PRICING UNDER FEDERAL MILK MARKET REGULATION

Federal milk market regulation sets the wholesale price of most fluid milk in this country. This paper explores the purposes served by price-setting procedures under regulation and their quantitative impact. The institutional and theoretical background is provided, and an econometric model of a regulated milk market is estimated. The latter demonstrates that actual prices are consistent with those which would maximize producer benefit in 1960 and 1970, and that regulation produces quite substantial effects on prices and quantities within markets, on price patterns among markets, and on income distribution and economic efficiency.     

A DISEQUILIBRIUM MODEL OF A HIRING-HALL LABOR MARKET

This paper analyzes a labor market in which workers possess incomplete information about their exchange opportunities. Within this environment workers allocate time to the acquisition of job-related information. Rules are specified determining where workers will seek employment and how firms will vary wages in response to workers' choices. Assuming a change in workers' notional labor supply, the paper then analyzes the dynamics of labor market disequilibrium. Two principal conclusions emerge: (1) Workers' time costs of acquiring information rise during disequilibrium. (2) In general the final wage differs from the wage that would prevail if a Walrasian auctioneer guided the labor market's adjustment.     

PRICING ANOMALIES IN THE MARKET FOR DIAMONDS: EVIDENCE OF CONFORMIST BEHAVIOR

Some goods are consumed not just for their intrinsic utility but also for the impression their consumption has on others. We analyze the market for such a commodity—diamonds. We collect data on price and other attributes from the inventories of three large online retailers of diamonds. We find that people are willing to pay premiums upward of 18% for a diamond that is one‐half carat rather than slightly less than a half carat and between 5% and 10% for a one‐carat rather than a slightly less than one‐carat stone. Since a major portion of larger gem‐quality diamonds are used for engagement rings, such an outcome is consistent with Bernheim's model of conformism, where individuals try to conform to a single standard of behavior that is often established at a focal point. In this case, prospective grooms signal their desirability as a mate by the size of the diamond engagement ring they give their fiancées. (JEL A1, D4)     

A QUALITY-ADJUSTMENT MODEL OF THE ACADEMIC LABOR MARKET: THE CASE OF ECONOMISTS

This paper uses some new data on the initial academic placements of new Ph.D. economists to test a quality-adjustment model, which is consistent with the hypothesis that most academic appointments follow a "downstream" pattern. By the use of weighted least squares the authors confirm the importance of the perceived quality of the faculty of the degree granting program, the publishing performance of former graduates of these programs, and the student/faculty ratio of these programs in economics over the period 1960 to 1978. Finally, it is shown that contrary to popular opinion, the extent of the "downstream" pattern has not been magnified in the so-called buyers markets of the 1970's.     

FUTURES MARKET BACKWARDATION UNDER RISK NEUTRALITY

J.M. Keynes first introduced the theory of normal backwardation in futures markets. In the language of (British) commodities markets, a backwardation is an excess of the spot price over futures prices. As is well-known, Keynes suggested that this might be explained as a risk premium. Less well known is that Keynes actually proposed two distinct theories of backwardation.
Of these two theories of backwardation, the latter has recently received much attention. The purpose of this paper is to formalize Keynes' first theory, his liquid stocks theory, with an eye to its eventual empirical test.
We follow the recent formalizations of the risk premium theory by assuming the existence of perfectly competitive asset markets. To emphasize the differences between the two theories, however, we assume that there are well-funded risk neutral investors. Thus, risk premia cannot explain backwardation under our assumptions. Instead, backwardations arise because of interactions between equilibrium in the commodities exchange, both in spot and futures trading, and the production, consumption and storage decisions taken on the real side of the economy.     

AN INTERNATIONAL ARBITRAGE PRICING MODEL WITH PPP DEVIATIONS

This paper derives an intertemporal, international arbitrage pricing model that relaxes more assumptions than previous asset pricing paradigms. The analysis shows how risk, risk premia, and the translation of these variables between all real and nominal numeraires depend upon a small number of stochastic state variables that define the economy's production and credit opportunities. When the model is applied to the forward exchange market, it highlights the potentially central role of real exchange rates in determining the evolution of forward exchange risk premia.     

AIRLINE PRICING BEHAVIOR UNDER LIMITED INTER‐MODAL COMPETITION

This paper empirically analyzes airline pricing for short‐haul flights in contexts with no credible threat of inter‐modal competition. To this end, we explore the southern Italian market since it is less accessible by other transport modes and thus fares are the direct outcome of air‐related competition. We show, in fact, that market power matters, depending on the level of intra‐modal competition, and that airlines apply differentiated mark‐ups. Besides, consistent with the implementation of inter‐temporal price discrimination (IPD), we find a non‐monotonic inter‐temporal profile of fares with a turning point included in the interval of the 43rd to 45th days before departure. Finally, we provide evidence that in more competitive markets, airlines are more likely to engage in IPD. (JEL L11, L13, L93)     

COSTLY EXTERNAL FINANCE AND INVESTMENT EFFICIENCY IN A MARKET EQUILIBRIUM MODEL

The corporate finance literature suggests that a financially constrained firm invests less than an identical unconstrained firm. This does not imply that financial frictions cause firms to invest less than in a frictionless economy. When firms compete for investment funds, an increase in financial frictions can lead individual firms to increase their investment levels. A greater than the frictionless level of investment is likely in low-productivity firms, in cash-rich firms, and in firms with cheap external capital. Government programs that make capital cheaper for small firms may lead to lower levels of investment for all firms and decrease efficiency (JEL O16, E22, E44, G20)     

INFORMATION VALUE UNDER DEMAND UNCERTAINTY AND ENDOGENOUS MARKET LEADERSHIP

In an oligopoly model with firms choosing to produce in one of two periods, we identify the circumstance under which a firm's having early information regarding stochastic demand results in market leadership. High demand volatility leads to Stackelberg competition with the information‐advantaged firm leading. In the N‐firm case an equilibrium with multiple leaders and multiple followers emerges endogenously. In a duopoly information acquisition game we identify conditions that determine whether neither, one, or both firms will pay to acquire early information and note that one firm's obtaining early information may generate a positive externality benefitting its competitor. Both symmetric and asymmetric outcomes are possible and Stackelberg market leadership may occur in equilibrium, but only when firms have different costs of information. Our finding that an information advantage may convey leadership which then affects the value of information to the players applies to other settings exhibiting first‐mover advantage such as certain public good provision games. (JEL C72, D82, L13)     

ESTIMATING MARKET POWER IN HOMOGENOUS PRODUCT MARKETS USING A COMPOSED ERROR MODEL: APPLICATION TO THE CALIFORNIA ELECTRICITY MARKET

This study proposes a novel econometric approach to estimating market power in homogenous product markets. We use a composed error model to estimate the stochastic part of firms' strategic pricing equation. This part is formed by two random variables: a traditional error term, which captures random shocks, and a random conduct term, which measures the degree of market power. This approach allows for the conduct parameter to vary flexibly across firms and within firms over time, and avoids ad hoc structural restrictions for identifying firms' conduct. The empirical application of our approach is based on a well‐known California wholesale electricity market data set, which has been rigorously used to study market power. Our results suggest that realization of market power varies over both time and firms, and reject the assumption of a common or time‐invariant conduct parameter. (JEL C34, C51, L13, L94)     

THE NEAR OPTIMALITY OF MARK-UP PRICING

Mark-up pricing policies result in a loss of profits compared to marginal pricing behavior. These losses, however, are often very small, even for large changes in the money supply. But by adopting a simple pricing rule the firm does not have to forecast the future, and avoids the informational and computational costs required to determine the profit maximizing price each period. Thus, even if these costs are small, mark-up pricing policies may be optimal, or approximately so, at least for some firms. In a macro model this is likely to imply large monetary non-neutralities.     

BEYOND EDUCATION AND FAIRNESS: A LABOR MARKET TAXATION MODEL FOR THE GREAT GATSBY CURVE

Applied researchers have been drawn to models that attribute the demonstrated cross‐country differences in intergenerational income transmission to government failures to invest in the human capital of poor children. To highlight another potential mechanism, the disincentive effects of labor market taxation and redistribution, we present a simple model that can explain cross‐country differences in intergenerational mobility and other previously observed empirical patterns. Empirical tests using data on income mobility, tax rates, and public expenditures largely support the model predictions. We conclude that the common presumption that intergenerational mobility largely measures fairness or opportunity, and the resultant policy recommendations, are premature. (JEL D31, J24, J62)     

TWO-PART PRICING FOR A MULTI-PRODUCT MONOPOLIST

This paper examines profit-maximizing multi-part pricing arrangements by multi-product monopolists. The results indicate that prices set by such firms will deviate from the marginal-cost-pricing efficiency norm when multi-part tariffs can be set on only a subset of the firm's product line. Per unit prices will be set above marginal cost when the monopolist sells goods that are substitutes, while per unit prices for complements may be set above or below marginal cost. In either case, the pricing strategy will involve increasing the demand for goods on which an entry fee can beset.