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When are Supply and Demand Determined Recursively Rather than Simultaneously? Another look at the Fulton Fish Market Data

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Kathryn Graddy
Peter E. Kennedy

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Abstract

When a supply and demand model is recursive, with errors uncorrelated across the two equations, ordinary least square (OLS) is the recommended estimation procedure. Supply to a daily fish market is determined by the previous night`s catch, so this would appear to be a good example of a recursive market. Despite this, data from the Fulton fish market are treated in the literature, without explanation, as coming from a simultaneous-equations market. We provide the missing explanation: inventory changes, influenced by current price, affect daily supply. Instrumental variable estimates using the full data set differ very little from OLS estimates using only observations with little inventory change, providing strong support for our explanation. Finally, we note that because of inventory changes, estimates of supply price elasticities in high-frequency markets must be interpreted with care.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 297.

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Date of creation: 2006
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Handle: RePEc:oxf:wpaper:297

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Related research
Keywords: Simultaneous Equations Inventories Demand Estimation Fish Fulton Market

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Find related papers by JEL classification:
C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
L6 - Industrial Organization - - Industry Studies: Manufacturing

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Sokbae 'Simon' Lee, 2004. "Endogeneity in quantile regression models: a control function approach," CeMMAP working papers CWP08/04, Centre for Microdata Methods and Practice, Institute for Fiscal Studies. [Downloadable!]
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  2. Kennedy, Peter E, 2002. " Sinning in the Basement: What Are the Rules? The Ten Commandments of Applied Econometrics," Journal of Economic Surveys, Blackwell Publishing, vol. 16(4), pages 569-89, September. [Downloadable!] (restricted)
  3. Angrist, Joshua D & Graddy, Kathryn & Imbens, Guido W, 2000. "The Interpretation of Instrumental Variables Estimators in Simultaneous Equations Models with an Application to the Demand for Fish," Review of Economic Studies, Blackwell Publishing, vol. 67(3), pages 499-527, July.
  4. Kathryn Graddy, 1995. "Testing for Imperfect Competition at the Fulton Fish Market," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 75-92, Spring. [Downloadable!] (restricted)
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