Pricing models

Abstract

Our aim in this book is to analyse the connections between spatially separated markets. A preliminary step in this direction is to understand how prices are determined in a single market. Subsequent chapters (and especially chapter 8) will have to rely on that knowledge. Price theory is a vast subject, however, and this chapter should be seen as an introduction intended for non-specialists rather than a review. Prices are determined by the confrontation of demand and supply; but supply (and also to some extent demand) is adjusted by producers to get the best advantage from the information they have in hand at the time when they plan their future production. In other words, the whole economic environment is likely to play a role in the process. According to these different environments, various kinds of pricing models have been proposed. Our aim in this chapter is to discuss a number of concepts which have been put forward in relation with these topics during the last decades. Many of these concepts have an interest in their own; for instance the rational expectations approach besides being used in price theory has important implications for macroeconomics or for the description of rational learning mechanisms. In section one, we examine cobweb models under various phenomenological (i.e. ad hoc) anticipation assumptions: first we consider models without inventories, then we discuss the role of inventories. In section two, we introduce the concept of rational expectations: first, we review empirical and theoretical motivations for its introduction, then we present the basic results of Muth’s original paper. In section three, we discuss how spatial price competition fits into the framework of imperfect competition theories.