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27—Chevalier et al, Prices in Peak Demand Periods Eric Rasmusen, erasmuse@Indiana

27—Chevalier et al, Prices in Peak Demand Periods Eric Rasmusen, erasmuse@Indiana.edu. April 27, 2003. How Should Prices React when Market Demand Increases?. --- they should rise, if the market supply is not perfectly elastic But the opposite seems to often happen.

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27—Chevalier et al, Prices in Peak Demand Periods Eric Rasmusen, erasmuse@Indiana

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  1. 27—Chevalier et al, Prices in Peak Demand Periods Eric Rasmusen, erasmuse@Indiana.edu April 27, 2003

  2. How Should Prices React when Market Demand Increases? --- they should rise, if the market supply is not perfectly elastic But the opposite seems to often happen.

  3. WHY MIGHT PRICES FALL WHEN MARKET DEMAND IS HIGH? • Economies of scale in search ( Warner & Barsky, 1995) • 2. Collusion breaks down (Rotemberg & Saloner, 1986) • 3. Price-informing ads become more profitable (Lal & Matutes, 1994) • 4. Not mentioned---different people start buying when market demand increases, and those new people are more price sensitive. (I like this one)

  4. Lal & Matutes, 1994, Loss Leader Model Consumers do not know prices unless they are advertised. Thus, by the Diamond Paradox, [Diamond, about 1970], unadvertised prices are all at the reservation price level. Sellers therefore are eager to get consumers in the store. So they will advertise some prices, and even lose money on them, making money on the unadvertised prices. I think a similar model could be built using a one-product world. Some consumers can see ads, some cannot. If demand is strong enough, it is worth the fixed cost of an ad to become the low-price, high-volume store, as in Salop and Stiglitz’s Bargains and Ripoffs model.

  5. Empirical Differences? CKR do not actually describe the Warner-Barsky model---not even verbally. That is odd, given that they do lay out Lal-Matutes and Rotemberg-Saloner models. They claim that if demand for just one item rises, then in the WB and RS models, all prices should be unaffected. I don’t know why they think that; the WB and RS models can apply to single goods sold at groceries just as well as the entire line of goods sold. They claim, however, that the following two findings support LM against WB and RS: 1. Prices RISE for goods whose demand falls at Christmas, tho prices fall for goods whose demand rises (This takes us back to the old increasing-MC model.) 2. Food prices fall during seasonal peaks.

  6. Empirical Differences? CKR do not actually describe the Warner-Barsky model---not even verbally. That is odd, given that they do lay out Lal-Matutes and Rotemberg-Saloner models. They claim that if demand for just one item rises, then in the WB and RS models, all prices should be unaffected. I don’t know why they think that; the WB and RS models can apply to single goods sold at groceries just as well as the entire line of goods sold. They claim, however, that the following two findings support LM against WB and RS: 1. Prices RISE for goods whose demand falls at Christmas, tho prices fall for goods whose demand rises (This takes us back to the old increasing-MC model.) 2. Food prices fall during seasonal peaks.

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