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

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  • Graddy, Kathryn
  • Kennedy, Peter E

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.

Suggested Citation

  • Graddy, Kathryn & Kennedy, Peter E, 2007. "When are Supply and Demand Determined Recursively Rather than Simultaneously? Another look at the Fulton Fish Market Data," CEPR Discussion Papers 6053, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:6053
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    More about this item

    Keywords

    Demand; Estimation; Fish; Fulton market; Inventories; Simultaneous equations;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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