Edgeworth price cycle
An Edgeworth price cycle is an asymmetric price variation that has the following characteristics:
#The good/service is a homogeneous commodity and customers are extremely price-sensitive. If one vendor undercuts another, they will capture all or a very large portion of the market (where "very large" means "as much as they can handle").
#Beginning from an equilibrium, one competitor will initiate a round of undercutting by pricing below the equilibrium. Because of (1), competitors will respond immediately, the same day if possible, with a match or a slight undercut.
#Undercutting will continue until they bid the price down to the wholesale cost.
#One competitor will then restore prices. Everyone will follow as quickly as possible, and the cycle repeats.
Because of (1), smaller competitors have a greater incentive to initiate cutting. Larger competitors will generally be the initiator of restorations. The cycle is asymmetric because restorations happen nearly simultaneously, but undercutting is generally slower.
Edgeworth cycles are distinguished from both
sticky pricingand cost-based pricing. Sticky prices are typically found in markets with less aggressive price competition, so there are fewer or no cycles. Purely cost-based pricing occurs when retailers mark up from wholesale costs, so costs follow wholesale variations closely.
Competitive gasoline markets with a high degree of independent or small retailers typically demonstrate Edgeworth cycling, while markets dominated by majors (vertically integrated firms) will tend toward sticky pricing. Because the cycles tend to occur frequently, weekly average prices found in government reports will generally mask the cycling. Some studies have shown the restorations to occur on Tuesdays, with undercutting beginning within the next two days.
*E., Maskin and Tirole, J., “A Theory of Dynamic Oligopoly II: Price Competition, Kinked Demand Curves and Edgeworth Cycles”, Econometrica 56, 1988.
*Eckert, Andrew and West, Douglas S., "Retail Gasoline Price Cycles across Spatially Dispersed Gasoline Stations", Journal of Law and Economics, Vol. XLVII, No. 1, April 2004, p. 245
*Noel, Michael (2003), [http://econ.ucsd.edu/publications/files/2004-04.pdf Edgeworth Price Cycles, Cost-based Pricing and Sticky Pricing in Retail Gasoline Markets]
*Noel, Michael (2004), [http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1020&context=ucsdecon Edgeworth Price Cycles: Evidence from the Toronto Retail Gasoline Market]
Wikimedia Foundation. 2010.
Look at other dictionaries:
Edgeworth Price Cycle — In markets with homogenous goods, a sequence of rapid, incremental price cutting among competitors that lowers the retail price until it reaches the cost of the good. Eventually, competitors reset prices to their previous levels (allowing a… … Investment dictionary
Irish Literature — • It is uncertain at what period and in what manner the Irish discovered the use of letters. It may have been through direct commerce with Gaul, but it is more probable, as McNeill has shown in his study of Irish oghams, that it was from the… … Catholic encyclopedia
Economics — This article is about the social science. For other uses, see Economics (disambiguation). For a topical guide to this subject, see Outline of economics. Economics … Wikipedia
English literature — Introduction the body of written works produced in the English language by inhabitants of the British Isles (including Ireland) from the 7th century to the present day. The major literatures written in English outside the British Isles are… … Universalium
Unemployment — World unemployment rates as of January 2009[update] Unemployment (or … Wikipedia
children's literature — Body of written works produced to entertain or instruct young people. The genre encompasses a wide range of works, including acknowledged classics of world literature, picture books and easy to read stories, and fairy tales, lullabies, fables,… … Universalium
Keynesian economics — Economics … Wikipedia
List of economics topics — This aims to be a complete list of the articles on economics. It does not include articles about economists, who are listed in the list of economists. NOTOC A * Accounting Accounting reform Actuary Adaptive expectations Adverse selection Agent… … Wikipedia
Concurrence — Pour les articles homonymes, voir Concurrence (homonymie). La concurrence économique correspond à une situation de libre confrontation entre l offre et la demande, sur un marché Ainsi plusieurs agents proposent de vendre des biens ou des services … Wikipédia en Français
Concurrence commerciale — Concurrence Pour les articles homonymes, voir Concurrence (homonymie). La concurrence économique en anglais competition in economics est une situation où plusieurs agents proposent des produits ou des services équivalents ou bien dont les… … Wikipédia en Français