Sales by multi‐product retailers

This paper examines the rationale underlying periodic price promotions, or sales, for perishable food products by supermarket retailers. Whereas previous studies explain sales in a single‐product context as arising from informational, storage cost, or demand heterogeneity, this study focuses on the central role of retailers as multi‐product sellers of complementary goods. By offering a larger number of discounted products within a particular category, retailers are able to attract a sufficient number of customers to offset the effect of lower margins on sale items by selling more high‐margin items. The implications that emerge from the resulting mixed‐strategy equilibrium are tested in a product‐level, retail‐scanner data set of fresh fruit sales. Hypotheses regarding the rationale and effectiveness of sales are tested by estimating econometric models that describe (1) the number of sales items per store, (2) the depth of a given sale, and (3) promotion effectiveness on store‐level demand. The results of this econometric analysis support the hypothesis that the breadth and depth of price promotions are complementary marketing tools, thus explaining how EDLP and HI‐LO store formats can exist in the same monopolistically competitive market equilibrium. Copyright © 2006 John Wiley & Sons, Ltd.     

Identification and stochastic specification in Rosen's hedonic price model

The use of an explicitly specified utility function to derive the inverse demand functions in S. Rosen's hedonic price model provides considerable insight into the correct stochastic specification of the model. It turns out that except in special cases, the inverse demand equations are nonlinear in parameters and cannot be formulated conveniently as regression models. Moreover, the inverse demand functions and the hedonic price function must be estimated simultaneously to obtain consistent estimates of the parameters of these functions. A tractable estimation technique is described. It is desirable to derive the inverse demand functions from a utility specification that is not a strongly separable function of houses' attributes since strong separability implies the existence of deterministic relations among incomes, prices, and observed housing attributes that may fail to hold in applications. Finally, it is shown that the use of an explicitly specified utility function does not guarantee identification of the parameters of Rosen's model.     

The Determinants of Price Adjustments in Retail Supermarkets

This paper examines the determinants of price adjustment decisions by supermarkets to increase or decrease prices for 11 different food categories and evaluates the characteristics of these firms that influence these decisions. We use a unique dataset to analyze firm variables and industry variables and their impact on price adjustment in supermarket stores. The study contributes to the price adjustment literature by identifying determinants of price behavior by stores and product category. We find that the rationale for increasing prices differs from that for decreasing prices, retailers make different adjustment decisions based on product category, and market‐level controls have little impact. Copyright © 2015 John Wiley & Sons, Ltd.     

Price promotions as a threat to brands

Manufacturers frequently resist heavy discounting of their products by retailers. Since low prices should increase demand and manufacturers could simply refuse to fund deep price promotions, such resistance is puzzling at first sight. We develop a model in which price promotions cause shoppers to evaluate the relative importance of quality and price against a market-wide reference point. With deep discounting, consumers perceive quality differences as less pronounced, eroding brand value and the bargaining position of brand manufacturers. This reduces their profits and may even lead to a delisting of their products. By linking price promotions to increased one-stop shopping and more intense retail competition, our theory also offers an explanation for the rise of store brands.     

Estimating the Demand for Housing, Land, and Neighbourhood Characteristics

This paper provides estimates of the structure of demand for individual housing and neighbourhood characteristics and for land in two British cities. We estimate a hedonic price function, and from this obtain the implicit prices of house attributes. These prices are used to estimate a demand system for each city. These perform well, and enable us to calculate price and income elasticities for each of the non-dichotomous characteristics and for land. To counteract criticisms of demand estimates derived within the hedonic framework a method is developed for selecting an appropriate set of instrumental variables. Estimates derived from this method, however, differ only slightly from those obtained using the conventional techniques. Several features of these estimates provide insights into the unusual characteristics of the British housing market, the effects of constraints imposed by land use planning, and the effects of changing income distribution on the structure of demand.     

The effect of oil supply shocks on US economic activity: What have we learned?

Estimated responses of real oil prices and US gross domestic product (GDP) to oil supply disruptions vary widely. We show that most variation is attributable to differences in identification assumptions and in the model specification. Models that allow for a large short-run price elasticity of oil supply imply a larger response of oil prices and a larger, longer lived contraction in US real GDP. We find that, if we condition on a range of supply elasticity values supported by microeconomic estimates, the differences in the oil price responses diminishes. We also examine the role of lag length, of using pre-1973 data, alternative measures of real economic activity and using the median response function instead of the modal structural model.     

Price Stickiness in the US and Europe Revisited: Evidence from Internet Prices*

This paper compares price stickiness on the Internet and in traditional brick‐and‐mortar stores and examines differences across five countries: France, Germany, Italy, the UK and the US. Contrary to conventional retail prices, we find that Internet prices change less often in the US than in EU countries. However, this does not hold for all product categories. Second, prices on the Internet are not necessarily more flexible than prices in brick‐and‐mortar stores. Third, our dataset reveals substantial heterogeneity in the frequency of price changes across Internet shops. Finally, panel logit estimates suggest that the likelihood of observing a price change is a function of both state‐dependent and time‐dependent factors.     

Dynamic Competition with Experience Goods

This paper considers dynamic competition in the case in which consumers are only able to learn about their preferences for a certain product after experiencing it. After trying a product a consumer has more information about that product than about untried products. When competing in such a market firms with more sales in the past have an informational advantage because more consumers know their products. If products provide a better-than-expected fit with greater likelihood, taking advantage of that informational advantage may lead to an informational disadvantage in the future. This paper considers this competition with an infinite horizon model in a duopoly market with overlapping generations of consumers. Two effects are identified: On one hand marginal forward-looking consumers realize that by purchasing a product in the current period will be charged a higher expected price in the future. This effect results in reduced price sensitivity and higher equilibrium prices. On the other hand, forward-looking firms realize that they gain in the future from having a greater market share in the current period and compete more aggressively in prices. For similar discount factors for consumers and firms, the former effect is more important, and prices are higher the greater the informational advantages. The paper also characterizes oscillating market share dynamics, and comparative statics of the equilibrium with respect to consumer and firm patience, and the importance of the experience in the ex post valuation of the product.     

Random Advertising and Monopolistic Price Dispersion

We investigate the role of price advertising in a market where consumers are imperfectly informed about prices. We consider a monopolist whose demand depends on price and advertising expenditure. This demand function is derived from optimizing behavior of consumers. Uninformed consumers may pay a cost to visit the seller and obtain price information. Advertising enables the monopolist to increase the number of informed consumers. In equilibrium the uninformed consumers form rational price expectations, and the seller necessarily adopts a random pricing and advertising strategy.     

Signaling Quality in an Oligopoly When Some Consumers Are Informed

This paper considers a signaling game between two competing firms and consumers. The firms have common private information concerning their qualities, and some of the consumers are informed about the firms' qualities. Firms use prices and uninformative advertising as signals of quality. The model reveals that in the separating equilibrium, prices are first climbing and then declining with the proportion of informed consumers, while the expenditure on uninformative advertising is declining. Firms' profits are highest when the proportion of informed consumers is at an intermediate level. Pooling equilibria exist if the proportion of informed consumers is below a certain threshold.     

Multiproduct price competition with heterogeneous consumers and nonconvex costs

This paper extends the oligopolistic model of price competition to environments with multiple goods, heterogeneous consumers, and arbitrary continuous cost functions. A Nash equilibrium in mixed strategies with an endogenous sharing rule is proven to exist. It is also shown that, in environments with fixed costs and constant marginal costs, all (symmetric and asymmetric) equilibria exhibit price dispersion across stores. Furthermore, the paper identifies scenarios in which prices will necessarily be random. In these markets, stores keep each other guessing because, given the fixed costs, they would incur a loss if their price strategies were anticipated and beaten by competitors. This is interpreted as an important economic feature that is possibly behind random price promotions such as weekly specials.     

Departures from marginal-cost pricing in the American automobile industry: Estimates for 1977–1978

How are prices set in the American automobile oligopoly? This paper seeks empirical estimates of the extent of departure from marginal-cost pricing and of the effects of foreign competition. The model estimated has product differentiation, multiproduct firms, and heterogeneity in consumer tastes. The estimation presumes that product type (proxied by engineering specifications) is exogenous to the price/quantity market equilibrium. Cross-section results for the 1977 and 1978 model years yield price-cost margins around 10%. Import competition has the effect of lowering equilibrium margins for compact and subcompact models.     

A prediction comparison of housing sales prices by parametric versus semi-parametric regressions

This study estimates a hedonic price function using a semi-parametric regression and compares the price prediction performance with conventional parametric models. This study utilizes a large data set representing 2595 single-family residential home sales between July 2000 and June 2002 from Pitt County, North Carolina. Data from Geographic Information Systems (GIS) are incorporated to account for locational attributes of the houses. The results show that the semi-parametric regression outperforms the parametric counterparts in both in-sample and out-of-sample price predictions, indicating that the semi-parametric model can be useful for measurement and prediction of housing sales prices.     

Intermittent Price Changes in Production Plants: Empirical Evidence Using Monthly Data

The price‐setting behaviour of manufacturing plants is examined using a large panel of monthly surveyed plant‐ and product‐specific prices. The sample shows a high frequency of zero changes, relatively small price changes and a strong seasonal price‐change pattern. The intermittent feature of price changes is modelled with thresholds which are smaller in January, and a quadratic loss function associated with the distance from the target price. The findings show statistically significant pricing thresholds, which are only two‐thirds in January, and partial adjustment parameters implying that 60% of the deviation between the target price and the current price is closed each month.     

“When Should Manufacturers Want Fair Trade?”: New Insights from Asymmetric Information when Supply Chains Compete

We study a model of competing manufacturer/retailer pairs where adverse selection and moral hazard are coupled with promotional externalities at the downstream level. In contrast to earlier models mainly focusing on a bilateral monopoly setting, we show that with competing brands a ‘laissez‐faire’ approach towards vertical price control might not always promote productive efficiency. Giving manufacturers freedom to control retail prices is more likely to harm consumers when retailers impose positive promotional externalities on each other, and the converse is true otherwise. Our simple model also suggests that, with competing supply chains, consumers and manufacturers might prefer different contractual modes if promotional externalities have substantial effects on demands.     

Yield curve in an estimated nonlinear macro model

This paper estimates a sticky price macro model with US macro and term structure data using Bayesian methods. The model is solved by a nonlinear method. The posterior distribution of the parameters in the model is found to be bi-modal. The degree of nominal rigidity is high at one mode (“sticky price mode”) but is low at the other mode (“flexible price mode”). I find that the degree of nominal rigidity is important for identifying macro shocks that affect the yield curve. When prices are more flexible, a slowly varying inflation target of the central bank is the main driver of the overall level of the yield curve by changing long-run inflation expectations. In contrast, when prices are more sticky, a highly persistent markup shock is the main driver. The posterior probability of each mode is sensitive to the use of observed proxies for inflation expectations. Ignoring additional information from survey data on inflation expectations significantly reduces the posterior probability of the flexible price mode. Incorporating this additional information suggests that yield curve fluctuations can be better understood by focusing on the flexible price mode. Considering nonlinearities of the model solution also increases the posterior probability of the flexible price mode, although to a lesser degree than using survey data information.     

School Quality and Real House Prices: Inter- and Intrametropolitan Effects

This study focuses on explaining variations in real constant-quality house prices in jurisdictions located in multiple MSAs. Using a hedonic house price framework, we test competing theories of house price determination. Using two variants of the random coefficients model, we find that public school quality has a very large impact on real constant-quality house prices. Our results suggest that capitalization of school quality differences occurs on a per lot basis rather than per square foot of land. Also important to the explanation of variations in house prices are variables derived from urban theory, such as distance to the CBD, and from the amenity literature, such as a community's crime rate, arts, and recreational opportunities     

How far can reduced childcare prices push female labour supply?

Exploiting exogenous variation in childcare prices stemming from a childcare price reform, this paper estimates effects of reductions in childcare costs on female labour supply. The reform introduced a cap on childcare prices, and lead to considerable reductions in prices depending on family type and region of residence. Since the price is determined by a handful of observed characteristics, we are able to match households that are similar in all relevant aspects, but experienced quite different price changes. Our difference-in-differences regression matching estimates are very precise, and close to zero.     

A dymimic model of housing price determination

This paper presents and estimates a model of the resale housing market. The data are a cross-section of monthly time series obtained from the multiple-listing service for a suburb of San Diego. The model is specified and estimated as a dynamic multiple indicator multiple cause system of equations where the capitalization rate is taken to be an unobservable time series to be estimated jointly with the unknown parameters. These are estimated by maximum likelihood using an EM algorithm based upon Kalman filtering and smoothing.The specification of the model features hedonic equations for each house sale and a dynamic equation for the capitalization rate which is constrained to make the expectation of prices equal the present value of the net returns to home ownership whenever the economic variables stabilize at steady state values. Out of steady state, the capitalization rate slowly adapts to new information.The model attributes a large portion of housing price increases of the 1970's to a fall in the capitalization rate which in turn was driven by rental inflation, tax rates and mortgage rates. Post-sample simulations indicate an initial flattening of housing inflation rates and later a fall brought on by the increase in steady state capitalization rates. In-sample simulations show that although both Proposition 13 and the inflation induced rise in the marginal income tax rates provided partial explanations for the fall in capitalization rates, the single most important factor was the acceleration in price of housing services which interacted with the tax treatment of home ownership to produce an amazing 18% average annual rate of price increase over the last seven years of the 1970's.     

The Structure of Urban Land Prices

Recognition of the existence of nonlinear land prices has an impact on the measurement of the rate at which land price declines with distance from the urban center. It is hypothesized that concave parcel prices have given rise to overly large estimates of the rate of price decline with distance, because parcel sizes increase with distance and increased parcel sizes would be associated with lower unit prices as a result of the concavity of the land price function. This hypothesis is empirically tested using vacant residential, commercial, and industrial land sales from within Cook County, Illinois. An important finding is that allowing for concavity greatly reduces, although it does not eliminate, measured rates of price decline with distance.