Controlling the Price Level

Abstract . Governments determine the size of the unit of value just as they determine the length and weight of physical units of measure. What are the different ways that a government can control the size of the unit of value, that is, control the price level? In general, the government designates a resource—gold, paper currency, another country's currency—and defines its unit of value as a particular amount of that resource. An interesting variant, proposed by Irving Fisher in 1913 and implemented more recently in Chile, is to alter the resource content of the unit to stabilize the price level. Another idea is to alter the interest rate paid on reserves in a way that stabilizes the price level. This essay originally appeared as “Controlling the Price Level,”Contributions to Macroeconomics 2(1), Article 5. See http://www.bepress.com/bejm/contributions/vol2/iss1/art5 . Reprinted with kind permission of the Berkeley Electronic Press.     

Price asymptotics

This paper examines the pricing decisions of a seller facing an unknown demand function. It is assumed that partial information, in the form of an independent random sample of values, is available. The optimal price for the inferred demand satisfies a consistency property—as the size of the sample increases, the maximum profit and price approach the values for the case where demand is known. The main results deduced here are asymptotics for prices. Prices converge at a rate of O _p (n ^−1/3) with a limit that can be expressed as a functional of a Gaussian process. Implications for the comparison of mechanisms are discussed.      

Lively Lands: The Spatial Reproduction Squeeze and the Failure of the Urban Imaginary

This article argues that the theoretical invisibility of non-privatized land tenures constitutes a failure of the urban imaginary, which restricts the ability to forge less commodified urban futures. The article explicates two attributes of non-privatized land—fungibility and combinatoriality—that produce an urban land nexus capable of fostering pro-poor agglomeration economies and generating socialities that exceed the model of the separative self that is hegemonic in more propertied settings. Fungibility, it shows, externalizes supportive economies of production and reproduction into surrounding neighborhoods by shifting the boundaries and terms of usufruct without cadastral oversight or regulation. Combinatoriality—a hybrid formulation of combined territories and combined territorialities—describes overlapping forms of access to land or demarcations of legitimate land use, either competitive or reciprocal. Together, these two attributes of non-privatized land systems produce a propinquity requirement for economic production, or a social density and liveliness more limited in privatized land markets. Through a diagnostic analogy with the simple reproduction squeeze characteristic of subsistence agrarian settings, it charts how an urban spatial reproduction squeeze—felt globally in dense, rising-rent environments across the global North and South—generates subsistence needs that mixed-tenure environments are uniquely capable of fulfilling and that can provide inspiration for radical housing struggles elsewhere.     

The Fable of Land Reform: Leases and Credit Markets in Occupied Japan

Development officials and scholars routinely argue that land reform can raise productivity. It may not always do so, they write, but it can—and during 1947–1950 in Japan it did. Land reform may sometimes raise productivity, but it did not raise it in Japan. The claim that it did is a fable, a tale people tell and re‐tell only because they wish it were true. A lease is a credit transaction—a way for local elites (tied to local information networks in ways that banks can never be) to extend funds to farmers. Elites could lend money directly, but would need to create a security interest to protect their loans. Doing so requires legal procedures, however, and most local elites in prewar Japan lacked the university education necessary to manipulate those procedures. By contrast, a lease lets local elites protect their funds simply by retaining the right to evict tenants who fail to pay. As such, it represents a way for investors and farmers jointly to economize on credit market costs. The Japanese land reform program effectively banned this transaction‐cost economizing credit‐market strategy, expropriated the wealth of the investors who used it—and cut the rate of growth in agricultural productivity.     

Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market

This article proposes a new explanation for why retail prices respond more quickly to cost increases than cost decreases. I develop a search model that assumes consumers’ expectations of prices are based on prices observed during previous purchases. This model predicts that consumers search less when prices are falling, which results in higher profit margins and a slower price response to cost changes. I then empirically examine patterns of retail gasoline price response and price dispersion to show that this model predicts observed price behavior better than previously suggested explanations.     

A Test of U. S. National Economic Policy in the Post-World War II Period

Abstract . This inquiry is an effort to evaluate the macroeconomic performance of the United States economy in the period after the close of World War II in terms of the macroeconomic goals to which national economic policy supposedly had been directed. That is, whether policy achieved full employment, price stability or an adequate rate of growth. Insofar as key indicators can be used as a basis for judgment—and there is, as yet, no scientific basis for measuring how far that reliance can be chanced—it would appear that policy was least successful in attaining full employment with price stability, or full employment, or price stability. In certain infrequent periods, growth seems to have occurred. But was its rate “adequate?” And did it result from policy? Analysis by key indicators may not tell us much, if anything; but it helps to delineate an approach toward policy-monitoring researchers need to cultivate.     

Chain-Store Pricing Across Local Markets

Chain‐stores now dominate most areas of retailing. While retailers may operate nationally or even internationally, the markets they compete in are largely local. How should they best operate pricing policy in respect of the different markets served—price uniformly across the local markets or on a local basis according to market conditions? We model this by allowing local market differences, with retail markets differing by their size and the number of players present. We show that practising price discrimination is not always best for a chain‐store. Competitive conditions exist under which uniform pricing can raise profits.     

Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals?

Real assets are usually valued by computing the stream of profits they can bring to a price‐taking firm in a liquid market. This method ignores market fundamentals by assuming that all the relevant information is included in the spot price. Our article analyses the bias resulting from such an approach when the market is imperfectly competitive. We propose a stylised two‐period model of the natural gas market with no uncertainty, focusing on strategic interactions between two types of oligopolistic players—pure traders and suppliers with downstream customers—who have access to storage. We show that the true value of storage capacity is not the same for traders and for suppliers. Comparing the latter value with the traditional price‐taking valuation reveals a systematic bias that tends to induce underinvestment.     

A Linear Programming Model of the Consumer Price Index Food Component

A bstract A linear programming model is used to measure the rate of inflation in the food component of the consumer price index A diet model to minimize the cost of a diet subject to constraints on nutritive requirements, variety, pal-atabihty, and menu-function is constructed and the rates of increase in a strict minimum cost model and an expanded constraint model are measured for the period 1980-87 Consistent with the consumer utility literature, it is found that the current Laspeyres index approach to measuring the cost of living in fact provides an upper limit on true cost of living increases Results also show that the cost of maintaining a minimum level of subsistence increases more rapidly than the cost of a more palatable diet Finally, the results show that in fact there is very little room for substitution among food items within a reasonable diet model     

Price Discrimination under Customer Recognition and Mergers

This paper studies the interaction between horizontal mergers and price discrimination by endogenizing the merger formation process in the context of a repeated purchase model with two periods and three firms wherein firms may engage in behavior‐based price discrimination (BBPD). From a merger policy perspective, this paper's main contribution is twofold. First, it shows that when firms are allowed to price discriminate, the (unique) equilibrium merger gives rise to significant increases in profits for the merging firms (the ones with information to price discriminate), but has no ex‐post effect on the outsider firm's profitability, thereby eliminating the so‐called (static) “free‐riding problem.” Second, this equilibrium merger is shown to increase industry profits at the expense of consumers' surplus, leaving total welfare unaffected. This then suggests that competition authorities should scrutinize with greater zeal mergers in industries where firms are expected to engage in BBPD.     

Is Stock Price Correlated with Oil Price? Spurious Regressions with Moderately Explosive Processes

This study explores the spurious effects in linear regressions with moderately explosive processes. Asymptotic results are developed for the least square estimator, the typical t‐statistic, the Durbin–Watson statistic, and the coefficient of determination. The typical t‐statistic is unable to detect the presence of a spurious relationship, due to the presence of nuisance parameters that characterize deviations from unity. Moreover, the t‐statistic for common explosive processes has different asymptotics compared to that for distinct explosive processes. Such differences further complicate the use of the t‐statistic. We demonstrate that two popular methods available in the literature are incapable for this purpose due to similar difficulties. To overcome these limitations, we propose a t‐test based upon balanced regressions that induces asymptotic inference based on the standard normal distribution, which is therefore robust to deviations from unity. These results are further generalized to spurious regressions with multivariate mildly explosive processes. Simulation results confirm that our test is effective in finite samples, while other alternatives are not. An empirical example that demonstrates the phenomenon of spurious correlation between the NASDAQ stock index and crude oil price in the US is provided to show the practical merit of our proposed method.     

Exclusivity and Control

We model competition between content distributors (platforms) for content providers, and show that whether or not content is exclusive or “multihomes” depends crucially on whether or not content providers maintain control over their own pricing to consumers: if content providers sell their content outright and relinquish control, they will tend to be exclusive; on the other hand, if content providers maintain control and only “affiliate” with platforms, then multihoming is sustainable in equilibrium. We show that the outcome under affiliation depends on the tradeoff between platform rent extraction (which increases in exclusivity) and content rent extraction (which increases in multihoming), and demonstrate that the propensity for exclusivity can be increasing, decreasing, or even nonmonotonic in content quality. Finally, if a content provider internalizes the effect of its own price on platform demand, we prove that a platform that already has exclusive access to content may prefer to relinquish control over content pricing to the content provider in order to reduce price competition at the platform level.     

Customization with Vertically Differentiated Products

We consider a duopoly market with heterogeneous consumers. The firms initially produce vertically differentiated standard products located at the end points of the variety interval. Customization provides ideal varieties for consumers but has no effect on quality. The firms first choose whether to customize their products, then engage in price competition. We show that the low‐quality firm never customizes alone; customization becomes more likely as the difference between the firms’ qualities increases; and less likely as the fixed cost of customization increases. We extend the base model by relaxing two important assumptions—uniform pricing and exogenous quality. The main conclusions with uniform pricing continue to hold when price customization is allowed. In the second extension the firms’ qualities are endogenously determined. We show that the firms choose to be either substantially differentiated in quality or nondifferentiated.     

The Passion of Self-interest: The Development of the Idea and Its Changing Status

Abstract . Contemporaries who evoke the passion of self-interest and cite Adam Smith as its most prominent defender have exhibited little appreciation for the speckled history of this passion. Moreover, they have demonstrated little awareness of how Smith did not view this passion as a virtue. Some of the major reasons are explained for the changes in our attitude toward self interest. A philosophical refutation of the thesis that self-interest is our only motive for acting as we do is offered and the record is set straight on how Smith viewed the State's role in imposing limits on, and giving direction to, self-interest as a testimony to man's failure at self-legislation. Today the contenders for power—the special interests—are pitted against the guardians of public order.     

An Examination into the Relevance of the Median Voter Model: Empirical Evidence Offers Support for the Model and Certain Uses

Abstract . This study analyzes some criticisms of the empirical use of the median voter model. In an attempt to evaluate these criticisms, a local school expenditure model is constructed which incorporates various income measures and various measures of tax price. Results indicate that median income outperforms other income measures. This empirical evidence offers support for the median voter model and its use in empirical work. The median tax price measure proved not to be of statistical significance. It should not be used without independent validation. Moreover, it does not outperform other tax price measures, in this test, at least. Further research is needed to explain this seeming anomaly.     

An Incomes Policy for the Professions: the Dutch Experience

Abstract . In 1951 the United States began moving toward an incomes policy, an attempt to end postwar wage and price inflation by linking changes in these prices to gains in productivity. Other countries later followed suit; some countries had already adopted wage and price control policies. The Netherlands moved toward an incomes policy immediately after World War II. Initially, the Dutch program involved wages only, but in the 1970s it became an accepted principle that private professional income should be comparable with the salaries of government officials and civil servants with comparable training and responsibilities. In the Netherlands (as in the United States and, before medicine was socialized, the United Kingdom) health professionals operate on a fee-for service basis and their incomes escalated as a result of both inflation and monopoly power. So they were subjected to the incomes policy. The policy's effectiveness in curbing income escalation cannot be determined with certainty—reliable data are lacking. However, the evidence indicates that the policy failed to achieve its original purpose.     

Price Discrimination in Input Markets: Downstream Entry and Efficiency

The extant theory on price discrimination in input markets takes the structure of the downstream industry as exogenously given. This paper endogenizes the structure of the downstream industry and examines the effects of permitting third‐degree price discrimination on market structure and welfare. We identify situations where permitting price discrimination leads to either higher or lower wholesale prices for all downstream firms. These findings are driven by upstream profits being discontinuous due to costly entry. Moreover, permitting price discrimination fosters entry which often improves welfare. Nevertheless, entry can also reduce welfare because it may lead to a severe inefficiency in production.     

Price support and spreads in the IPO aftermarket: An empirical microstructure study

Using the inventory components of spreads as a measure of inventory holding-risk, we test the hypothesis of Hanley et al. [Hanley, K. W., Kumar, A., & Seguin, P. J. (1993). Price stabilization in the market for new issues. Journal of Financial Economics, 34, 177–197] that price supports reduce market makers’ inventory holding-risk in the aftermarket of initial public offerings (IPOs). We find that both spreads and their inventory components are significantly smaller in the earlier periods of the IPO aftermarket than those in the later periods. More importantly, the inventory components of spreads are significantly smaller for stocks without over-allotment options (OAOs) exercised, and for stocks with lower or negative initial returns which are more likely to have price supports. The results are consistent with the price support hypothesis.     

The Price Effect on Spatial Structure: Revisiting the New Economic Geography Model

Abstract

This paper adds a factor of production, land, to the standard core-periphery model of the New Economic Geography to analyse the effect of land rent on the price index and spatial structure. The result indicates that when production of the manufacturing sector has high dependence on land, and high demand elasticity for differentiated goods, the price index of the core region is higher than that of the periphery, and that the price index could rise with a degree of agglomeration. Meanwhile, the market forces cannot generate a core-periphery structure, which indicates the significance of the price effect on spatial structure.     

The index of decent subsistence

The index of decent subsistence (IDS) is a price index that allows for purchasing substitutions when food prices change. The consumer's food basket is represented by a utility maximizing quadratic program that computes the cost of decent subsistence (CDS) and assures gastronomic equivalence among the food baskets optimized at various price levels. This IDS is the ratio of respective CDS measures. IDS estimates from USDA food group data are presented for the 1965–1975 and 1978–1989 time periods. These estimates are shown to be inconsistent with fixed weight price indexes computed for the same periods. Implications for the food stamp program and institution feeding systems are discussed.