Market Leader Pre Intermediate Progress Test Keys

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There are three suppliers in each period. A supplier's consumption depends on the number of buyers in the market (supply curve),the current market price (demand curve), and the cost of producing the intermediate good (production curve). We assume that the productioncurve is a step function. It is simple to adjust the model to allow for more complicated production curves. (The linear production curve can be viewed as a special case with m = 1.) The production curve is concave upward,which means that the cost of producing the intermediate good falls faster than its quantity.

For the manufacturing agents,the demand curve is concave downward, so the quantity supplied by the manufacturer is less than the quantity demanded. The manufacturer's consumption can be split into the cost of producing the intermediate good and the cost of selling it in period 1. Initially, these costs are constant and equal to the sunk startup cost of producing one good. They are equal to the purchased commodity discount for period 1. (If there are additional costs, we can include them as a lump-sum markup on the product cost in period 1.) The manufacturing agent earns the markup over the sales price on one end product. The markup is equal to the product cost less the commodity discount. This number is multiplied by the quantity of the good produced in period 1 and the price in period 1 is subtracted from this product cost. The selling price in period 1 is determined by a combination of the price charged in period 1 and the cost of selling. The cost of selling depends on the number of buyers in the market and the price that the good is selling for.

The demand curve has a negative slope, meaning that buyers are willing to pay a higher price for a larger quantity of the intermediate good. However, the slope of the demand curve is much lower than the slope of the production curve. This is the inverse of the industry's sunk startup cost model. The slope of the demand curve is only slightly larger than 1. By contrast, the slope of the production curve is set to 3, which implies that the marginal cost of production declines faster than the marginal revenue from each extra buyer. These two properties of the model imply that the price difference between suppliers initially exceeds the markup.

We then test for the robustness of the finding that prices converge over time. Our analysis is based on a fixed-cohort model, which unlike the standard models in the literature, does not assume convergence. We find that our estimates of price dispersion are not sensitive to the assumption of convergence.8 This result is interesting for at least two reasons. First, it shows that the declining price dispersion is a robust result that is independent of the assumptions about convergence in the literature. Second, it highlights that our results are sensitive to the assumption of convergence only because we make the strong assumption that there is no backward smoothing, that is, that prices do not move in the opposite direction of a given price gap over time. This may be the case in the domestic market for many products, especially those for which the leading supplier has a large market share. However, it may not be the case in foreign markets, where the leading supplier typically does not have a large market share. Our experiment using synthetic data also shows that the declining price dispersion is indeed robust to backward smoothing. 827ec27edc