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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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  • Graddy, Kathryn
  • Kennedy, Peter E

Abstract

When a supply and demand model is recursive, with errors uncorrelated across the two equations, ordinary least squares (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.

Suggested Citation

  • Graddy, Kathryn & Kennedy, Peter E, 2007. "When are Supply and Demand Determined Recursively Rather than Simultaneously? Another look at the Fulton Fish Market Data," CEPR Discussion Papers 6053, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:6053
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    References listed on IDEAS

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    1. Kennedy, Peter E, 2002. "Sinning in the Basement: What Are the Rules? The Ten Commandments of Applied Econometrics," Journal of Economic Surveys, Wiley Blackwell, vol. 16(4), pages 569-589, September.
    2. Daniel B. Suits, 1955. "An Econometric Model of the Watermelon Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 37(2), pages 237-251.
    3. Hausman, Jerry A., 1983. "Specification and estimation of simultaneous equation models," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 7, pages 391-448, Elsevier.
    4. Joshua D. Angrist & Kathryn Graddy & Guido W. Imbens, 2000. "The Interpretation of Instrumental Variables Estimators in Simultaneous Equations Models with an Application to the Demand for Fish," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(3), pages 499-527.
    5. Lee, Sokbae, 2007. "Endogeneity in quantile regression models: A control function approach," Journal of Econometrics, Elsevier, vol. 141(2), pages 1131-1158, December.
    6. Peter E. Kennedy, 2002. "Sinning in the Basement: What are the Rules? The Ten Commandments of Applied Econometrics," Journal of Economic Surveys, Wiley Blackwell, vol. 16(4), pages 569-589, September.
    7. 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.
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    More about this item

    Keywords

    Demand; Estimation; Fish; Fulton market; Inventories; Simultaneous equations;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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