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Complex price dynamics in vertically linked cobweb markets

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  • Chaudhry, Muhammad Imran
  • Miranda, Mario J.

Abstract

We enrich the traditional cobweb model by explicitly modelling interdependencies between upstream and downstream farmers in a vertically linked agricultural supply chain. Analysis of the system of nonlinear difference equations characterizing price dynamics in the underlying model reveal complex, quasi-cyclical price fluctuations around the unique equilibrium state. We show that time-delays arising from the unequal lengths of upstream and downstream production cycles have profound effects on price dynamics. From a policy perspective, we find that improvements in downstream production technology and declines in consumers’ sensitivity to prices lead to chaotic price fluctuations. Simulations under reasonable model calibrations reproduce the stylized features of actual prices, including quasi-cyclical fluctuations, positive first-order autocorrelation and fat-tailed distributions. In doing so, we address a major criticism of the theory of endogenous price fluctuations: the failure of chaotic cobweb models to replicate positively autocorrelated prices.

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  • Chaudhry, Muhammad Imran & Miranda, Mario J., 2018. "Complex price dynamics in vertically linked cobweb markets," Economic Modelling, Elsevier, vol. 72(C), pages 363-378.
    • Handle: RePEc:eee:ecmode:v:72:y:2018:i:c:p:363-378
    DOI: 10.1016/j.econmod.2018.02.012
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    Cited by:

    1. Poitras, Geoffrey, 2023. "Cobweb Theory, Market Stability, And Price Expectations," Journal of the History of Economic Thought, Cambridge University Press, vol. 45(1), pages 137-161, March.
    2. Zhao, Xin & Calvin, Katherine & Patel, Pralit & Abigail, Snyder & Wise, Marshall & Waldhoff, Stephanie & Hejazi, Mohamad & Edmonds, James, 2021. "Impacts of interannual climate and biophysical variability on global agriculture markets," Conference papers 333245, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    3. Ge Gao & Xinmin Liu & Huijun Sun & Jianjun Wu & Haiqing Liu & Wei (Walker) Wang & Zhen Wang & Tao Wang & Haoming Du, 2019. "Marginal Cost Pricing Analysis on Tradable Credits in Traffic Engineering," Mathematical Problems in Engineering, Hindawi, vol. 2019, pages 1-10, January.
    4. Muhammad Imran Chaudhry & Mario J. Miranda, 2024. "Endogenous price fluctuations: Evidence from the chicken supply chain in Pakistan," American Journal of Agricultural Economics, John Wiley & Sons, vol. 106(2), pages 637-658, March.

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    More about this item

    Keywords

    Nonlinear cobweb models; Time-delays; Chaos; Agricultural commodity price fluctuations; Vertically linked agricultural supply chains;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices

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