Can spot and contract markets co-exist in agriculture?
By Miguel Carriquiry and Bruce A. Babcock, Center for Agricultural and Rural Development, Iowa State University. - New production technologies, consumers who are more discriminating, and the need for improved coordination are among the forces driving the move from spot markets to contracts.
16 May 2004
2 minute read
Some worry that this tendency will result in the disappearance of spot markets,
or at least that they will become too thin to be of help for an efficient price discovery
process.
Other authors point to the reduction in welfare of independent producers
resulting from contracting in oligopsonistic industries. While a large body of literature is
available tackling the contract versus spot market decision, much less is known about the
reasons that lead to procurement in both markets.
This paper provides a simple model to
study how fundamental economic factors influence the contracting behavior of farmers
and processors. In the model, processors contract upstream with price-taking farmers.
Participation in both markets arises as a Nash equilibrium for a wide range of
parameterizations. Numerical methods are used to examine the effects of fundamental
economic factors on the relative size of the spot and contract markets.
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Source: CARD, ISU - April 2004
26 October 2024
4
minute read
