Demand uncertainy and unemployement in a monopoly union model

The main concern of this paper is to show the importance of demand uncertainty in the determination of the "natural rate of unemployment". In the goods market there is demand heterogeneity -coming from preferences, and demand uncertainty -related solely to heterogeneity. Demand uncertainty is introduced in a monopoly union model where unions set wages at the first stage of the game, without knowing with certainty the demand for the good produced by the firm. Because the union assigns a positive probability at the event "underemployment equilibrium", it expects that the expected unemployment rate be positive. Since all the uncertainty is firm specific (i.e., there is not aggregate uncertainty), aggregate employment is equal to the union expected employment and then there is unemployment at equilibrium. In some islands the idiosyncratic demand shock is high and firms produce constrained by its full-employment capacity, but at the same time in the other islands the idiosyncratic demand shock is low and firms optimally produce less than its full-employment output

Product Variety and Demand Uncertainty

We show that demand uncertainty leads to vertical product differentiation even when consumers are homogeneous. When a firm anticipates that its inventory or capacity may not be fully utilized, product variety can reduce its expected costs of excess capacity. When the firm offers a continuum of product varieties, the highest quality product has the highest profit margins but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute margin. We derive these results in both a monopoly model and a variety of different competitive models. We conclude with a discussion of empirical predictions together with a brief discussion of supporting evidence available from marketing studies.

Menu Auctions with Demand Uncertainty.

We apply a Bernheim-Whinston (1986) type mechanism to a situation where a single buyer with uncertain demand wishes to buy from a small number of suppliers. We let suppliers bid a payment contingent on own quantity supplied, and another payment contingent on the realization of total demand. We show that there is a unique equilibrium which is also efficient. This equilibrium is equivalent to the one under the ‘truthful bids’ restriction used in the model without uncertainty in Bernheim-Whinston (1986).procurement; efficient auctions; multi unit auctions; uniqueness

Regulating Availability with Demand Uncertainty

I evaluate German regulation that requires retail discounters to guarantee the availability of their products in bargain sales. The regulation is meant to prevent loss leaders. Retailers however claim that rationing is due to demand uncertainty and thereby undermine the regulation's rationale. Indeed, demand uncertainty explains empirical observations better than a theory of loss leaders. This paper shows, however, that also under demand uncertainty the regulation has positive effects. Ultimately, it raises production, which, under imperfect competition, is beneficial. A strict regulation overshoots its goal when high demand is relatively unlikely. In this case more sophisticated regulation is required.

Dynamic co-movements of stock market returns, implied volatility and policy uncertainty

We examine time-varying correlations among stock market returns, implied volatility and policy uncertainty. Our findings suggest that correlations are indeed time-varying and sensitive to oil demand shocks and US recessions. Highlights: We examine dynamic correlations of stock market returns, implied volatility and policy uncertainty. Dynamic correlations reveal heterogeneous patterns during US recessions. Aggregate demand oil price shocks and US recessions affect dynamic correlations. A rise in the volatility of policy uncertainty dampens stock market returns and increases uncertainty. Increases in stock market volatility reduce stock market returns and increase uncertainty

The timing of capacity expansion investments in oligopoly under demand uncertainty

Since a flexibility value emerges in waiting to expand capacity, the impact of demand uncertainty in an oligopolistic industry leads to capacity expansion timing. The creation of growth opportunities is then the outcome of expanding capacity at optimal times. However, in our model different capacity size competitors interact not affecting each others, because assessing the impact of demand uncertainty on capacity expansion projects takes them to set up independently their optimal capacity expansion timing schedules. In equilibrium no firm expands capacity more often than any other. Under demand uncertainty simultaneity in capacity expansions is the only possible Markov Perfect Equilibrium

Demand uncertainy and unemployement in a monopoly union model.

The main concern of this paper is to show the importance of demand uncertainty in the determination of the "natural rate of unemployment". In the goods market there is demand heterogeneity -coming from preferences, and demand uncertainty -related solely to heterogeneity. Demand uncertainty is introduced in a monopoly union model where unions set wages at the first stage of the game, without knowing with certainty the demand for the good produced by the firm. Because the union assigns a positive probability at the event "underemployment equilibrium", it expects that the expected unemployment rate be positive. Since all the uncertainty is firm specific (i.e., there is not aggregate uncertainty), aggregate employment is equal to the union expected employment and then there is unemployment at equilibrium. In some islands the idiosyncratic demand shock is high and firms produce constrained by its full-employment capacity, but at the same time in the other islands the idiosyncratic demand shock is low and firms optimally produce less than its full-employment output.Unemployment; Monopoly Union; Demand Uncertainty;

Increasing optimism and demand uncertainty

By allowing the initial prior over market size to be a mixture of distributions, this paper extends the model of irreversible investment under uncertainty proposed by Rob (1991). We find that capacity expansion fuels investors' optimism. It is shown in the paper that the crash is always preceded by a boom when the initial prior is a mixture of exponential distributions.Learning Investment Uncertainty

Money demand and macroeconomic uncertainty

In this study we construct a measure of macroeconomic uncertainty from several observable economic indicators for the euro area. Indicator variables are based on financial market data, such as medium-term returns, loss and volatility measures but also come from surveys that capture business and consumer sentiment. From these we estimate the path of underlying macroeconomic uncertainty using an unobserved components model. Employing cointegration analysis it is demonstrated that the extracted measures of uncertainty help to explain the increase in euro area M3 over the period 2001 to 2004. Similar evidence can be found for US monetary aggregates. --Money demand,Macroeconomic Uncertainty,Excess Liquidity

Endogenous capacities and price competition: the role of demand uncertainty

This paper analyzes a model of capacity choice followed by price competition under demand uncertainty. Under various assumptions regarding the nature and timing of demand realizations, we obtain general predictions concerning the role of demand uncertainty on equilibrium outcomes. We show that it reduces the multiplicity of equilibria, it may rule out the existence of symmetric equilibria, and it leads to endogenous capacity asymmetries even though firms are ex-ante symmetric. Furthermore, as compared to the certainty equivalent game, demand uncertainty reduces prices and increases consumer surplus, but it also decreases total welfare because of the emergence of idle capacity. By relying on the analysis of firms' reaction functions as well as on the theory of submodular games, we are able to show that a subgame perfect equilibrium always exists and to fully characterize it