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Discussion Paper Details

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

Author(s): Kathryn Graddy and Peter E Kennedy

Publication Date: January 2007

Keyword(s): demand, estimation, fish, Fulton market, inventories and simultaneous equations

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Graddy, K and Kennedy, P. 2007. 'When are Supply and Demand Determined Recursively Rather than Simultaneously? Another look at the Fulton Fish Market Data'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6053