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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

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: 01 Dec 2006
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Handle: RePEc:oxf:wpaper:297

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Keywords: Simultaneous Equations; Inventories; Demand; Estimation; Fish; Fulton Market;

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  1. Sokbae Lee, 2004. "Endogeneity in Quantile Regression Models: A Control Function Approach," Econometric Society 2004 North American Summer Meetings, Econometric Society 521, Econometric Society.
  2. Graddy, K., 1993. "Testing for Imperfect Competition at the Fulton Fish Market," Papers, Princeton, Department of Economics - Financial Research Center 137, Princeton, Department of Economics - Financial Research Center.
  3. Kennedy, Peter E, 2002. " Sinning in the Basement: What Are the Rules? The Ten Commandments of Applied Econometrics," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 16(4), pages 569-89, September.
  4. 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, Wiley Blackwell, Wiley Blackwell, vol. 67(3), pages 499-527, July.
  5. Hausman, Jerry A., 1983. "Specification and estimation of simultaneous equation models," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 7, pages 391-448 Elsevier.
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