Markup rule

Abstract: Government often chooses simple rules to regulate industry even when firms and consumers are heterogeneous. We evaluate the implications of this practice in the context of alcohol pricing where the regulator uses a single markup rule that does not vary across products. We estimate an equilibrium model of wholesale pricing and retail demand for horizontally differentiated spirits that allows for heterogeneity in consumer preferences based on observable demographics. We show that the single markup increases market power among upstream firms, particularly small firms whose portfolios are better positioned to take advantage of the policy. For consumers, the single markup acts as a progressive tax by overpricing products favored by the rich. It also decreases aggregate consumer welfare though 16.7% of consumers are better off under the policy. These consumers tend to be older, less wealthy or educated, and minorities. Simple policies therefore generate significant cross-subsidies and may be an effective tool for government to garner favor of key constituencies.

Abstract: This paper describes the performance of learning, markup and pseudo-maximizing pricing rules when applied using data on past operations in simulated environments. Performance is evaluated on (1) average last profit achieved after ten periods of experimentation with alternative prices and (2) total profit achieved over ten periods. The pseudo-maximizing rule performs at least as well as other feasible rules when the demand and cost curves are both deterministic and when the demand curve is deterministic and the cost curve is linear, but stochastic. In all other settings, the markup rule performs at least as well as other feasible rules.

Abstract: The food supply system consists of multiple stages of production, with prices at each stage coordinating the transformation of farm commodities to final consumer products. Food and agricultural policies often stem from public concern about the disparate movements of consumer food and farm prices. Widening spreads between retail food and farm prices and concentration in some industries raise concerns about market power (USDA). Early research describes retail-to-farm price spreads with a single markup rule (George and King). However, Gardner demonstrates that a single rule is misleading because price responses to shifts in consumer demand differ from responses to shifts in input supply. Furthermore, price spreads are central to tests of market power. Market power tests often derive from representative firms' profit functions and a model of consumer demand and reduce to tests on conjectural variations parameters in price spread equations. Such tests are sensitive to restrictions im-

Abstract: Government often chooses simple rules to regulate industry even when firms and consumers are heterogeneous. We evaluate the implications of this practice in the context of alcohol pricing where the regulator uses a single markup rule that does not vary across products. We estimate an equilibrium model of wholesale pricing and retail demand for horizontally differentiated spirits that allows for heterogeneity in consumer preferences based on observable demographics. We show that the single markup increases market power among upstream firms, particularly small firms whose portfolios are better positioned to take advantage of the policy. For consumers, the single markup acts as a progressive tax by overpricing products favored by the rich. It also decreases aggregate consumer welfare though 16.7% of consumers are better off under the policy. These consumers tend to be older, less wealthy or educated, and minorities. Simple policies therefore generate significant cross-subsidies and may be an effective tool for government to garner favor of key constituencies.