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Estimation of Dynamic Decision Models with Corner Solutions: A Model of Price and Inventory Decisions

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Author Info
V. Aguirregabir (The University of Western Ontario)

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Abstract

This paper proposes and applies a method of moments to estimate dynamic decision models with corner solutions. The method extends previous results by Hotz and Miller (1993) and Pakes (1994), and it allows for unobserved state variables affecting both the continuous choice (interior solution) and the discrete choice (interior solution / corner solution). The method is applied to estimate a model of price and inventory decisions using data of individual goods from a supermarket chain. The estimation shows that lump-sum ordering costs and lump-sum price adjustment costs are significant, but ordering costs are quantitatively more important. Numerical solutions of the model show that, in that context, the interaction between price and inventory decisions can explain the high frequency of nominal price reductions observed in the data.

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Publisher Info
Paper provided by EconWPA in its series Econometrics with number 9603002.

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Length: 49 pages
Date of creation: 06 Mar 1996
Date of revision:
Handle: RePEc:wpa:wuwpem:9603002

Note: Type of Document - WordPerfect 6.0; prepared on IBM PC; to print on PostScript; pages: 49 ; figures: included
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Related research
Keywords: Dynamic decision models; Limited dependent variables; (S; s) price and inventory decisions; Lump-sum adjustment costs;

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Find related papers by JEL classification:
C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models
C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

References listed on IDEAS
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  1. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April. [Downloadable!] (restricted)
  2. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September. [Downloadable!] (restricted)
  3. repec:att:wimass:19916 is not listed on IDEAS
  4. Anil K. Kashyap, 1991. "Sticky prices: new evidence from retail catalogs," Working Paper Series, Macroeconomic Issues 91-26, Federal Reserve Bank of Chicago.
    Other versions:
  5. Ariel Pakes, 1991. "Dynamic Structural Models: Problems and Prospects. Mixed Continuous Discrete Controls and Market Interactions," Cowles Foundation Discussion Papers 984, Cowles Foundation, Yale University. [Downloadable!]
  6. Newey, Whitney K., 1984. "A method of moments interpretation of sequential estimators," Economics Letters, Elsevier, vol. 14(2-3), pages 201-206. [Downloadable!] (restricted)
  7. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April. [Downloadable!] (restricted)
  8. Eckstein, Zvi & Wolpin, Kenneth I, 1989. "Dynamic Labour Force Participation of Married Women and Endogenous Work Experience," Review of Economic Studies, Blackwell Publishing, vol. 56(3), pages 375-90, July.
  9. Slade, M.E., 1992. "Sticky Prices in a Dynamic Oligopoly; An Empirical Investigation of Fixed and Variable Adjustment Costs," UBC Departmental Archives 92-06, UBC Department of Economics.
    Other versions:
  10. Rust, J., 1992. "Do Peaple Behave According to Bellman's Principle of Optimality," Papers e-92-10, Stanford - Hoover Institution.
  11. Pakes, Ariel S, 1986. "Patents as Options: Some Estimates of the Value of Holding European Patent Stocks," Econometrica, Econometric Society, vol. 54(4), pages 755-84, July. [Downloadable!] (restricted)
  12. Sheshinski, Eytan & Weiss, Yoram, 1983. "Optimum Pricing Policy under Stochastic Inflation," Review of Economic Studies, Blackwell Publishing, vol. 50(3), pages 513-29, July. [Downloadable!] (restricted)
  13. Das, Sanghamitra, 1992. "A Micro-econometric Model of Capital Utilization and Retirement: The Case of the U.S. Cement Industry," Review of Economic Studies, Blackwell Publishing, vol. 59(2), pages 277-97, April. [Downloadable!] (restricted)
  14. Ariel Pakes, 1986. "Patents as Options: Some Estimates of the Value of Holding European Patent Stocks," NBER Working Papers 1340, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Blackwell Publishing, vol. 44(2), pages 287-303, June. [Downloadable!] (restricted)
  16. Hotz, V Joseph & Robert A. Miller & Seth Sanders & Jeffrey Smith, 1994. "A Simulation Estimator for Dynamic Models of Discrete Choice," Review of Economic Studies, Blackwell Publishing, vol. 61(2), pages 265-89, April. [Downloadable!] (restricted)
    Other versions:
  17. Hotz, V Joseph & Miller, Robert A, 1993. "Conditional Choice Probabilities and the Estimation of Dynamic Models," Review of Economic Studies, Blackwell Publishing, vol. 60(3), pages 497-529, July. [Downloadable!] (restricted)
  18. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September. [Downloadable!] (restricted)
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