orders confuses sentiment traders, leading to an overestimation of the true asset value which actually remains the same. We find that sentiment factor has a nonmonotonic impact on the responsiveness to order information and price informativeness. Furthermore, it is shown that informed traders behave like a contrarian, and can use order information to reassess the price, which results in the multiplicity of equilibria.     

Transfer price and equilibrium in multidivisional firms: an examination of divisional autonomy and central control

The problem faced by a firm that oversees two divisions, one of which produces and one of which uses an intermediate good, is considered. Since divisions have information that is not available to the centre, it is useful to allow the divisions some autonomy in their sales and procurement decisions. The analysis allows the centre to specify the transfer price that must be used in trades between divisions as well as placing restraints on their ability to trade with outside firms. In most of the models presented in this paper, the centre cannot observe the market price of the intermediate product, and in some models it cannot observe divisional costs. It is shown how the centre can obtain the full information solution in the simplest case by using a penalty factor that encourages internal trade. However, when divisional costs are not observable, the full information outcome is not obtainable. In this case, the optimal value of the penalty factor implies a tradeoff between the benefits of allowing divisions to act to take advantage of price opportunities in outside markets and savings in transactions costs of trades between divisions.     

ASYMMETRIC INFORMATION FLOWS IN CUSTOMER MARKETS

In customer markets an information asymmetry exists between a firm's current customers and prospective customers. When a firm changes its price, current customers are instantly aware of the price change, while potential customers are informed slowly of the change. The paper explicitly models this information imperfection and the associated asymmetry in firms' customer flows. The main result of the paper is that, because of the information asymmetry, there will be a range of marginal cost and demand over which the firm has no incentive to change price. It is also shown that prices will be more upwardly flexible than downwardly flexible. The size of the range, and the extent of downward price inflexibility, depends on the rate at which information is transmitted to customers.     

Selling licences for a process innovation: the impact of the product market on the selling mechanism

Abstract.  This article considers the sale by a research lab of licences for a cost-reducing innovation. The marginal cost of a firm that wins a licence is private information and the acquisition of a licence imposes a negative externality on the other firms. The lab's optimal revenue is determined from a class of mechanisms in which the lab selects the number of licences and the reserve price before the sale. The role of the downstream product market in the determination of the number of licences is analyzed. Furthermore, it is also shown that the optimal reserve price may be zero.     

Are Rational Expectations Equilibria with Private Information Eductively Stable?

The paper derives conditions for eductive stability of rational expectations equilibria in simple linear economic models with private information. Following Guesnerie (1992; 2002), the concept of eductive stability is used. It is shown that even in a private information setting, rational expectations equilibria might be justified as a result of mental process of reasoning of the agents. The paper considers an equilibrium concept, where the agents are unable to condition their forecasts on the actual market price. It is shown that eductive stability in this case requires that a condition is satisfied that is also relevant in the symmetric information case. This condition is compared to the respective stability condition that must hold if agents are able to use the current market price as an additional source of information. It turns out that the conditions for eductive stability that emerge under both equilibrium concepts differ.revised version received September 11, 2003     

Market News in Commodity Price Theory: Application to the Ethiopian Grain Market

This paper examines the effect of "news" or advance information about future production on competitive storage behaviour and prices using a structural model of commodity markets. In particular, it generalizes the neoclassical storage model to incorporate information on future harvests, while allowing for seasonal production, two features important to African and other developing country grain markets. The model is first developed to suit the case of the Ethiopian grain markets, and a general model is then stated. The effects on welfare and price variability of the addition of news are discussed, as well as changes in key demand and uncertainty parameters. The model is shown to replicate some features of the data better than the model without news, particularly the high autocorrelation in price, and performs better in formal estimation. However, it appears that the incorporation of news still fails to explain the extreme seasonal price movements observed.     

The impact of experience on risk taking, overconfidence, and herding of fund managers: Complementary survey evidence

Empirical research has shown that inexperienced fund managers yield significantly higher returns than their more experienced colleagues. If the portfolios of inexperienced are not more risky, this result would contradict the hypothesis of market efficiency. Therefore, it is an important question whether inexperienced fund managers tend to taker higher risks. Higher risk taking may be explained by a higher degree of overconfidence, less herding behavior, or a lower degree of risk aversion. Since the results concerning the relationship between experience and risk taking in previous studies are rather contradictory we provide complementary survey evidence of 117 German fund managers which can improve our understanding in this field. In line with the results of previous studies, we find that herding is decreasing with experience while the evidence concerning risk taking and overconfidence is mixed. Nevertheless, our results provide some support for the hypothesis that inexperienced managers do indeed take higher risks.     

Shadow prices,consistency and the value of life

This paper examines the consequences of inconsistent shadow pricing. The principal example of such inconsistency is the value of life/safety. Second-best shadow pricing policy is shown to depend upon how public sector budgets are allocated and the principle that public sector decision-makers should agree to a consistent shadow price is shown to require information unlikely to be available. A weaker consistency principle requiring minimal information is then developed.     

The impact of brand selection on price competition - a double-edged sword

Brand selection - the number of alternative brands of a particular product - is a double-edged sword in that on the one hand it increases rivalry and so stimulates price competition but on the other hand it causes consumers to be poorly informed and thus vulnerable to exploitation and so dampens price competition. This phenomenon is demonstrated analytically and empirically, with analytical work based on Hotelling's unit market line. Using price dispersion as a measure of the state of price competition, it is shown that a widening in price dispersion, that is, a lessening of price competition, arises from an increase in brand selection. Any increase in the number of alternative brands on offer (brand selection) causes an increase in ‘DIF-ness’ (Distortion in Information Function) which in turn causes an increase in price dispersion (a lessening of price competition). The phenomenon is demonstrated empirically through a small survey of household beverages.