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Expected Price (expected + price)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting80%

Selected Abstracts

A Search Model Where Consumers Choose Quantity Based on Expected Price

THE JOURNAL OF INDUSTRIAL ECONOMICS, Issue 4 2003
Paolo Buccirossi
I describe a price game in which consumers face search costs and base their quantity decision on the expected price. Because of search costs, the choice of the firm they will buy from is described by a random process. I show that the expected equilibrium price is above the monopoly price. This result does not change if demand comes from a small share of perfectly informed consumers with zero search costs. [source]

Economic Evaluation of Scale Dependent Technology Investments

PRODUCTION AND OPERATIONS MANAGEMENT, Issue 1 2005
Phillip J. Lederer
We study the effect of financial risk on the economic evaluation of a project with capacity decisions. Capacity decisions have an important effect on the project,s value through the up-front investment, the associated operating cost, and constraints on output. However, increased scale also affects the financial risk of the project through its effect on the operating leverage of the investment. Although it has long been recognized in the finance literature that operating leverage affects project risk, this result has not been incorporated in the operations management literature when evaluating projects. We study the decision problem of a firm that must choose project scale. Future cash flow uncertainty is introduced by uncertain future market prices. The firm's capacity decision affects the firm's potential sales, its expected price for output, and its costs. We study the firm's profit maximizing scale decision using the CAPM model for risk adjustment. Our results include that project risk, as measured by the required rate of return, is related to the inverse of the expected profit per unit sold. We also show that project risk is related to the scale choice. In contrast, in traditional discounted cash flow analysis (DCF), a fixed prescribed rate is used to evaluate the project and choose its scale. When a fixed rate is used with DCF, a manager will ignore the effect of scale on risk and choose suboptimal capacity that reduces project value. S/he will also misestimate project value. Use of DCF for choosing scale is studied for two special cases. It is shown that if the manager is directed to use a prescribed discount rate that induces the optimal scale decision, then the manager will greatly undervalue the project. In contrast, if the discount rate is set to the risk of the optimally-scaled project, the manager will undersize the project by a small amount, and slightly undervalue the project with the economic impact of the error being small. These results underline the importance of understanding the source of financial risk in projects where risk is endogenous to the project design. [source]

A Search Model Where Consumers Choose Quantity Based on Expected Price

THE JOURNAL OF INDUSTRIAL ECONOMICS, Issue 4 2003
Paolo Buccirossi
I describe a price game in which consumers face search costs and base their quantity decision on the expected price. Because of search costs, the choice of the firm they will buy from is described by a random process. I show that the expected equilibrium price is above the monopoly price. This result does not change if demand comes from a small share of perfectly informed consumers with zero search costs. [source]

Demand Diversification Under Uncertainty and Market Power

ASIAN ECONOMIC JOURNAL, Issue 4 2001
John J. Y. Seo
This paper justifies theoretically and empirically the diversification behaviour of an importing firm when it chooses the mixture of potentially differentiated products of its major input under price uncertainty. The paper investigates an equilibrium relationship among three key explanatory variables, which are the expected price, the systematic risk of price, and monopolistic market power of the suppliers in the market. The theoretical section shows that there exists a conflict between the risk,diversification effect and the agent's preference over certain products when the importer chooses the vector of optimal quantity shares. The latter effect may disturb or even dominate the former, which can be represented in an equilibrium relationship similar to the framework of the CAPM. As an empirical application, the Chinese wheat import market is examined and analysed to answer the questions raised by the basic statistics. JEL classification: F12; F14; L22 [source]

The Effects of Foreign Price Uncertainty on Australian Production and Trade,

THE ECONOMIC RECORD, Issue 273 2010
ELIE APPELBAUM
This article provides an empirical analysis of the impact of uncertain international prices on Australia's production sector and international trade. We model the movement of traded goods prices via a generalised autoregressive conditional heteroskedasticity model and embed this within an expected utility maximising model of the production sector. The empirical results are consistent with expected utility maximisation and the hypothesis of risk neutrality is soundly rejected. Estimates of the effects of changes in expected prices and volatility of traded goods prices upon production decisions and the return to capital are discussed. The conclusion is that price uncertainty matters for the Australian production sector. [source]