Centrality And Pricing In Spatially Differentiated Markets PDF Download

The price of a good is a vital tool for allocating resources in our economy. The relative prices of many similar or related goods can serve to sort demand between markets to ensure that resources are spent where they are most valued. Firms and consumers can both act to move resources between markets and in so doing alter relative prices as markets clear. The process by which this occurs is quite intricate and unique to the goods, the market structure, and supply constraints in question. These cross-market interactions complicate otherwise simple exchanges between buyers and sellers and understanding market sorting behavior has become an ongoing endeavor of the economics literature. This volume comprises my collective works investigating inter-market sorting, with particular attention to the role of pricing as both a sorting mechanism and signal of relative valuation. I examine both the firm and consumer sides of markets. I use natural experiments to demonstrate the effects of changing demand and supply conditions on prices and quantities. My work is found in three chapters, each examining a distinct market and research question under this greater theme. Chapter 1 considers horizontally differentiated goods, homes in different real estate markets, and demonstrates the efficiency with which consumers alter their willingness to pay when faced with changes in relative cost of ownership. The demand for housing is heavily influenced by access to employment opportunities. The cost of gasoline determines the cost of such access and therefore, the relative prices in markets with varying commuting needs. Locally exogenous gasoline price movements demonstrate the causal impact of higher fuel costs on urban housing markets: a shift of market demand towards real estate markets with less costly commutes. Higher fuel prices increase the value of real estate with shorter commutes and easier access to driving alternatives, raising housing costs in urban centers and increasing demand for public transportation. Every incremental $1 per gallon of gasoline reduces home values by .143 percent per commute mile, or $5,191 for the average home and commute. This translates into a discount rate of 6.4 percent, comparable to mortgage rates for the period. The findings describe an efficient real estate market and emphasize the urgency of proper energy policy. Chapter 2 demonstrates how a firm's capacity constraint can interrelate prices in markets with very different demand segments by studying the airline industry. Air freight is an important dimension of the airline services industry that is often ignored. I examine the cross-price effects of air freight and air passenger service when serviced by a common carrier. Air freight represents one-third of all tonnage shipped by air and aircraft weight limitations are often binding constraints. I utilize mandatory reporting data on U.S. domestic fares, passenger counts, capacities, and cargo weight to measure the trade-off that airlines face in choosing to carry cargo or passengers. I find evidence that average price levels and the degree of price discrimination between passenger groups increase for routes with higher cargo fill rates. An airline's ability to carry freight causes prices paid by passengers to rise by an average of 5.4 percent, and a one standard deviation rise in freight fill rates raises passenger prices by 10.6 percent. Chapter 3 examines consumer demand and firm pricing strategies for a vertically differentiated set of goods in the retail sector. Firms create hierarchical decision structures to facilitate operations across markets. If incentives are not complete, managers may not make efficient, profit-maximizing choices. I demonstrate one such inefficiency where a firm's optimal pricing requires coordination across brands that are managed by distinct operational divisions. I examine the entry of a vertically and spatially differentiated national retailer into new markets by its three brands, the pricing response by its other nearby brands, and the quantity sold by those stores. An event study regression approach provides evidence that the different brands react competitively to entry. These three case studies demonstrate some of the intricate processes by which consumers and producers sort resources between related markets.