Storable good market with intertemporal cost variations

Antoniou, Fabio and Fiocco, Raffaele (2020): Storable good market with intertemporal cost variations.

Abstract

In a storable good market, we investigate a firm’s pricing policy and the welfare effects associated with the firm’s ability to commit to future prices in the presence of time-varying production costs. We show that, if costs are expected to increase, the firm’s lack of commitment leads to lower prices than full commitment when consumer storage costs are relatively small and demand is not too convex. This enhances consumer surplus and, under certain circumstances, total welfare. For intermediate consumer storage costs, the firm’s full commitment generally benefits consumers and, a fortiori, the whole economy. Our analysis provides potentially significant empirical and policy implications, especially regarding the patterns of cost pass-through rates.

• Item Type: MPRA Paper
• Language: English
• Keywords: commitment, consumer storage, cost variations, pass-through, storable goods.
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D42 - Monopoly; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L12 - Monopoly ; Monopolization Strategies

References

Abboud, L., Gray, A. (2018). Rising costs force consumer goods groups to raise prices. Financial Times. Available at https://www.ft.com/content/8a34e412-d72e-11e8ab8e6be0dcf18713 (last retrieved in December 2019).

Anderson, S. T., Kellogg, R., Salant, S. W. (2018). Hotelling under pressure. Journal of Political Economy, 126(3), 984-1026.

Anton, J. J., Biglaiser, G., Vettas, N. (2014). Dynamic price competition with capacity constraints and a strategic buyer. International Economic Review, 55(3), 943-958.

Anton, J. J., Das Varma, G. (2005). Storability, market structure, and demand-shift incentives. Rand Journal of Economics, 36(3), 520-543.

Antoniou, F., Fiocco, R. (2019). Strategic inventories under limited commitment. Rand Journal of Economics, 50(3), 695-729.

Antoniou, F., Fiocco, R., Guo, D. (2017). Asymmetric price adjustments: A supply side approach. International Journal of Industrial Organization, 50, 335-360.

Banerjee, A., Cockerell, L., Russell, B. (2001). An I(2) analysis of inflation and the markup. Journal of Applied Econometrics, 16(3), 221-240.

Banerjee, A., Russell, B. (2001). The relationship between the markup and inflation in the G7 economies and Australia. Review of Economics and Statistics, 83(2), 377-384.

Bénabou, R. (1989). Optimal price dynamics and speculation with a storable good. Econometrica, 57(1), 41-80.

Bénabou, R. (1992). Inflation and markups: Theories and evidence from the retail trade sector. European Economic Review, 36(2-3), 566-574.

Berbeglia, G., Rayaprolu, G., Vetta, A. (2019). Pricing policies for selling indivisible storable goods to strategic consumers. Annals of Operations Research, 274(1-2), 131-154.

Besanko, D., Dubé, J.-P., Gupta, S. (2005). Own-brand and cross-brand retail pass-through. Marketing Science, 24(1), 123-137.

Bessembinder, H., Coughenour, J. F., Seguin, P. J., Smoller, M. M. (1995). Mean reversion in equilibrium asset prices: Evidence from the futures term structure. Journal of Finance, 50(1),361-375.

Blattberg, R. C., Eppen, G. D., Lieberman, J. (1981). A theoretical and empirical evaluation of price deals for consumer nondurables. Journal of Marketing, 45(1), 116-129.

Board, S. (2008). Durable-goods monopoly with varying demand. Review of Economic Studies, 75(2), 391-413.

Bulow, J. I., Pfleiderer, P. (1983). A note on the effect of cost changes on prices. Journal of Political Economy, 91(1), 182-185.

Coase, R. H. (1972). Durability and monopoly. Journal of Law and Economics, 15(1), 143-149.

Deaton, A., Laroque, G. (1996). Competitive storage and commodity price dynamics. Journal of Political Economy, 104(5), 896-923.

Dell’Ariccia, G., Rabanal, P., Sandri, D. (2018). Unconventional monetary policies in the euro area, Japan, and the United Kingdom. Journal of Economic Perspectives, 32(4), 147-172.

Deltas, G. (2008). Retail gasoline price dynamics and local market power. Journal of Industrial Economics, 56(3), 613-628.

Doval, L., Skreta, V. (2019). Optimal mechanism for the sale of a durable good.Working paper. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract id=3373051 (last retrieved in December 2019).

Dudine, P., Hendel, I., Lizzeri, A. (2006). Storable good monopoly: The role of commitment. American Economic Review, 96(5), 1706-1719.

Erdem, T., Imai, S., Keane, M. P. (2003). Brand and quantity choice dynamics under price uncertainty. Quantitative Marketing and Economics, 1(1), 5-64.

Fabinger, M.,Weyl, E. G. (2012). Pass-through and demand forms.Working paper. Available at file:///C:/Users/utente/Downloads/PassThroughAndDemandForms preview.pdf (last retrieved in December 2019).

Froot, K. A., Klemperer, P. D. (1989). Exchange rate pass through when market share matters. American Economic Review, 79(4), 637-654.

Garrett, D. F. (2016). Intertemporal price discrimination: Dynamic arrivals and changing values. American Economic Review, 106(11), 3275-3299.

Guo, L., Villas-Boas, J. M. (2007). Consumer stockpiling and price competition in differentiated markets. Journal of Economics and Management Strategy, 16(4), 827-858.

Head, A., Kumar, A., Lapham, B. (2010). Market power, price adjustment, and inflation. International Economic Review, 51(1), 73-98.

Hendel, I., Lizzeri, A., Roketskiy, N. (2014). Nonlinear pricing of storable goods. American Economic Journal: Microeconomics, 6(3), 1-34.

Hendel, I., Nevo, A. (2004). Intertemporal substitution and storable products. Journal of the European Economic Association, 2(2-3), 536-547.

Hendel, I., Nevo, A. (2006a). Sales and consumer inventory. Rand Journal of Economics, 37(3), 543-561.

Hendel, I., Nevo, A. (2006b). Measuring the implications of sales and consumer inventory behavior. Econometrica, 74(6), 1637-1673.

Hendel, I., Nevo, A. (2013). Intertemporal price discrimination in storable goods markets. American Economic Review, 103(7), 2722-2751.

Hong, P., McAfee, R. P., Nayyar, A. (2002). Equilibrium price dispersion with consumer inventories. Journal of Economic Theory, 105(2), 503-517.

Horton, C. (2018). Toilet paper shortage strikes Taiwan amid pricing panic. The New York Times.Available at https://www.nytimes.com/2018/02/27/world/asia/taiwantoilet-papershortage.html (last retrieved in December 2019).

Hotelling, H. (1932). Edgeworth’s taxation paradox and the nature of demand and supply functions. Journal of Political Economy, 40(5), 577-616.

Jeuland, A. P., Narasimhan, C. (1985). Dealing-temporary price cuts-by seller as a buyer discrimination mechanism. Journal of Business, 58(3), 295-308.

Miravete, E. J., Seim K., Thurk, J. (2018). Market power and the Laffer curve. Econometrica, 86(5), 1651-1687.

Mitraille, S., Thille, H. (2009). Monopoly behaviour with speculative storage. Journal of Economic Dynamics and Control, 33(7), 1451-1468.

Mitraille, S., Thille, H. (2014). Speculative storage in imperfectly competitive markets. International Journal of Industrial Organization, 35, 44-59.

Mitraille, S., Thille, H. (2016). Speculative constraints on oligopoly. In: Thuijsman, F.,Wagener, F. (Eds.), Advances in dynamic and evolutionary games: Theory, applications, and numerical methods (pp. 229-248). Birkhäuser, Cham.

Mrázová, M., Neary, J. P. (2017). Not so demanding: Demand structure and firm behavior. American Economic Review, 107(12), 3835-3874.

Nava, F., Schiraldi, P. (2014). Sales and collusion in a market with storage. Journal of the European Economic Association, 12(3), 791-832.

Nava, F., Schiraldi, P. (2019). Differentiated durable goods monopoly: A robust Coase conjecture. American Economic Review, 109(5), 1930-1968.

Ortner, J. (2017). Durable goods monopoly with stochastic costs. Theoretical Economics, 12(2), 817-861.

Osborne, M. (2018). Approximating the cost-of-living index for a storable good. American Economic Journal: Microeconomics, 10(2), 286-314.

Perrone, H. (2017). Demand for nondurable goods: A shortcut to estimating long-run price elasticities. Rand Journal of Economics, 48(3), 856-873.

Pesendorfer, M. (2002). Retail sales: A study of pricing behavior in supermarkets. Journal of Business, 75(1), 33-66.

Pires, T. (2016). Costly search and consideration sets in storable goods markets. Quantitative Marketing and Economics, 14(3), 157-193.

Ravn, M. O., Schmitt-Grohé, S., Uribe, M. (2010). Incomplete cost pass-through under deep habits. Review of Economic Dynamics, 13(2), 317-332.

Rochet, J.-C., Tirole, J. (2011). Must-take cards: Merchant discounts and avoided costs. Journal of the European Economic Association, 9(3), 462-495.

Su, X. (2007). Intertemporal pricing with strategic customer behavior. Management Science, 53(5), 726-741.

Su, X. (2010). Intertemporal pricing and consumer stockpiling. Operations Research, 58(4-part-2), 1133-1147.

Wang, E. Y. (2015). The impact of soda taxes on consumer welfare: Implications of storability and taste heterogeneity. Rand Journal of Economics, 46(2), 409-441.

Waugh, F. V. (1944). Does the consumer benefit from price instability? Quarterly Journal of Economics, 58(4), 602-614.