Alternative Policy Responses to Increased Use of Formula Pricing

B Brorsen, James Fain () and Josh Maples

Journal of Agricultural & Food Industrial Organization, 2018, vol. 16, issue 1, 11

Abstract: This article determines the potential effects of policies to address concerns about lower producer prices due to increased use of marketing agreements. Policies considered are banning alternative marketing agreements, compensating producers who sell on the cash market, and restricting the quantity of marketing agreements. We use an agent-based model in a common-value auction framework to analyze these policies. The common-value auction framework is used because it closely resembles how livestock are actually purchased. The agent-based model is used to find the common-value auction equilibrium. A ban on marketing agreements reduces social welfare and the other policy interventions have little effect on prices. Past theoretical studies predict marketing agreements will cause large reductions in prices paid to producers. Conversely, empirical studies show slight effects. This article offers an alternative theory that more closely matches livestock markets and our results reduce the gap between theoretical and empirical research. The common-value auction model predicts negative effects on producer prices close to those found in past empirical research.

Keywords: agent-based models; captive supplies; common-value auction; market power; marketing agreements; thin markets (search for similar items in EconPapers)
JEL-codes: C63 D44 L1 Q02 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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DOI: 10.1515/jafio-2017-0008

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