Peanut butter and OJ prices & volumes …

Couple of interesting posts to highlight. Nothing earth-shattering or paradigm-shifting, just a focus on price and traders’ response to price.

From Econbrowser, this:
Price dynamics
http://www.econbrowser.com/archives/2011/03/price_dynamics.html

Although the article opens with and examines:

A dominant class of economic theories is built on the assumption that prices respond only sluggishly to new economic conditions.

I found this of more immediate interest:

the weekly price of an 18-ounce jar of Peter Pan Creamy Peanut Butter at a supermarket in northwest Chicago.

It’s worth noting that in the Peter Pan graph above, the product was only on sale about one week out of five over this period. However, Chevalier and Kashyap find that these sales account for almost 40% of the ounces sold. For other products, the importance of sales is even more dramatic. For example, 12-ounce cans of Minute Maid frozen orange juice are on sale in 30% of the weeks, but those weeks account for 70% of the ounces sold.

Customers respond to sale prices by quickly buying big volumes. Makes sense.

OK, that’s peanut butter and orange juice … its not the stock market, or futures, or currencies, or etc.. But is there a lesson in there for FM traders? Traders too respond to price below value, it makes sense to buy to then sell later at, or above, value. Volumes below value wont be huge, they can’t be because, unlike the supermarket, low prices wont be held down until the “sale” ends (or inventory runs out), but will respond by rising as soon as the seller/s has/have completed his or her/their amount (hang on … inventory runs out …). So a trader is going to have to look for different clues that price is below value. What could these clues be? Accelerated response, for example? Reduced willingness of sellers to continue selling at the current price, or below? Other clues? (All this presupposes that a trader has an idea of where value is first, right … ?)

Of course, this all presupposes that a trader can recognise “value” (and therefore buy below, &/or sell above). The ‘regular’ price of peanut butter or OJ in the supermarket provides a good measure of value for the grocery consumer, but in stock/futures/currencies/etc. other measures are going to have to be found. Trading with an incorrect perception of value could result in losing trades (balanced out by luck in the short term at least).

Going back to the beginning of the article and the initial purpose of the paper:

A dominant class of economic theories is built on the assumption that prices respond only sluggishly to new economic conditions.

Interesting to look at the question from a longer-term perspective (not a day-trader persepctive) and try to assess how prices adjust to ‘new economic conditions’. Evidence from the financial markets (like daily HLC charts :-)) would tend to suggest that prices can well take some time to adjust (and perceptions of value shift in the longer-term). And also, this, from a different article, at Calculated Risk, here:
Birthday Houses
http://www.calculatedriskblog.com/2011/03/birthday-houses.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29

growing collection of homes that real estate insiders dub “birthday houses,” a term that refers to any property that has gone unsold longer than a year. …
As Jim the Realtor always says, there’s nothing that price won’t fix. Instead these owners are chasing the prices down – very slowly.

Different markets, different timeframes, different results.

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