On the Coexistence of Spot and Contract Markets: a Delivery Requirement Explanation
AbstractA model is presented in which spot and contract market exchange co-exist. A contract consists of a delivery requirement between an upstream and a downstream party. Contract formation determines to a certain extent the probability distribution of the spot market price. This contract formation externality entails the removal of high reservation price buyers and various sellers from the spot market. The first effect decreases the expected spot market price when the number of contracts is small, whereas the decrease in the number of sellers and additional residual contract demand increase the expected spot market price beyond a certain number of contracts. It implies an endogenous upper bound on the number of contracts. Contract prices are positively related to the number of contracts. Finally, additional contracts reduce the variance of the spot market price when the number of contracts is sufficiently large.
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Bibliographic InfoPaper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2006 Annual meeting, July 23-26, Long Beach, CA with number 21041.
Date of creation: 2006
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Spot market; contract externality; co-existence; delivery requirement; Marketing; D40; L10;
Find related papers by JEL classification:
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
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