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

Kathryn Graddy and Peter Kennedy

No 6053, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: C3 L6 (search for similar items in EconPapers)
Date: 2007-01
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Working Paper: When are Supply and Demand Determined Recursively Rather than Simultaneously? Another look at the Fulton Fish Market Data (2006)
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