A class of monotone economies in which rational expectations equilibria exist but prices do not reveal all information

Some economies having excess demands which depend monotonically on agents' information signals are examined. If there are no multiple market clearing prices, then these economies have strict rational expectations equilibria in which equilibrium prices alone do not transmit all information.     

Optimal Hedging Under Forward-Looking Behaviour*

The study focuses on the production and hedging behaviour of forward-looking risk-averse competitive firms. It is shown that there is separation between production and hedging. Optimal productin for a forward-looking firm is identical to that of an otherwise equivalent myopic firm. However, the optimal forward-looking hedge differs from the optimal myopic hedge. If forward prices are unbiased, full hedging is suboptimal when the firm is forward looking and output and material input prices are contemporaneously related. Furthermore, under certain conditions, the optimal forward-looking hedge under unbiased forward prices is strictly smaller than the full hedge.     

Determinants of the premium in forward contracts

Whilst the benefits of forward contracting for goods and services have been extensively researched in terms of mitigating market power effects in spot markets, we analyse how the risk in spot price formation induces a counteracting premium in the contract prices. We consider and test a wide-ranging set of propositions, involving fundamental, behavioural, dynamic, market conduct and shock components, on a long data set from the most liquid of European electricity forward markets, the EEX. We show that part of what is conventionally regarded as the market price of risk in electricity is actually that of its underlying fuel commodity, gas; that market power has a double effect on prices, insofar as it increases spot prices and induces a forward premium; that oil price sentiment spills over and that the premium reacts to scarcity and the higher moments of spot price uncertainty. We observe that considerations of the scale and determinants of the forward premium are at least as important as the market power effects in spot market price formation when evaluating the efficiency of wholesale power trading.     

Softening competition through forward trading

In the history of alleged manipulations on forward markets, it has been observed that high prices resulted from a cartel's long positions. The present paper addresses this issue in a simple model of price setting duopolists. We show that forward trading results in producers buying forward their own production, so that equilibrium prices are increased compared to the case without forward trading. This result contrasts with the social desirability of forward markets emphasized by the academic literature.     

Energy price transmissions during extreme movements

This paper investigates price transmissions across European energy forward markets at distinct maturities during both normal times and extreme fluctuation periods. To this end, we rely on the traditional Granger causality test (in mean) and its multivariate extension in tail distribution developed by Candelon, Joëts, and Tokpavi (2013). Considering forward energy prices at 1, 10, 20, and 30 months, it turns out that no significant causality exists between markets at regular times whereas comovements are at play during extreme periods especially in bear markets. More precisely, energy prices comovements appear to be stronger at short horizons than at long horizons, testifying an eventual Samuelson mechanism in the maturity prices curve. Diversification strategies tend to be more efficient as maturity increases.     

Non-Walrasian equilibria and the law of one price

We present a market game which features multiple posts for each commodity. We use this framework to illustrate the idea that in non-Walrasian markets, where individual activities influence market clearing prices, there are equilibria where commodities are exchanged simultaneously in two posts at different prices, thus defying the ‘law of one price’. Such equilibria are compatible with an apparent arbitrage possibility, which dissipates whenever individuals try to take advantage of it.     

The Emergence of the Law of Value in a Dynamic Simple Commodity Economy

Abstract

A dynamic computational model of a simple commodity economy is examined and a theory of the relationship between commodity values, market prices and the efficient division of social labour is developed. The main conclusions are: (i) the labour value of a commodity is an attractor for its market price; (ii) market prices are error signals that function to allocate the available social labour between sectors of production; and (iii) the tendency of prices to approach labour values is the monetary expression of the tendency of a simple commodity economy to allocate social labour efficiently. The model demonstrates that, in the special case of simple commodity production, Marx's law of value can naturally emerge from multiple local exchanges and operate ‘behind the backs’ of actors solely via money flows that place budget constraints on their local evaluations of commodity prices, which are otherwise subjective and unconstrained.     

Inflation and relative-price variability — A model for an open economy applied to Sweden

The relationship between inflation and relative-price variability is analyzed empirically in a multi-market, partial information equilibrium model, which incorporates raw materials on the supply side, open economy characteristics and allows different supply responses across markets. The hypothesis that the expected, as well as the unexpected, rate of inflation affects relative-price variability is put forward and tested. The empirical results are consistent with the view that inflation is non-neutral, in the sense that it affects relative prices, and it is also shown that raw material prices as well as foreign demand are important determinants of relative-price variability in the Swedish economy.     

An analysis of multiple structural breaks in US relative farm prices

The movement of farm prices relative to other commodity prices is analysed for the period 1913:01 to 2003:12, investigating the number and time of structural breaks and discussing likely causes of structural breaks in the relative farm prices. Bai and Perron's (1998, 2003) multiple structural change test with a dynamic programming algorithm is used. This test makes it possible to have an efficient computation of the estimates of the break points as global minimizers of the sum of squared residuals. We find six structural breaks when we consider only the mean process and two breaks when we consider the mean and autoregressive processes. Possible causes for these breaks are discussed.     

Freeware as a competitive deterrent

Using perfect foresight and adaptive models, this paper examines the effect of competitor asymmetry, consumer sensitivity to incentives and adaptive processes on freeware strategies and competitive outcomes. Four roles played by freeware in competitive markets are identified – it can be a mechanism to build or speed up the growth of a network without the need to lower prices on the commercial version, a deterrence mechanism, a hindrance to a rival’s network building efforts, and a coordination device in the presence of forward looking consumers. We determine the optimal prices of the commercial version, the decisions to introduce freeware and the freeware qualities for both competing firms.     

Ascending price Vickrey auctions

We show that an ascending price auction for multiple units of a homogeneous object proposed by Ausubel (i) raises prices for packages until they reach those nonlinear and non-anonymous market clearing prices at which bidders get their marginal products and (ii) the auction is a primal–dual algorithm applied to an appropriate linear programming formulation in which the dual solution yields those same market clearing prices. We emphasize the similarities with efficient incentive compatible ascending price auctions to implement Vickrey payments when there is a single object or when objects are heterogeneous but each buyer does not desire more than one unit. A potential benefit of these common threads is that it helps to establish the principles upon which Vickrey payments may be implemented through decentralized, incentive compatible procedures.     

The futures price of a commodity in fixed supply

This letter shows that in a general equilibrium model of homogeneous population with production risk, the futures price of a commodity which is in fixed supply is always below the expected futures spot price (e.g., normal backwardation). It also shows that the difference between the futures price and the expected spot price increases as the representative individual's risk aversion rises. An important application of this model is to the housing market since houses are in fixed supply in the short run and buying a house is like holding a long position in a forward contract. Therefore, if population is homogeneous, houses are not a good consumption hedge and the prices of houses are below their expected rental prices.     

Testing for weak-form efficiency of crude palm oil spot and future markets: new evidence from a GARCH unit root test with multiple structural breaks

There is a sizeable literature that tests for weak-form efficiency in commodity and energy spot and future prices. While many studies now allow for multiple structural breaks to address the criticism that conventional unit root tests have low power to reject the unit root null in the presence of structural change, the extant literature overlooks the fact that conventional unit root tests are biased in the presence of conditional heteroscedasticity. We apply a recently developed generalized autoregressive conditional heteroscedasticity (GARCH) unit root test with multiple structural breaks to crude palm oil spot and future prices and find much more evidence against weak-form efficiency than that found using tests that fail to allow for conditional heteroscedasticity. Our results point to the importance of allowing for heteroscedasticity when testing for efficiency in commodity and energy spot and future prices.     

Imaginary money against sticky relative prices

This paper considers price setting in pure units of account, linked to the means of payment through managed parities. If prices are sticky in the units in which they are set, parity changes may facilitate equilibrium adjustment of relative prices. The paper derives simultaneously the optimal choice of unit of account by each price setter, and the optimal parity policy. The gains from having multiple units of account are computed for a simple calibrated economy.     

Price Adjustment to Exchange Rates and Forward‐looking Exporters: Evidence from USA–China Trade

This paper shows that the pricing behavior of exporting firms exhibits a “forward‐looking” nature with sticky prices. As a result, the expectations of future exchange rates affect current prices at both the product level and firm level. We find evidence by employing both highly disaggregated Harmonized System (HS) 10‐digit product‐level import data of the USA and firm–product level customs data on China's exports to the USA. These findings provide evidence for a previously unexplored micro‐level forward‐looking nature of trade price adjustment as response to future exchange rates, and suggest a potentially important factor in helping explain incomplete exchange rate pass‐through.     

Formation of buyer-seller trade networks in a quality-differentiated product market

Abstract .  We examine the formation of buyer-seller links when exchange can take place only if such a link exists. Sellers produce products of different qualities, and multiple sellers can form a sellers' association to pool their customers setting uniform prices. Buyers form trade links with individual sellers or sellers' associations. We show which buyer-seller links will form and find the set of links that are stable and show how these links influence prices. We also show that a trade network mismatch may occur where a high-quality good remains unsold even without an economy-wide excess supply of goods.     

DIRECTED SEARCH,COORDINATION FAILURE,AND SELLER PROFITS: AN EXPERIMENTAL COMPARISON OF POSTED PRICING WITH SINGLE AND MULTIPLE PRICES

We experimentally examine posted pricing and directed search. In one treatment, capacity‐constrained sellers post fixed prices, which buyers observe before choosing whom to visit. In the other, firms post both “single‐buyer” (applied when one buyer visits) and “multibuyer” (when multiple buyers visit) prices. We find, based on a 2 × 2 (two buyers and two sellers) market and a follow‐up experiment with 3 and 2 × 3 markets, that multibuyer prices can be lower than single‐buyer prices or prices in the one‐price treatment. Also, allowing the multibuyer price does not affect seller profits and increases market frictions.     

Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices

We study adaptive learning in a monetary overlapping generations model with sticky prices and monopolistic competition for the case where learning agents observe current endogenous variables. Observability of current variables is essential for informational consistency of the learning setup with the model setup but generates multiple temporary equilibria when prices are flexible and prevents a straightforward construction of the learning dynamics. Sticky prices overcome this problem by avoiding simultaneity between prices and price expectations. Adaptive learning then robustly selects the determinate (monetary) steady state independent from the degree of imperfect competition. The indeterminate (non-monetary) steady state and non-stationary equilibria are never stable. Stability in a deterministic version of the model may differ because perfect foresight equilibria can be the limit of restricted perceptions equilibria of the stochastic economy with vanishing noise and thereby inherit different stability properties. This discontinuity at the zero variance of shocks suggests one should analyse learning in stochastic models.     

Strategic Consumption Complementarities: Can Price Flexibility Eliminate Inefficiencies and Instability?

Generally, two facts occur with strategic complementarities and fixed prices: (i) the equilibria are multiple and (ii) if the complementarities are strong, the law of demand is violated and the equilibrium is unstable. In this paper, we analyse the effect of price flexibility on these features as well as on market welfare properties. Assuming an exchange economy with H agents consuming two goods with one strategic complement, we show that flexibility of prices may remove both the multiplicity of the equilibria and the instability of behavior when the externalities are strong. Moreover, we find conditions to correct instability when it is caused by perverse wealth effects. When preferences are quasilinear and identical, if the externality is beneficial, any equilibrium is Pareto optimal despite the externality. But if the externality is detrimental, corrections are required.     

Climate change,fossil fuel prices and depletion: The rationale for a falling export tax

This paper examines how world prices affect depletion of exhaustible fossil fuels for export and the role of an export revenue tax in curbing depletion. Both effects are studied for a small open economy affected by climate change. We find that setting an export revenue tax rate to fall over time at the marginal social cost of depletion due to lower productivity from climate change encourages a resource exporter to leave an optimal stock in the ground – unextracted and unburnable. Growing prices during the past decade similarly curb depletion. Falling prices bring forward extraction. Because production is independent of consumption, the marginal social cost is independent of utility parameters which are difficult to estimate. Slowing fossil fuel extraction and the effective export of emissions is a contemporary challenge for climate policy. Our findings identify both why an export revenue tax should decline over time and an estimable target rate of decline to help meet this challenge amid changing world prices.