Cross-section instability in financial markets: impatience, extrapolation, and switching

This paper presents a stylized model of interaction among boundedly rational heterogeneous agents in a multi-asset financial market to examine how agents’ impatience, extrapolation, and switching behaviors can affect cross-section market stability. Besides extrapolation and performance based switching between fundamental and extrapolative trading documented in single asset market, we show that a high degree of ‘impatience’ of agents who are ready to switch to more profitable trading strategy in the short run provides a further cross-section destabilizing mechanism. Though the ‘fundamental’ steady-state values, which reflect the standard present-value of the dividends, represent an unbiased equilibrium market outcome in the long run (to a certain extent), the price deviation from the fundamental price in one asset can spill-over to other assets, resulting in cross-section instability. Based on a (Neimark–Sacker) bifurcation analysis, we provide explicit conditions on how agents’ impatience, extrapolation, and switching can destabilize the market and result in a variety of short and long-run patterns for the cross-section asset price dynamics.

Seeding the Herd: Pricing and Welfare Effects of Social Learning Manipulation

This paper is motivated by the recent emergence of various interference tactics employed by sellers attempting to manipulate social learning. We revisit the classic model of observational social learning and extend it to allow for (i) asymmetric information on product value between the seller and the consumers and (ii) the ability of the seller to “seed” the observational learning process with a fake purchase, in an attempt to manipulate consumer beliefs. We examine the interaction between social learning manipulation and equilibrium market outcomes as well as the impact of antimanipulation measures aimed at detecting and punishing misconduct. The analysis yields three main insights. First, we show that increasing the intensity of antimanipulation measures can have unintended consequences, often inducing higher levels of manipulation as well as higher equilibrium prices. Second, we find that although measures of high intensity can completely deter misconduct, such measures do not lead to any improvement in either seller or consumer payoffs, relative to the case where no measures are present. Third, we demonstrate that in many cases, measures of intermediate intensity can leverage seller manipulation to simultaneously improve both seller and consumer payoffs. This paper was accepted by Jayashankar Swaminathan, operations management.

Price-Directed Cost Sharing and Demand Allocation Among Service Providers with Multiple Demand Sources and Multiple Facilities

Problem definition: We consider capacity sharing through demand allocation among firms with multiple demand sources and multiple service facilities. Firms decide on the allocation of demand from different sources to different facilities to minimize delay costs and service-fulfillment costs possibly subject to service-level requirements. If firms decide to operate collectively as a coalition, they must also decide on a scheme for sharing the total cost. Academic/practical relevance: We study capacity sharing through demand allocation in service systems in the presence of service-fulfillment costs. Our problem is motivated by service collaboration in healthcare involving public–private partnerships. Methodology: We formulate the problem as a cooperative game and identify a cost allocation that is in the core. Results: The cost-allocation scheme we identify is price-directed, and the cost of each firm consists of three components: (1) the delay cost incurred within the firm; (2) a cost paid for the capacity used by the firm at facilities owned by other firms; and (3) a payment received for fulfilling demand of other firms at facilities owned by the firm. Interestingly, we show that the cost-allocation scheme is equivalent to a market equilibrium—that is, it can be implemented in a decentralized fashion. We extend our analysis to settings where the capacity of each facility is endogenously determined and to settings where a service-priority policy is deployed. Our results are robust to a variety of generalizations: partial sharing, partial transfer, facilities modeled as general queueing systems, and convex delay costs. Managerial implications: Our findings provide guidelines for and insights into how to carry out demand allocation and cost sharing among different firms in the presence of service-fulfillment costs to foster service collaboration. In particular, the equilibrium market prices can be viewed as the prices/subsidies for service collaboration in a public–private partnership.

COMPARATIVE ANALYSIS OF FOREIGN PRACTICE OF JUSTIFICATION OF THE INITIAL MAXIMUM PRICE OF THE CONTRACT IN THE PUBLIC ORDER PLACEMENT SYSTEM

The paper highlights the main aspects of the formation and justification of the maximum price when placing a state order by participants in the contract system of foreign countries. The analysis of the best practices in public procurement is described on the example of countries such as the USA, Canada, UK, France, Brazil, Australia. Differences in comparison with the domestic practice of justifying the initial maximum price are revealed, associated with the obligatory survey of participants in the procurement procedure by government customers, with explanations of the decision taken by the commission of the government customer. The work reflects foreign analogues of the concept of the initial maximum contract price used in Russian practice, which are subject to the principles of agreeing a reasonable and fair price, as well as the open and hidden nature of the reserve price. The essence of the concept of the preliminary price of a state contract mentioned in the directives and guidelines of the European Union is revealed. The article reveals the factors enshrined in foreign regulations that prevent the formation of an equilibrium market price in the system of placing a government order, associated not only with a conflict of interest, but also with the unjustified provision of cost and non-cost benefits

Measuring Competition in Banking Sector in Oman

Purpose of the study: The purpose of the study was to investigate and measure the competitive environment in the banking sector in Oman. Design/Methodology/Approach: This study considered an effort towards measuring the nature of competition of 12 out of 16 Omani banks from 2009 to 2019 over applying Panzar and Rosse (PR-model). It measured the competition index, called H-statistic, as it gives a quantitative assessment of the competitive nature of the studied market. The non-structural model was adopted to measure the competitive behavior of the banking sector. The data was taken from Muscat Securities Market (MSM) over obtaining financial statements of banks and data was tested using the Statistical Package for Social Sciences (SPSS). Findings: The result showed that it was not able to reject the monopolistic competition that H value considered between values of zero and one for the banking market in Oman. Thus, Omani banks operate under monopolistic competition. Practical Implications: The study has interesting policy implications. It is recommended to encourage foreign banks' presence to enhance the competitive condition of the banking sector thus making sure the exit and the entrance of banks in the industry to raise the competition. Social Implications: The flexibility in the competitive condition of the banking sector will lead to an increased competition so this will produce a variety of services and products to improve the banks’ performance and customer satisfaction. Originality/value: This is the first study of its kind in studying and testing the competitive environment for the banking sector in Oman using the PR-model. Keywords: Banking Competition in Oman, Monopolistic Competition, Market Equilibrium, Market contestability, Pazan and Rosse (PR model)

How Strategic Behavior of Natural Gas Exporters Can Affect the Sectors of Electricity, Heating, and Emission Trading during the European Energy Transition

The European demand for natural gas imports may change through the energy transition, which may affect natural gas exporters’ strategic behavior and consequently the natural gas prices. Changes in natural gas prices in turn influence the European energy sector in terms of gas consumption in the short-term and investments in the long-term. The present paper develops a large-scale partial equilibrium market model formulated as a mixed complementarity model (MCP) with conjectural variations. This model considers the global natural gas market and the European markets of electricity, heating, and emission trading in one equilibrium. We apply this model to investigate the long-term impact of market power by gas exporters on the mentioned energy-related markets on the horizon of 2050. The results of the study show that a decrease in the market power by gas exporters decreases natural gas prices, leading to cheaper electricity and CO2 prices in the mid-term. However, a very tight emission cap in 2050 can result in the reverse phenomenon.

Intra-brand competition in a differentiated oligopoly

In this paper we consider a differentiated oligopoly with two product varieties that are supplied by two groups of firms. After computing the Cournot solution of the game, we study its sensitivity to different sources of competition, namely the degree of product substitutability and market composition. Market composition can change either via new firms entering one industry or via firms switching production techniques, thus modifying the intensity of intra-brand competition. After studying the welfare consequences of an intensification of competition, we identify the equilibrium market composition when firms are driven by profit considerations. All the results are expressed in terms of the degree of product substitutability and of what we define “weighted relative efficiency” (WRE), which is a parameter combining both firm characteristics and market conditions.

ANALYSIS OF NON-EQUILIBRIUM STATES OF MILK-RAW MATERIAL MARKET IN THE CONTEXT OF EFFECTIVE REGIONAL AGRARIAN POLICY IMPLEMENTATION

In order to analyze non-equilibrium states in the regional markets of milk-raw materials, a model of "estimated price" has been developed. That model is a function of two factors, an indicator opposite to the supply elasticity, the role of which is to assess the efficiency of the price stimulus and resource efficiency, acting as an indicator of the balanced state of the market. Four types of non-equilibrium market state were identified based on that model and tested on the example of individual markets of the VRO (Volga Region Okrug). Thus it is possible to classify markets according to two characteristics: surplus or deficit and positive or negative reaction of milk sales volume to price incentive. These parameters are determined by the structural characteristics of the market and, above all, by the level of development of the collective sector - agricultural organizations. In regions with low level of development of the collective sector there is a significant shortage in the market of milk-raw materials and a weak reaction of agricultural organizations to the price incentive. At the same time, the actual price of milk sales came close to the upper limit of the price range of the "estimated price," which as a matter offact indicates that there is a limit for further price incentives. However, even under these conditions, the structural position ofprocessors in the market is stronger and incapable of solving the deficit problem. Regions with a high level of development of the collective sector are characterized by two situations - either surplus or slight deficit with the possibility of transition to balance in the market and excessive price incentive. Here, the actual price turns out to be much higher than the "estimated price," which shows the presence of a complementary price, - an investment instrument for the development of dairy cattle breeding. The application of the "estimated price" tool allows to synthesize the methodology of several approaches. In particular the decomposition of the price factor of 1 ton of milk by two factors: full costs and profit from the sale of 1 ton of milk, allowed to link the provisions of the concept of supply elasticity and the theory of reproduction.

Risk Identification and Evaluation of the Long-term Supply of Manganese Mines in China Based on the VW-BGR Method

Manganese is mostly used in the iron and steel industry and serves as an important metal mineral in the national economy. It is difficult to substantially increase the output of China’s manganese ore because it is of low grade and high impurity content. However, as a large consumer in the world, it is very important to ensure the long-term stable supply of this mineral. Collecting historical data on manganese ore in China over the past 20 years, we identified and evaluated risks during the whole process of production, supply, consumption, reserves, and trade of resources using the Volkswagen and German Federal Institute for Geosciences and Natural Resources (VW-BGR) method by selecting nine indicators: current market equilibrium, market price volatility, Reserve/production ratio, import dependence, import concentration, country risks, country concentration and future supply and demand trend. Furthermore, we assessed its economic importance by calculating the contribution of manganese ore involved in different value chains. It shows the same downward trend both in manganese ore consumption and economic importance, and the future demand of manganese ore will slow down, and the global supply will exceed demand. Based on the comprehensive evaluation of supply and demand trends in the past and future, it was concluded that the current market balance, import dependence and country concentration risks are the main driving factors for the supply risk of manganese ore in China, showing higher supply risk than that of the other factors; the resource and geostrategic risks are moderate, and may significantly reduce the supply risk if effective measures are implemented. As per the aforementioned analysis, to address the risk of supply interruption, this study provides some suggestions and measures, such as strengthening resource reserves and low-grade manganese ore utilization at home, actively exploring foreign markets, exploiting overseas resources, expanding import channels, extending the industrial chain, and adopting equity mergers and acquisitions abroad.