RESEARCH ON PRICE SETTING AND FIRM DYNAMICS

SUMMARY OF MY RESEARCH ON PRICE SETTING AND FIRM DYNAMICS  HERE 

Essays on Price Determination and Expectations, Ph.D. thesis, University of  Stockholm, 1985.  

Price Dynamics of Exporting and Import Competing Firms, Scandinavian Journal of Economics, 88, 417-436, 1986.

A model of a market for an internationally traded good is presented in this paper. Buyers, who are customers of one firm, are imperfectly informed about other firms' prices and it is costly for them to change from one supplier to another. This leads to dynamic market share equations, which allow analysis of the interaction between price/quantity decisions of exporting and import-competing firms. One result is that although the prices of import-competing firms must in the long run match import prices, they may in the short run be uncorrelated or even negatively correlated with import prices.

Customer Markets, Credit Market Imperfections and Real Price Rigidity, Economica 58, 317-23, 1991.

According to standard theory, an increase in demand should raise prices of goods, given factor prices. Empirically, however, prices appear to be unaffected by short-run variations in demand. This paper suggests an explanation of this observation. If customers react slowly to price changes and credit markets are imperfect, prices may be unchanged or even fall when demand increases. The reason is that when demand is high, profits are high, and firms can compete more intensely for customers without increasing their borrowing. 

Market Shares, Financial Constraints, and Pricing Behavior in the Export Industry, Economica 69, 583-607, 2002.

 A structural dynamic model of price and quantity adjustment is estimated on time series data for exports and export prices, Two sources of dynamics are considered: customer markets and preset prices. As predicted by the customer market model, the market share adjusts slowly after a change in the relative price and financial conditions affect prices. Prices are found to be sticky in the sense that they do not reflect the most recent information about costs and exchange rates. A parsimoniously parameterized structural model explains about 90% of the variation in market share and the relative price. 

Price and Investment Dynamics: Theory and Plant Level Data (with Magnus Lundin, Charlotte Bucht, and Tomas Lindström), 

Journal of Money Credit and Banking 41, 907-934, 2009.

We construct a model of a firm competing for market share in a customer market and making investments in physical capital. The firm is financially constrained and there are implementation lags in investment. Our model predicts that product prices should depend on costs and competitors' prices but respond weakly to demand shocks. Also, prices should be strongly related to investment. We estimate price and investment equations on panel data for Swedish manufacturing plants and find results that are qualitatively in line with these predictions, though the relation between investment and prices is stronger than predicted by our model. 

Product Market Imperfections and Employment Dynamics (with Mikael Carlsson and Stefan Eriksson),

Oxford Economic Papers 65, 447-470, 2013.

How important is imperfect competition in the product market for employment dynamics? To investigate this, we formulate a model of employment adjustment with search frictions, vacancy costs, hiring costs, and imperfect competition in the product market. From this model, we derive a structural equation for employment that we estimate on firm-level data. We find that product market demand shocks have significant and quantitatively large effects on employment. This supports a model with imperfect competition in the product market. We find no evidence that the level of unemployment in the local labour market has a direct effect on job creation in existing firms. In some specifications, we find evidence of congestion effects, i.e., that hiring is slowed down if there are many vacancies in the local labour market.

DEEP DYNAMICS  (with Glenn Mickelsson and Karolina Stadin)  NEW VERSION 2024    VERY SHORT PRESENTATION

We use panel data to examine how firms adjust production, employment, capital and inventories in response to demand-side shocks. Then, we construct a theoretical model that matches our estimated impulse-response functions. We find that a combination of convex adjustment costs and implementation lags explains average input adjustment very well. While inputs adjust slowly, production responds quickly to the demand shock and this is explained by increasing returns (overhead labor) and increased factor utilization. Inventory adjustment amplifies the effects of demand-side shocks on production.   

Response to referees at top journal