pricing and efficiency in competitive markets market interventions & institutions dr. nikos...
Post on 19-Dec-2015
214 views
TRANSCRIPT
Pricing and Efficiency in Competitive Markets
Market Interventions & InstitutionsDr. Nikos NikiforakisThe University of Melbourne
Overview
The purpose of this talk: Part I: To show how we can utilize
theoretical tools to evaluate the effect of different policies.
Part II: To show the importance of experiments in evaluating different institutions
Ultimately, the goal is to let you know some of the policy analysis that is out there and importance of experiments
Pricing and Efficiency in Competitive Markets
Part I:Market Interventions
Introduction Earlier on we saw that…
In a competitive market the equilibrium price (p*) will be the one where quantity demanded will equal quantity supplied.
p* is the price that maximizes efficiency as all gains from trade are exhausted
What happens to p* and q* as the economic environment changes?
Introduction
We will discuss two types of policy:
1. Taxes2. Price controls
“Comparative statics”: change in equilibrium outcomes as a result of a change in economic environment.
Imposition of tax Different taxes (direct-indirect, value-
quantity, progressive-regressive etc.) We will consider effects of a quantity
tax on sellers (for further discussion see Stiglitz (2000))
Quantity tax – a tax levied per unit of quantity bought or sold
For simplicity let’s consider that there exist many buyers and sellers
That is, demand and supply curves are straight lines
Imposition of tax
quantity
price Demand curve Supply curve beforetax
e0
q0
p0
Example 1: Tax imposed to sellers
Imposition of tax
quantity
price Demand curve Supply curve beforetax
e0
q0
p0
Example 1: Tax imposed to sellers
Imposition of tax
quantity
price Demand curve Supply curve beforetax
e0
e1
q0q1
p1
p0
Example 1: Tax imposed to sellers
Imposition of tax
quantity
price Demand curve Supply curve beforetax
e0
e1
q0q1
p1
p0
Example 1: Tax imposed to sellers
p1- p0< t
Imposition of tax
quantity
price Demand curve Supply curve beforetax
e0
e1
q0q1
p1
p0
Example 1: Tax imposed to sellers
ps
p1- p0< t
Imposition of tax
quantity
price Demand curve Supply curve beforetax
e0
e1
q0q1
pb
p0
Example 1: Tax imposed to sellers
ps
Consumer surplus
p1- p0< t
Imposition of tax
quantity
price Demand curve Supply curve beforetax
e0
e1
q0q1
pb
p0
Example 1: Tax imposed to sellers
ps
Consumer surplus
Producer surplus
p1- p0< t
Imposition of tax
quantity
price Demand curve Supply curve beforetax
e0
e1
q0q1
pb
p0
Example 1: Tax imposed to sellers
Tax revenueps
Consumer surplus
Producer surplus
p1- p0< t
Imposition of tax
quantity
price Demand curve Supply curve beforetax
e0
e1
q0q1
pb
p0
Example 1: Tax imposed to sellers
Tax revenueps
Consumer surplus
Producer surplus
Deadweight loss
Tax in the first experiments
A Perfectly Inelastic Supply
quantity
priceDemand curve
Supply curve
e0
q0
p0
Supply cannot increase or decrease (at least in the short-run). That is, supply curve won’t be shifted and market price (p0) will remain the same. Therefore, all the tax will be paid by the suppliers.
A Perfectly Inelastic Supply
quantity
priceDemand curve
Supply curve
e0
q0
p0
Supply cannot increase or decrease (at least in the short-run). That is, supply curve won’t be shifted and market price (p0) will remain the same. Therefore, all the tax will be paid by the suppliers.
p0 - t
A Perfectly Inelastic Demand
quantity
priceDemand curve
Supply curve
e0
q0
p0
Demand will not react to price changes (important drugs, cigarettes) As a result sellers will pass along all the tax to the buyers.
A Perfectly Inelastic Demand
quantity
priceDemand curve
Supply curve
e0
q0
p0
p0 + t
Demand will not react to price changes (important drugs, cigarettes) As a result sellers will pass along all the tax to the buyers.
Tax Liability-Side Equivalence
Tax Liability-Side Equivalence
p0
pb
ps
Demand curveSupply curve before tax
TLSE says that it is irrelevant who is responsible for payingthe tax – the equilibrium price facing buyers and sellers willbe the same as the tax will be passed on.
quantity
price
Tax Liability-Side Equivalence
p0
p1
p2
Demand curveSupply curve before tax
Demand curvebefore tax
Supply curve
TLSE says that it is irrelevant who is responsible for payingthe tax – the equilibrium price facing buyers and sellers willbe the same as the tax will be passed on.
quantity
price
quantity
price
Tax Liability-Side Equivalence Experimental evidence support TLSE (Borck et
al., 2001; Ruffle, 2004)
TLSE might not be clearly understood by some policy makers and civilians who confuse statutory with economic incidence.
One explanation is that there is confusion between gross and net earnings. (See Ruffle (2004) for Canadian Conservative Party shift from a manufacturer to a consumer tax and Krugman (2000) discussion on Bush’s gasoline tax cuts.
Special cases: if demand/supply are perfectly inelastic/elastic, i.e. if one of the curves is horizontal/vertical, then only one side will pay the tax.
Price Controls
Term ‘price controls’ refers to the imposition of a price floor, i.e. minimum price, or a price ceiling, i.e. maximum price.
Recent example in Australia minimum wages in the labour market.
What is the effect of such a policy?
Price Controls
We saw that competitive markets maximize efficiency by exhausting all gains from trade.
A price floor (like a price ceiling) will prohibit some of the trades and thus lower efficiency.
Price Controls
quantity
priceDemand curve Supply curve
e0
q0
p0
Price Controls
quantity
priceDemand curve Supply curve
e0
q0
p0
pmin
qb qs
Price Controls
quantity
priceDemand curve Supply curve
e0
q0
p0
pmin
qb qs
Efficiency losses not only due to prohibition of trades, but also due to ‘anchoring effects’ (Falk et al., 2006).
Consumer surplus
Price Controls
quantity
priceDemand curve Supply curve
e0
q0
p0
pmin
qb qs
Efficiency losses not only due to prohibition of trades, but also due to ‘anchoring effects’ (Falk et al., 2006).
Consumer surplus
Producer surplus
Price Controls
quantity
priceDemand curve Supply curve
e0
q0
p0
pmin
qb qs
Deadweight loss
Efficiency losses not only due to prohibition of trades, but also due to ‘anchoring effects’ (Falk et al., 2006).
Consumer surplus
Producer surplus
Market Predictions
Market Predictions
Market Predictions
Market Predictions
Consumer surplus
Market Predictions
Consumer surplus
Producer surplus
Market Predictions
Deadweight lossConsumer surplus
Producer surplus
Experimental Results
0
10
20
30
40
50
1 2 3 4 5 6
Period
Price
Experimental Results
Summary (Part I) We saw how economic theory can help
us predict the impact of imposing taxes and price controls.
Experiments indicate that theory predicts well actual behaviour.
Removing the price control does not necessarily improve efficiency due to anchoring effects (see Isaac and Plott (1981) for anchoring effects after price controls).
Pricing and Efficiency in Competitive Markets
Part IIInstitutions
Introduction The Bank of Sweden Prize in Economic
Sciences in Memory of Alfred Nobel 2002
Vernon Smith: “for the use of laboratory experiments as a tool in empirical economic analysis, in particular, for the study of different market mechanisms”.
Institution: Rules of the game Feasible actions Sequence of actions Information conditions
Introduction
Does it matter if only sellers can post prices (like in retail markets)?
Many institutions: Double auction markets, English Auctions, Dutch Auctions, government grants.
How can we compare performance: Experiments
Posted Offer Markets
Most retail markets in western countries
Sellers quote prices on a take-it-or-leave-it basis
Sometimes due to government regulation (shipping, alcoholic beverages)
Double Auction
Double Auction
Posted Offer
Posted Offer
Summary (Part II)
Institutions are important Experiments ideal in helping us
evaluate which institution is optimal for each situation
… and to convince decision makers!!
AND NOW …
Before we decide which experiment will decide your payments you get to vote …
Average payoffs: Experiment 1: $ 37.17 Votes: Experiment 2: $ 35.29 Votes: Experiment 3: $ 22.00 Votes:
Further reading Borck, R., Engelmann, D., Müller, W., Normann, H.T. (2001)
Tax Liability-Side Equivalence in Experimental Posted-Offer Markets, Southern Economic Journal, 68:3, 672-692.
Falk, A., Fehr, E., Zehnder, C. (2006) Fairness Perceptions and Reservations Wages - The Behavioral Impact of Minimum Wage Laws, forthcoming in Quarterly Journal of Economics.
Isaac, M., Plott, C. (1981) Price Controls and the Behavior of Auction Markets, American Economic Review, 71, 448-459.
Ruffle, Bradley J. (2005) "Tax and Subsidy Incidence Equivalence Theories: Experimental Evidence from Competitive Markets", Journal of Public Economics, 89:8, 1519-1542.
Stiglitz, Joseph. (2000) Economics of the public sector, Norton & Co.
Ketcham, J., Smith, V., Williams, A. (1984) A Comparison of Posted-Offer and Double-Auction Pricing Institutions, The Review of Economic Studies, 51:4, 595-614.