Home Alternative Policy Responses to Increased Use of Formula Pricing
Article
Licensed
Unlicensed Requires Authentication

Alternative Policy Responses to Increased Use of Formula Pricing

  • B. Wade Brorsen ORCID logo EMAIL logo , James R. Fain and Joshua G. Maples
Published/Copyright: November 21, 2017

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.

JEL Classification: C63; D44; L1; Q02

Funding statement: The research was funded by United States Department of Agriculture Cooperative Agreement 58-3000-3-0045. Brorsen also receives financial support from the A.J. and Susan Jacques Chair and the Oklahoma Agricultural Experiment Station and USDA National Institute of Food and Agriculture, Hatch Project number OKL02939. Maples received support from a Sitlington Enriched Graduate Scholarship. Earlier versions of the paper were presented at an Economics Research Service workshop and an Agricultural and Applied Economics Association invited paper session.

References

Adjemian, M. K., B. W. Brorsen, W. Hahn, T. L. Saitone, and R. J. Sexton. 2016 (March). “Thinning Markets in U.S. Agriculture: What Are the Implications for Producers and Processors?” USDA Economic Research Service Economic Information Bulletin 148.Search in Google Scholar

Agricultural Marketing Service. 2015. Slaughter Cattle Summary. Online. http://www.ams.usda.gov/market-news/slaughter-cattle-summary.Search in Google Scholar

Azzam, A. 2003. “Market Transparency and Market Structure: The Livestock Mandatory Reporting Act of 1999.” American Journal of Agricultural Economics 85 (2):387–395.10.1111/1467-8276.00127Search in Google Scholar

Balmann, A. (2000).Modeling Land Use with Multi-agent Systems: Perspectives for the Analysis of Agricultural Policies. IIFET 2000 Proceedings.Search in Google Scholar

Boyer, C. N., and B. W. Brorsen. 2013. “Changes in Beef Packers’ Market Power after the Livestock Mandatory Price Reporting Act: An Agent-Based Auction.” American Journal of Agricultural Economics 95 (4):859.10.1093/ajae/aat005Search in Google Scholar

Boyer, C. N., B. W. Brorsen, and J. R. Fain. 2015. “Private-Value Auction Versus Posted-Price Selling: An Agent-Based Model Approach.” Intelligent Systems in Accounting, Finance, and Management 22:249–262.10.1002/isaf.1381Search in Google Scholar

Boyer, C. N., B. W. Brorsen, and T. Zhang. 2014. “Common-Value Auction versus Posted-Price Selling: An Agent-Based Model Approach.” Journal of Economic Interaction and Coordination 9 (1):129–149.10.1007/s11403-013-0115-zSearch in Google Scholar

Brester, G. W., J. M. Marsh, and J. A. Atwood. 2004. “Distributional Impacts of Country-Of-Origin Labeling in the U.S. Meat Industry.” Journal of Agricultural and Resource Economics 29: 206–227. I do not understand why you have capitalized the o in of.Search in Google Scholar

The Cattle Site. 2016. “How Will GIPSA Rules Affect US Farmers?” November 8. Accessed November 9, 2016. http://www.thecattlesite.com/news/50341/how-will-new-gipsa-rules-affect-us-farmers/.Search in Google Scholar

Chung, C., and E. Tostão. 2009. “Nonparametric Estimation of Oligopsony in First-Price Auction.” Journal of Agricultural Economics 60 (2):318–333.10.1111/j.1477-9552.2008.00188.xSearch in Google Scholar

Coatney, K. T., J. M. Riley, and S. E. Head. 2013. “The Competitive Implications of Linking Forward Contract Prices to Spot Market Transactions in the Presence of Economies of Size.” Working paper, Mississippi State University.Search in Google Scholar

Conover, C. J. 2010. “Congress Should Account for the Excess Burden of Taxation.” CATO Institute Policy Analysis paper No. 669. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1710774.10.2139/ssrn.1710774Search in Google Scholar

Crespi, J. M., T. L. Saitone, and R. J. Sexton. 2012. “Competition in U.S. Farm Product Markets: Do Long-Run Incentives Trump Short-Run Market Power?.” American Journal of Agricultural Economics 34 (4):669–695.10.1093/aepp/pps045Search in Google Scholar

Crespi, J. M., and R. J. Sexton. 2005. “A Multinomial Logit Framework to Estimate Bid Shading in Procurement Auctions: Application to Cattle Sales in the Texas Panhandle.” Review of Industrial Organization 27 (3):253–278.10.1007/s11151-005-1755-5Search in Google Scholar

Crespi, J. M., and T. Xia. 2015. “A Note on First-Price Sealed-Bid Cattle Auctions in the Presence of Captive Supplies.” Agricultural and Resource Economics Review 44:340–345.10.1017/S1068280500005098Search in Google Scholar

Feldstein, M. 1999. “Tax Avoidance and the Deadweight Loss of the Income Tax.” The Review of Economics and Statistics 81 (4):674–680.10.1162/003465399558391Search in Google Scholar

Franken, J. R. V., and J. L. Parcell. 2012. “Evaluation of Market Thinness for Hogs and Pork.” Journal of Agricultural and Applied Economics 44:461–475.10.1017/S1074070800024044Search in Google Scholar

Gordy, Michael E. 1998 (August). “Computationally Convenient Distributional Assumptions for Common-Value Auctions.” Computational Economics 12 (1): 61–78.10.1023/A:1008645531911Search in Google Scholar

Guerci, E., I. Stefano, and S. Cincotti. 2008. “Learning Agents in an Artificial Power Exchange: Tacit Collusion, Market Power and Efficiency of Two Double-Auction Mechanisms.” Computational Economics 32:73–98.10.1007/s10614-008-9127-5Search in Google Scholar

Hailu, A., and S. Thoyer. 2010. “What Format for Multi-unit Multiple-Bid Auctions? Agent-Based Simulation of Auction Performance and Non-linear Bidding Behavior.” Computational Economics 35: 189–209.10.1007/s10614-010-9199-xSearch in Google Scholar

Ji, I. B., and C. Chung. 2012. “Causality between Captive Supplies and Cash Market Prices in the US Cattle Procurement Market.” Agricultural and Resource Economics Review 41 (3):340.10.1017/S1068280500001301Search in Google Scholar

Kinnucan, H. W., H. Xiao, and C. J. Hsia. 1996. “Welfare Implications of Increased US Beef Promotion.” Applied Economics 28 (10):1235–1243.10.1080/000368496327787Search in Google Scholar

Koontz, S. R. 2013. “Price Discovery Issues for Fed Cattle: What’s the Future of the Cash Market or How Thin Is Too Thin?” Presentation for USDA Agricultural Outlook Forum. February 2013.Search in Google Scholar

Koontz, S. R., and C. E. Ward. 2011. “Livestock Mandatory Price Reporting: A Literature Review and Synthesis of Related Market Information Research.” Journal of Agricultural and Food Industrial Organization 9 (1):9.10.2202/1542-0485.1254Search in Google Scholar

Lawrence, J. D. 2010. “Hog Marketing Practices and Competition Questions.” Choices 25 (2):1–11.Search in Google Scholar

Lusk, J. L., and J. D. Anderson. 2004. “Effects of Country-Of-Origin Labeling on Meat Producers and Consumers.” Journal of Agricultural and Resource Economics 29 (2):185–205.Search in Google Scholar

Mathews, K. H., W. Brorsen, W. F. Hahn, C. Arnade, and E. Dohlman. 2015. “Mandatory Price Reporting, Market Efficiency, and Price Discovery in Livestock Markets.” USDA Economic Research Service Report LDPM-254-01.Search in Google Scholar

Meyer, D. J. 1988. “Competition and Bidding Behavior: Some Evidence from the Rice Market.” Economic Inquiry 26 (1):123–132.10.1111/j.1465-7295.1988.tb01673.xSearch in Google Scholar

Meyer, S. R. 2013. “A Tragedy of the Commons – How Do We Proceed without A Spot Market?” Presentation for USDA Agricultural Outlook Forum. Arlington, VA. February 22.Search in Google Scholar

Morrison Paul, C. 2001. “Market and Cost Structure in the U.S. Beef Packing Industry: A Plant-Level Analysis.” American Journal of Agricultural Economics 83:64–76.10.1111/0002-9092.00137Search in Google Scholar

Muth, M. K., J. Del Roccili, M. Asher, J. Atwood, G. Brester, S. C. Cates, M. C. Coglaiti, S. A. Karns, S. Koontz, J. Lawrence, Y. Liu, J. Marsh, B. Martin, J. Schroeder, J. L. Taylor, and C. L. Viator. 2007. GIPSA Livestock and Meat Marketing Study, Volume 3: Fed Cattle and Beef Industries. Research Triangle Park, NC: RTI International for USDA Grain Inspection, Packers and Stockyards Administration.Search in Google Scholar

Muth, M. K., Y. Liu, S. R. Koontz, and J. D. Lawrence. 2008. “Differences in Prices and Price Risk across Alternative Marketing Arrangements Used in the Fed Cattle Industry.” Journal of Agricultural and Resource Economics 33:118–135.Search in Google Scholar

Raj, C 2009. “Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance.” American Economic Journal: Economic Policy 1 (2): 31–52.10.1257/pol.1.2.31Search in Google Scholar

R-CALF. 2011. “Joint Letter Requesting Captive Supply Rulemaking.” Accessed August 2, 2014. http://www.r-calfusa.com/wp-content/uploads/competition/110201JointLetterCaptiveSupplyRulemaking.pdf.Search in Google Scholar

Salas, P. C. 2016. “Relational Contracts and Product Quality: The Effect of Bargaining Power on Efficiency and Distribution.” Journal of Agricultural and Resource Economics 41 (3):406–424.Search in Google Scholar

Schroeder, T. C., R. Jones, J. Mintert, and A. Barkley. 1991. The Impacts of Captive Supplies on the Fed Cattle Industry. Blacksburg, VA: Research Institute on Livestock Pricing.Search in Google Scholar

Schroeter, J. R., and A. Azzam. 2003. “Captive Supplies and the Spot Market Price of Fed Cattle: The Plant‐Level Relationship.” Agribusiness 19 (4):489–504.10.1002/agr.10070Search in Google Scholar

Taylor, J., M. Muth, and S. Koontz. 2007. “Livestock and Meat Marketing Arrangements: Background on Proposed Livestock Marketing Arrangements Legislation.” LM-1. Livestock Marketing Information Center. Accessed August 1, 2014. http://www.lmic.info/memberspublic/LMMA/LM-1%20Fact%20Sheet_legislation.pdf.Search in Google Scholar

Tesfatsion, L. 2001. “Introduction to the Special Issue on Agent-Based Computational Economics.” Journal of Economic Dynamics and Control 25:281–293.10.1016/S0165-1889(00)00027-0Search in Google Scholar

United States Department of Agriculture, Agricultural Marketing Service (USDA, AMS). 2014. USDA-AMS National Daily Direct Slaughter Cattle – Delivered Cattle Summary, Report LM_CT106. Multiple reports. Accessed 15 August.Search in Google Scholar

United States Department of Justice (USDOJ), United States Department of Agriculture (USDA). 2010. Public Workshops Exploring Competition Issues in Agriculture: A Dialogue on Competition Issues Facing Farmers in Today’s Agricultural Marketplace. Fort Collins, CO: Colorado State University. 27 August.Search in Google Scholar

Ward, C. E. 2002. “A Review of Causes for and Consequences of Economic Concentration in the US Meatpacking Industry.” Current Agriculture, Food & Resource Issues 3:1–28.Search in Google Scholar

Ward, C. E. 2010. “Assessing Competition in the US Beef Packing Industry.” Choices 25 (2):1–14.Search in Google Scholar

Ward, Clement E, Stephen E Koontz, and Ted C. Schroeder. 1998 (December). “Enter Article title here…” Impacts from Captive Supplies on Fed Cattle Transaction Prices 23 (2): 494–514.Search in Google Scholar

Ward, C. E., D. S. Peel, J. N. Trapp, T. L. Dowty, and S. R. Koontz. 1999. “Marketing Agreement Impacts in an Experimental Market for Fed Cattle.” American Journal of Agricultural Economics 81 (2):347–358.10.2307/1244586Search in Google Scholar

Ward, C. E., M. K. Vestal, and Y. Lee. 2014. “Relationships between Alternative Marketing Arrangement Prices for Fed Cattle and Hogs.” Selected Paper Presented at Western Agricultural Economics Association’s Annual Meeting, Colorado Springs, CO, June 22–24.Search in Google Scholar

Xia, T., and R. J. Sexton. 2004. “The Competitive Implications of Top-Of-The-Market and Related Contract-Pricing Clauses.” American Journal of Agricultural Economics 86:124–138.10.1111/j.0092-5853.2004.00567.xSearch in Google Scholar

Zhang, M., and R. J. Sexton. 2000. “Captive Supplies and the Cash Market Price: A Spatial Markets Approach.” Journal of Agricultural and Resource Economics 25 (1):88–108.Search in Google Scholar

Zhang, T., and B. W. Brorsen. 2010. “The Long-Run and Short-Run Impact of Captive Supplies on the Spot Market Price: An Agent-Based Artificial Market.” American Journal of Agricultural Economics 92 (4):1181–1194.10.1093/ajae/aaq033Search in Google Scholar

Published Online: 2017-11-21

© 2018 Walter de Gruyter GmbH, Berlin/Boston

Downloaded on 20.9.2025 from https://www.degruyterbrill.com/document/doi/10.1515/jafio-2017-0008/html
Scroll to top button