Three essays on prices and selection

Competitive Market Segmentation Abstract In a two-firm model where each firm sells a high-quality and a low-quality version of a product, customers differ with respect to their brand preferences and their attitudes towards quality. We show that the standard result of quality-independent markups crucially depends on the assumption that the customers' valuation of quality is identical across firms. Once we relax this assumption, competition across qualities leads to second-degree price discrimination. We find that markups on low-quality products are higher if consuming a low-quality product involves a firm-specific disutility. Likewise, markups on high-quality products are higher if consuming a high-quality product creates a firm-specific surplus. Selection upon Wage Posting Abstract We discuss a model of a job market where firms announce salaries. Thereupon, they decide through the evaluation of a productivity test whether to hire applicants. Candidates for a job are locked in once they have applied at a given employer. Hence, such a market exhibits a specific form of the bargain-then-ripoff principle. With a single firm, the outcome is efficient. Under competition, what might be called "positive selection" leads to market failure. Thus our model provides a rationale for very small employment probabilities in some sectors. Exclusivity Clauses: Enhancing Competition, Raising Prices Abstract In a setting where retailers and suppliers compete for each other by offering binding contracts, exclusivity clauses serve as a competitive device. As a result of these clauses, firms addressed by contracts only accept the most favorable deal. Thus the contract-issuing parties have to squeeze their final customers and transfer the surplus within the vertical supply chain. We elaborate to what extent the resulting allocation depends on the sequence of play and discuss the implications of a ban on exclusivity clauses.

Minimum carbon payment along an aridity gradient for dryland afforestation in non annex I countries with stochastic weather and prices

Recent findings demonstrate that trees in deserts are efficient carbon sinks. It remains however unknown whether the Clean Development Mechanism will accelerate the planting of trees in Non Annex I dryland countries. We estimated the price of carbon at which a farmer would be indifferent between his customary activity and the planting of trees to trade carbon credits, along an aridity gradient. Carbon yields were simulated by means of the CO2FIX v3.1 model for Pinus halepensis with its respective yield classes along the gradient (Arid – 100mm to Dry Sub Humid conditions – 900mm). Wheat and pasture yields were predicted on somewhat similar nitrogen-based quadratic models, using 30 years of weather data to simulate moisture stress. Stochastic production, input and output prices were afterwards simulated on a Monte Carlo matrix. Results show that, despite the high levels of carbon uptake, carbon trading by afforesting is unprofitable anywhere along the gradient. Indeed, the price of carbon would have to raise unrealistically high, and the certification costs would have to drop significantly, to make the Clean Development Mechanism worthwhile for non annex I dryland countries farmers. From a government agency's point of view the Clean Development Mechanism is attractive. However, such agencies will find it difficult to demonstrate “additionality”, even if the rule may be somewhat flexible. Based on these findings, we will further discuss why the Clean Development Mechanism, a supposedly pro-poor instrument, fails to assist farmers in Non Annex I dryland countries living at minimum subsistence level.

Endogenous Financing and the Long Run Impact of Money Growth on Output and Prices

Most monetary models make use of the quantity theory of money along with a Phillips curve. This implies a strong correlation between money growth and output in the short run (with little or no correlation between money and prices) and a strong long run correlation between money growth and inflation and inflation (with little or no correlation between money growth and output). The empirical evidence between money and inflation is very robust, but the long run money/output relationship is ambiguous at best. This paper attempts to explain this by looking at the impact of money growth on firm financing.

The Time-Series Properties on Housing Prices: A Case Study of the Southern California Market

We examine the time-series relationship between housing prices in eight Southern California metropolitan statistical areas (MSAs). First, we perform cointegration tests of the housing price indexes for the MSAs, finding seven cointegrating vectors. Thus, the evidence suggests that one common trend links the housing prices in these eight MSAs, a purchasing power parity finding for the housing prices in Southern California. Second, we perform temporal Granger causality tests revealing intertwined temporal relationships. The Santa Anna MSA leads the pack in temporally causing housing prices in six of the other seven MSAs, excluding only the San Luis Obispo MSA. The Oxnard MSA experienced the largest number of temporal effects from other MSAs, six of the seven, excluding only Los Angeles. The Santa Barbara MSA proved the most isolated in that it temporally caused housing prices in only two other MSAs (Los Angels and Oxnard) and housing prices in the Santa Anna MSA temporally caused prices in Santa Barbara. Third, we calculate out-of-sample forecasts in each MSA, using various vector autoregressive (VAR) and vector error-correction (VEC) models, as well as Bayesian, spatial, and causality versions of these models with various priors. Different specifications provide superior forecasts in the different MSAs. Finally, we consider the ability of theses time-series models to provide accurate out-of-sample predictions of turning points in housing prices that occurred in 2006:Q4. Recursive forecasts, where the sample is updated each quarter, provide reasonably good forecasts of turning points.

"Ripple Effects" and Forecasting Home Prices in Los Angeles, Las Vegas, and Phoenix

We examine the time-series relationship between housing prices in Los Angeles, Las Vegas, and Phoenix. First, temporal Granger causality tests reveal that Los Angeles housing prices cause housing prices in Las Vegas (directly) and Phoenix (indirectly). In addition, Las Vegas housing prices cause housing prices in Phoenix. Los Angeles housing prices prove exogenous in a temporal sense and Phoenix housing prices do not cause prices in the other two markets. Second, we calculate out-of-sample forecasts in each market, using various vector autoregessive (VAR) and vector error-correction (VEC) models, as well as Bayesian, spatial, and causality versions of these models with various priors. Different specifications provide superior forecasts in the different cities. Finally, we consider the ability of theses time-series models to provide accurate out-of-sample predictions of turning points in housing prices that occurred in 2006:Q4. Recursive forecasts, where the sample is updated each quarter, provide reasonably good forecasts of turning points.

The Impact of Property Condition Disclosure Laws on Housing Prices: Evidence from an Event Study using Propensity Scores

We examine the impact of seller's Property Condition Disclosure Law on the residential real estate values. A disclosure law may address the information asymmetry in housing transactions shifting of risk from buyers and brokers to the sellers and raising housing prices as a result. We combine propensity score techniques from the treatment effects literature with a traditional event study approach. We assemble a unique set of economic and institutional attributes for a quarterly panel of 291 US Metropolitan Statistical Areas (MSAs) and 50 US States spanning 21 years from 1984 to 2004 is used to exploit the MSA level variation in house prices. The study finds that the average seller may be able to fetch a higher price (about three to four percent) for the house if she furnishes a state-mandated seller.s property condition disclosure statement to the buyer. When we compare the results from parametric and semi-parametric event analyses, we find that the semi-parametric or the propensity score analysis generals moderately larger estimated effects of the law on housing prices.

Can a Newly Proposed Mechanism for Allocating Contracts in U.S. Electricity Wholesale Markets Lead to Lower Prices? A Game Theoretic Analysis

This study of the wholesale electricity market compares the cost-minimizing performance of the auction mechanism currently in place in U.S. markets with the performance of a proposed replacement. The current mechanism chooses an allocation of contracts that minimizes a fictional cost calculated using pay-as-offer pricing. Then suppliers are paid the market clearing price. The proposed mechanism uses the market clearing price in the allocation phase as well as in the payment phase. In concentrated markets, the proposed mechanism outperforms the current mechanism even when strategic behavior by suppliers is taken into account. The advantage of the proposed mechanism increases with increased price competition.

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The rise and fall in the price of food, fuel and manufactured goods : interdependency between prices and technology determining comparative advantages and development paths

Green innovation, which enables us to extract energy from food crops, caused a food shortage in 2008. Countries suffering severe damage started to reconsider their agricultural policy with the aim of becoming more autonomous. The food price hike of the time looks like a reversal of the celebrated Singer-Prebisch thesis proposed in the 1950s. This paper examines the consequences of this trend on the comparative advantages and development strategies of developing countries. For that purpose, first, trends and short-run fluctuations in the prices of fuel and bio-energy crops are investigated. It is shown that the price series of fuels and the crops are synchronized only after the fuel extracting technology came into effect. Second, the reversal of the Singer-Prebisch thesis is underpinned by the generic form of an endogenous growth model developed by Rebelo (1991). It is shown that as an economy grows, appreciation of the non-reproducible, such as mineral resources and raw labor, over the reproducible, such as capital goods, is the norm rather than an anomaly. Third, the consequences of the food price hike and underlying capital accumulation on the development strategies of labor-abundant and low-income countries are explored. It is concluded that the impact of the food price hikes on the alteration of a development strategy is only incremental, without reinforcement from raw-labor-saving innovation. A case study of inventions by JUKI Corporation, a world-leader in the sewing machine market exemplifies the fact that, of all the major inventions the company have made, raw-labor-saving inventions have not dominated, although JUKI's machines are sold to one of the most raw-labor-intensive industries.

How do free trade agreements change import prices? : firm-level evidence from China's imports from ASEAN

The literature has revealed the positive impacts of free trade agreements (FTAs) on export prices by employing product-level trade data. This paper empirically examines the impacts of FTAs on import prices at the firm level. We focus on firm-level imports in China from ASEAN countries by employing China’s firm-product-level trade data. As a result, controlling for firm characteristics and product characteristics, we could not find significantly positive impacts of an FTA’s entry into force on import prices of FTA eligible products. Instead, we found a significant increase in import quantities of FTA eligible products. Thus, at the firm level, the gains from FTAs for exporters may be the increase in export quantities rather than the rise in export prices.

Is there any premium for unobservable quality? : a hedonic price analysis of the Malagasy rice market

This paper examines if consumers pay a premium for unobservable quality in the absence of quality standards and/or quality grading systems and, if so, how they assess that unobservable quality, using a rice retail market in Madagascar as an example. In Madagascar, the lack of quality standards and/or grading systems for rice makes is considered to be one of the causes of the rice market's spatial disintegration. Thus, quality standards and grading systems will be necessary to increase the market's efficiency. We hypothesize that consumers and retailers use product origin and rice name as observable indictors of unobservable quality and test the hypothesis using hedonic price regressions. We find that the interaction terms of product origin and rice name significantly affect the price after controlling for both observable quality and spatial and temporal price variation, but that the contribution of product origin and rice name to rice price variation is smaller than spatial and temporal factors. We thus conclude that consumers pay a premium for unobservable quality throughout Madagascar. This finding implies that quality standards and/or grading systems will work in the Malagasy market and that improving market infrastructure such as roads and storage will make them even more effective.