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Can Food Processors Use Contracts To Influence Farm Cash Prices? The Competitive Implications Of Top-Of-The-Market And Related Pricing Clauses

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  • Xia, Tian
  • Sexton, Richard J.
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Abstract

When contract production is marketed contemporaneously with production sold through a spot market, it is conveninet to specify the contract price in terms of the subsequent cash price. This paper examines the competitive implications of such pricing arrangements, focusing in particular upon so-called "top-of-the-market (TOMP) pricing in cattle procurement, wherein the contract guarantees the producer the highest cash price prevailing at the time of delivery. We show that these contracts have anticompetitive consequences when the same buyers who purchase cattle with the TOMP clause also compete to procure cattle in the subsequent spot market. By committing to purchase cattle at a price to be determined later, beef packers' incentives to compete aggressively in the spot market are attenuated. Although TOMP pricing is not in producers' collective interest, rational sellers may nonetheless sign these contracts, in some cases with little or no financial inducement.

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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2002 Annual meeting, July 28-31, Long Beach, CA with number 19776.

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Date of creation: 2002
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Handle: RePEc:ags:aaea02:19776

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Keywords: Demand and Price Analysis;

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  1. Clement Ward & Marvin Hayenga & Ted Schroeder & John Lawrence & Wayne Purcell, 2000. "Contracting in the U.S. Pork and Beef Industries: Extent, Motives, and Issues," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 48(4), pages 629-641, December.
  2. Love, H. Alan & Burton, Diana M., 1999. "A Strategic Rationale For Captive Supplies," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(01), July.
  3. Elam, Emmett W., 1992. "Cash Forward Contracting Versus Hedging Of Fed Cattle, And The Impact Of Cash Contracting On Cash Prices," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(01), July.
  4. Schnitzer, Monika, 1994. "Dynamic duopoly with best-price clauses," Munich Reprints in Economics 3108, University of Munich, Department of Economics.
  5. J. Mark Ramseyer & Eric B. Rasmusen & John Shepard Wiley, 2000. "Naked Exclusion: Reply," American Economic Review, American Economic Association, vol. 90(1), pages 310-311, March.
  6. Schroeter, John R. & Azzam, Azzeddine M., 1999. "Econometric Analysis of Fed Cattle Procurement in the Texas Panhandle," Staff General Research Papers 11365, Iowa State University, Department of Economics.
  7. Ward, Clement E. & Koontz, Stephen R. & Schroeder, Ted C., 1998. "Impacts From Captive Supplies On Fed Cattle Transaction Prices," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(02), December.
  8. Innes, Robert & Sexton, Richard J., 1993. "Customer coalitions, monopoly price discrimination and generic entry deterrence," European Economic Review, Elsevier, vol. 37(8), pages 1569-1597, December.
  9. David E. Davis, 2000. "Does Top of the Market Pricing Facilitate Oligopsony Coordination?," SDSU Working Papers in Progress 12000, South Dakota State University, Department of Economics.
  10. Azzeddine Azzam, 1998. "Captive Supplies, Market Conduct, and the Open-Market Price," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 76-83.
  11. Thomas E. Cooper, 1986. "Most-Favored-Customer Pricing and Tacit Collusion," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 377-388, Autumn.
  12. Rasmusen, Eric B & Ramseyer, J Mark & Wiley, John S, Jr, 1991. "Naked Exclusion," American Economic Review, American Economic Association, vol. 81(5), pages 1137-45, December.
  13. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
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