Price Dynamics in Repeat-Purchase Markets*

A retail market in which customers repeat purchase is modelled. When customer movement between firms is sluggish, price overshooting characterizes firms' optimal response to demand or cost shocks. Thus retail prices would be predicted to be more variable than wholesale prices, a prediction at variance with empirical evidence. Uncertainty in demand and customer imperfect information are introduced into the model to attempt to reconcile this inconsistency between theory and evidence. The introduction of demand uncertainty actually increases the magnitude of price overshooting. By contrast, the introduction of imperfect customer information reduces the variability in retail prices.     

A Labour Monopolies Commission to Reduce Unemployment

Mr Tebbitt's proposals to reduce union obstructiveness have not taken account of their power as monopoly suppliers of labour. A pressing priority for the current session of Parliament should be the introduction of legislation to eradicate legal privilege which does not reflect market reality.     

Savings, Personal Wealth and Risk

In this Briefing Paper we examine the underlying determinants of personal savings behaviour to substantiate our view that the recent fall in savings rates does not imply that it must in future bounce back to some more normal level. On the contrary there are good reasons for believing that savings are more likely to go on falling than to rise.
We argue that consumer behaviour should be related explicitly to personal wealth as well as to disposable income. Personal wealth has risen substantially since 1982: the fall in inflation and long-term interest rates has pushed up gilts' prices; the recovery of profits has sparked off a stock market boom; and the value of the housing stock, which is by far the most important asset held by the personal sector, has started to rise again in real terms. This rise in asset values means that, despite a rise in consumption financed by borrowing, the personal sector balance sheet still in a healthy state, particularly when account is taken of the personal savings now held indirectly via pension funds. These have risen rapidly recently, reducing the need for other long-term savings.
The rise in total wealth has increased savers' tolerance of a fall in net liquid assets (bank and building society deposits etc less borrowing). The willingness to hold a smaller (precautionary) stock of net liquid assets may also reflect a perceived reduction in risk. Financial markets have been much more stable over the period since 1975 than over the preceding eight years, and may now be signalling that the period of adjustment to the shocks and disturbances of the 1970s is drawing to an end. The fall in savings is a worldwide phenomenon. As in the UK it is linked to the fall in inflation and may also be connected with the recovery of the world's major stock markets.     

Too Big to Be Efficient? The Impact of Implicit Subsidies on Estimates of Scale Economies for Banks

We examine whether “too‐big‐to‐fail” (TBTF) factors affect estimates of scale economies for large banks. From a standard model of bank production that does not control for any TBTF factors, we find evidence of scale economies for our sample of large banks. We then control for TBTF factors by using a measure of the “implicit subsidy” that emerges from a reduction in TBTF banks’ funding costs due to investor expectations of government support. We do this in two ways: first, we estimate scale economies from an augmented model of bank production that employs a proxy for the counterfactual price of debt that banks would face in the absence of any TBTF funding cost advantage; second, we estimate scale economies from a model of bank production that is estimated only for a sample of banks considered unlikely to be TBTF. After controlling for TBTF factors using either method, we no longer find evidence of scale economies for our sample of large banks. These results suggest that estimated scale economies for large banks are affected by TBTF factors.