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On the co-existence of spot and contract markets: an analysis of quality

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Author Info
Olmos, Marta Fernandez
Rosell-Martinez, Jorge
Espitia-Escuer, Manuel Antonio

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Abstract

The possible co-existence of spot and contract market that can emerge in the presence of quality issues with a number of growers and processors in each stage is something that has largely remained an open question in the literature. This paper is an attempt to fill this void. We use a straightforward two-stage Cournot oligopoly model with specific demand and cost functions. In the first stage, processors decide simultaneously whether or not to set an incentive contract. The second stage is the stage in which growers choose their levels of quantity and quality based on the industry structure developed in the first stage. With the help of numerical simulations we conducted the study of the equilibrium structures. Our results suggest that for a wide range of number of participants in both markets, participation in both markets constitutes a Nash equilibrium for the model.

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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida with number 6082.

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Date of creation: 2008
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Handle: RePEc:ags:aaea08:6082

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Keywords: Marketing;

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References listed on IDEAS
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  1. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March. [Downloadable!] (restricted)
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  2. Hueth, Brent & Ligon, Ethan, 2002. "Producer Price Risk and Quality Measurement," Staff General Research Papers 5037, Iowa State University, Department of Economics.
  3. Rachael Goodhue & Dale Heien & Hyunok Lee & Daniel Sumner, 2003. "Contracts and Quality in the California Winegrape Industry," Review of Industrial Organization, Springer, vol. 23(3), pages 267-282, December. [Downloadable!] (restricted)
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  4. Giraud-Heraud, Eric & Soler, Louis-Georges & Tanguy, Herve, 1999. "Avoiding Double Marginalisation in Agro-Food Chains," European Review of Agricultural Economics, Oxford University Press for the Foundation for the European Review of Agricultural Economics, vol. 26(2), pages 179-98, June.
  5. Allen, Douglas W & Lueck, Dean, 1999. "The Role of Risk in Contract Choice," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 704-36, October.
  6. Hueth, Brent & Ligon, Ethan, 2003. "Estimation of an Efficient Tomato Contract," Staff General Research Papers 10235, Iowa State University, Department of Economics.
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  7. Miguel Carriquiry & Bruce A. Babcock, 2002. "Can Spot and Contract Markets Co-Exist in Agriculture?," Center for Agricultural and Rural Development (CARD) Publications 02-wp311, Center for Agricultural and Rural Development (CARD) at Iowa State University. [Downloadable!]
  8. Alexander, Corinne & Goodhue, Rachael E. & Rausser, Gordon C., 2007. "Do Incentives For Quality Matter?," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 39(01), April. [Downloadable!]
  9. Hueth, Brent & Ligon, Ethan, 2002. "Agricultural Markets as Relative Performance Evaluation," Staff General Research Papers 5036, Iowa State University, Department of Economics.
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  10. Beard, T. Randolph & Thompson, Henry, 2003. "Duopoly quotas and relative import quality," International Review of Economics & Finance, Elsevier, vol. 12(2), pages 275-281. [Downloadable!] (restricted)
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