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Last edited by Kees Zeelenberg
December 24, 2012 | History
An edition of Industrial price formation (1986)

Industrial price formation

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By developing, analyzing and empirically applying models of industrial price formation, in particular in open economies, this books shows how models that have been derived from the micro-economic theory of producer and consumer behavior, can actually help to explain price formation in industries. The models will be applied to data for the Netherlands in the period 1961-1979. There are several reasons why it is useful to study industrial price formation and to use a micro-economic theory. Firstly, application of models of industrial price formation may give an answer to questions as: do more concentrated industries have higher profit margins than less concentrated industries?; are prices in more concentrated industries less flexible than prices in less concentrated industries?; does strong foreign competition lead to low profit margins and to lower price increases? Secondly, existing models of macro-economic or industrial price formation are often constructed ad hoc, with little theory and with many 'plausibility' arguments. In general, this yields little interpretation of the coefficients and thus hardly any restrictions. On the contrary, a micro-economic approach does give a clear interpretation to the coefficients and a theoretical basis to the inclusion of variables. For example, in studies of industrial price formation the domestic market share (or its complement, the foreign market share) is often used as an explanatory factor of the price-cost ratio; the argument is that a low value of the domestic market share means that foreign competition is heavy, which leads to low profit margins. This ad-hoc approach can easily lead to circular arguments, since the domestic market share depends in turn on the ratio between domestic prices and foreign prices. In Chapter 6 of this book it is shown how this variable arises from a micro-economic model, how its coefficient depends on the elasticity of substitution between domestic and foreign products, and that, according to the theory, this coefficient is positive. The approach followed in this book can be used to answer questions surrounding the differences between concentrated and less concentrated industries, and to examine whether strong foreign competition leads to low profit margins and lower price increases.

The book consists of three parts. In the first part the relation between costs and prices is studied with an input-output model and a model of historic-cost pricing. In the second part price formation under pure competition is studied: the law of one price is tested, and a general-equilibrium model of price formation in a small open economy is constructed and estimated. In the third part price formation under imperfect competition is studied with both partial and general-equilibrium methods; it includes a theoretical basis for a price equation that is much used in industrial-organization studies, an analysis of the relation between marginal cost, average cost, and capacity utilization, a treatment of the effects of market structure, and a general-equilibrium analysis of price formation under imperfect competition.

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Cover of: Industrial price formation
Industrial price formation
1999
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Cover of: Industrial price formation
Industrial price formation
1986, North-Holland, Sole distributors for the U.S.A. and Canada, Elsevier Science Pub. Co.
Hardcover in English

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Industrial price formation

First published in 1986



Work Description

By developing, analyzing and empirically applying models of industrial price formation, in particular in open economies, this books shows how models that have been derived from the micro-economic theory of producer and consumer behavior, can actually help to explain price formation in industries. The models will be applied to data for the Netherlands in the period 1961-1979. There are several reasons why it is useful to study industrial price formation and to use a micro-economic theory. Firstly, application of models of industrial price formation may give an answer to questions as: do more concentrated industries have higher profit margins than less concentrated industries?; are prices in more concentrated industries less flexible than prices in less concentrated industries?; does strong foreign competition lead to low profit margins and to lower price increases? Secondly, existing models of macro-economic or industrial price formation are often constructed ad hoc, with little theory and with many 'plausibility' arguments. In general, this yields little interpretation of the coefficients and thus hardly any restrictions. On the contrary, a micro-economic approach does give a clear interpretation to the coefficients and a theoretical basis to the inclusion of variables. For example, in studies of industrial price formation the domestic market share (or its complement, the foreign market share) is often used as an explanatory factor of the price-cost ratio; the argument is that a low value of the domestic market share means that foreign competition is heavy, which leads to low profit margins. This ad-hoc approach can easily lead to circular arguments, since the domestic market share depends in turn on the ratio between domestic prices and foreign prices. In Chapter 6 of this book it is shown how this variable arises from a micro-economic model, how its coefficient depends on the elasticity of substitution between domestic and foreign products, and that, according to the theory, this coefficient is positive. The approach followed in this book can be used to answer questions surrounding the differences between concentrated and less concentrated industries, and to examine whether strong foreign competition leads to low profit margins and lower price increases.

The book consists of three parts. In the first part the relation between costs and prices is studied with an input-output model and a model of historic-cost pricing. In the second part price formation under pure competition is studied: the law of one price is tested, and a general-equilibrium model of price formation in a small open economy is constructed and estimated. In the third part price formation under imperfect competition is studied with both partial and general-equilibrium methods; it includes a theoretical basis for a price equation that is much used in industrial-organization studies, an analysis of the relation between marginal cost, average cost, and capacity utilization, a treatment of the effects of market structure, and a general-equilibrium analysis of price formation under imperfect competition.

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Industrial price formation

This edition was published in by North-Holland, Sole distributors for the U.S.A. and Canada, Elsevier Science Pub. Co. in Amsterdam, . New York, . New York, N.Y., U.S.A.


Table of Contents

Introduction to the Series v
List of tables and figures xii
Preface xvii
1 Introduction and summary 1
PART 1 COSTS AND PRICES 5
2 Price formation in input-output models 5
2.1 Static model 6
2.2 Dynamic model 13
2.3 Summary 15
Appendix 2.1 Nonnegative matrices 16
Appendix 2.2 Difference equations 18
3 Dynamics of price formation 21
3.1 The production-period 21
3.2 The total production-period of final products 28
3.3 Costs and prices under historic-cost pricing 35
3.4 Simulations 40
3.5 Summary 51
PART 2 PRICE FORMATION UNDER PURE COMPETITION 52
4 The law of one price for a small open economy 52
4.1 The law of one price for the Netherlands 54
4.2 Aggregation and the law of one price 61
4.3 Summary 66
Appendix 4.1 Unit values and price index numbers 67
5 Price formation in general equilibrium 72
5.1 General equilibrium 72
5.2 Excess-demand functions 78
5.3 The net-export functions of a small open economy 82
5.4 Price formation in a small open economy 88
5.5 Price formation with perfect domestic and foreign substitutes 92
5.6 Specification of the price equation 93
5.7 Empirical analysis 98
5.8 Summary 107
PART 3 PRICE FORMATION UNDER IMPERFECT COMPETITION 109
6 Foreign competition and price formation 109
6.1 The profit-maximizing price 110
6.2 The price elasticity of demand 112
6.3 The price equation 117
6.4 Empirical analysis 120
6.5 Summary 123
7 Price formation under imperfect competition: Extensions to the basic model 126
7.1 A general price equation for consumer goods 126
7.2 Price formation of producer goods 130
7.3 Price formation of a multi-product firm 134
7.4 Marginal cost, average cost, and capacity utilization 135
7.5 Specification of the general price equation 138
7.6 Empirical analysis 141
7.7 Summary 146
Appendix 7.1 Some alternative estimates 149
8 Market structure and price formation 156
8.1 Measurement of concentration 156
8.2 Price leadership 160
8.3 Barriers to entry 162
8.4 Price formation under oligopoly 163
8.5 Empirical analysis 166
8.6 Prices, demand, and concentration 173
8.7 Summary 177
9 Price formation in general equilibrium under imperfect competition 178
9.1 Comparative statics of consumer-good prices 178
9.2 Two-good example 182
9.3 Comparative statics with consumer and producer goods 186
9.4 Specification of the elasticity matrices 188
9.5 Empirical analysis 189
9.6 Summary 193
Appendix 9.1 The elasticity matrices 196
APPENDICES 199
A Two-stage budgeting 199
A.1 Consumer demand under two-stage budgeting 199
A.2 Producer demand under two-stage budgeting 203
B Consumer and producer demand systems 205
B.1 The CES demand system 205
B.2 The Rotterdam system 209
C Data 212
C.1 Data for Part 1 212
C.2 Data for Part 2 213
C.3 Data for Part 3 215
References, List of notation, Indexes 234
References 234
List of notation 240
Author index 242
Subject index 245

Edition Notes

Bibliography: p. 234-239.
Includes indexes.

Series
Contributions to economic analysis, volume 158
Copyright Date
1986

Classifications

Dewey Decimal Class
338.5/2/09492
Library of Congress
HB235.N2 Z44 1986

ID Numbers

Open Library
OL2725849M
Internet Archive
IndustrialPriceFormation
ISBN 10
0444701028
ISBN 13
978-0444701022
LC Control Number
86019609
OCLC/WorldCat
14001581
British National Bibliography
GB8808071
Oxford University Bodleian Library Aleph System Number
013304856
National Library of Sweden (Libris)
4947729
National Library of Australia
662654
British Library
BLL01005729935
Harvard University Library
000583955
Goodreads
5042003

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December 24, 2012 Edited by Kees Zeelenberg Edited without comment.
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