Dennis W. Carlton, The Location and Employment Choices of New Firms: An Econometric Model with Discrete and Continuous Endogenous Variables, The Review of Economics and Statistics, Vol. 65, No. 3 (Aug., 1983), pp. 440-449

The views expressed herein are those of the author(s) and not necessarily those of the National Bureau of Economic Research. ©2004 by Dennis W. Carlton. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

This paper uses evidence on individual transaction prices to analyze price behavior. The evidence shows that, for many transactions, pricesremain rigid for periods exceeding one year. The rigidity of price ispositively correlated with industry concentration. For several productsthe correlation of price changes across buyers is low. The paper alsoinvestigates the relationship between price rigidity, price change, andthe length of time a buyer and seller have been doing business together. The author interprets the evidence as emphasizing the importance of nonprice rationing and the inadequacy of models in whichprice movements alone clear markets.

For many transactions, prices remain rigid for periods exceeding one year. Price rigidity is positively correlated with industry concentration. For several products, the correlation of price changes across buyers is low. The paper also investigates the relationship between price rigidity, price change, and the length of time a buyer and seller have been doing business. The evidence emphasizes the importance of non price rationing and the inadequacy of models in which price movements alone clear markets.

A peak-load model using two rationing schemes analyzes peak-load pricing under conditions of uncertainty and the appropriateness and equity of charging different prices to consumers. Two major points are made. First, with realistic rationing schemes and multiplicative demand, operating policies that maximize surplus to society are found to involve nonnegative profits and a price above long-run marginal costs in contrast to previous findings. For many situations, multiplicative demand uncertainty seems more relevant than additive uncertainty. If a competitive market is possible, then competition, perhaps with taxation, can achieve the social optimum. The second point emphasizes that using expected surplus as welfare function and charging the same price to all consumers may both be undesirable. The probability of obtaining a good is a characteristic of the good for which consumers have preference. 5 references.

Availability is an important attribute of a good in many markets. Such markets include retail stores, restaurants, hotels, manufacturing, taxi cabs, airlines, parks and public utilities. Some of these markets are competitive, some noncompetitive, and some regulated. Fluctuating delivery time can be thought of as the consumers' equivalent to varying availability of a good. Here too, customers face some risk of being unable to obtain goods when they want them. There are good reasons why some markets do not always clear in the classical supply and demand sense at each instant. The three features that characterize these markets are temporary price inflexibility, demand uncertainty, and production lags. Prices do not instantaneously adjust in response to shifts in demand. If demand is especially heavy during the moming, prices do not rise in the aftemoon. Several justifications for such temporary price inflexibility are possible. Consumers may dislike price fluctuations, and firms may be providing a service of stabilizing prices in the very short run. Changing price may be costly. To provide an effective signal, prices may have to remain fixed for some time period. Unless it is evident that demand and supply have permanently shifted, firms may be reluctant to change price. Whatever the reason, it is a fact that for many markets, price once set does not vary for some time. Of course, there still remains the issue of how the price is initially determined. The second feature of these markets is that demand is uncertain. If demand were perfectly predictable, there would be no need to have unsatisfied customers. The final feature is that production takes time. If instantaneous production were possible, once again there need be no unsatisfied customers. We assume that recontracting or insurance markets do not develop. Such markets rarely develop in reality presumably because of high transaction and monitoring costs. This paper discusses the implications of markets characterized by price inflexibility, demand uncertainty over the time period for which prices are inflexible, and noninstantaneous production. A competitive equilibrium is defined and its properties examined. The social welfare implications of these markets and the socially optimal policy and its relation to regulation are analyzed. This social welfare problem is exactly the same as a peak load pricing problem under uncertainty. We next deal with the behavior of a monopolist, who tends to oversupply availability, but whose behavior is consistent with a smoothly functioning economy. Finally, the issue of firm interaction and incentives for vertical integration is addressed.