When are Supply and Demand Determined Recursively Rather than Simultaneously? Another Look at the Fulton Fish Market Data

26 Pages Posted: 28 Jun 2007

See all articles by Kathryn Graddy

Kathryn Graddy

Brandeis University - Department of Economics

Peter E. Kennedy

Simon Fraser University (SFU) - Department of Economics

Date Written: January 2007

Abstract

When a supply and demand model is recursive, with errors uncorrelated across the two equations, ordinary least squares (OLS) is the recommended estimation procedure. Supply to a daily fish market is determined by the previous night's catch, so this would appear to be a good example of a recursive market. Despite this, data from the Fulton fish market are treated in the literature, without explanation, as coming from a simultaneous-equations market. We provide the missing explanation: inventory changes, influenced by current price, affect daily supply. Instrumental variable estimates using the full data set differ very little from OLS estimates using only observations with little inventory change, providing strong support for our explanation. Finally, we note that because of inventory changes, estimates of supply price elasticities in high-frequency markets must be interpreted with care.

Keywords: Demand, estimation, fish, Fulton market, inventories, simultaneous equations

JEL Classification: C3, L6

Suggested Citation

Graddy, Kathryn and Kennedy, Peter E., When are Supply and Demand Determined Recursively Rather than Simultaneously? Another Look at the Fulton Fish Market Data (January 2007). CEPR Discussion Paper No. 6053, Available at SSRN: https://ssrn.com/abstract=997069

Kathryn Graddy (Contact Author)

Brandeis University - Department of Economics ( email )

415 South Street MS 021
Waltham, MA 02453-2728
United States
781-736-8616 (Phone)
781-736-2269 (Fax)

HOME PAGE: http://people.brandeis.edu/~kgraddy/

Peter E. Kennedy

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
604-291-4516 (Phone)

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