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Captive Supplies And The Cash Market Price: A Spatial Markets Approach

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  • Zhang, Mingxia
  • Sexton, Richard J.

Abstract

Exclusive contracts (often called "captive supplies") between processors and farmers are in increasingly important feature of modern agriculture. We study an interesting empirical regulatory occurring in markets that feature both contract and spot exchange: the spot price is inversely related to the incidence of contract use in the market. We use a spatial model and a noncooperative game approach to show that processors can use exclusive contracts to manipulate the spot price in certain situations. Captive supplies in these settings represent geographic buffers that reduce competition among processors. However, in markets where the spatial dimension is less important, captive supplies are ineffective as barriers to competition because firms have incentive to "jump" across a captive supply region to procure the farm product.

Suggested Citation

  • Zhang, Mingxia & Sexton, Richard J., 2000. "Captive Supplies And The Cash Market Price: A Spatial Markets Approach," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(1), pages 1-21, July.
    • Handle: RePEc:ags:jlaare:30842
    DOI: 10.22004/ag.econ.30842
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    Cited by:

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    2. Tian Xia & John M. Crespi & Kevin C. Dhuyvetter, 2019. "Could packers manipulate spot markets by tying contracts to futures prices? And do they?," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 67(1), pages 85-102, March.
    3. Graubner, Marten & Sexton, Richard J., 2021. "Spatial competition in agricultural procurement markets," 2021 Annual Meeting, August 1-3, Austin, Texas 313962, Agricultural and Applied Economics Association.
    4. Tian Xia & Brian Sancewich, 2018. "Interaction between buyer power in agricultural procurement and seller power in food retailing, and optimal allocation of anti-trust efforts," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 6(1), pages 1-19, December.
    5. Bazoche Pascale & Giraud-Héraud Eric & Soler Louis-Georges, 2005. "Premium Private Labels, Supply Contracts, Market Segmentation, and Spot Prices," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 3(1), pages 1-30, February.
    6. Stephen F. Hamilton & David L. Sunding, 2021. "Joint Oligopsony‐Oligopoly Power in Food Processing Industries: Application to the us Broiler Industry," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(4), pages 1398-1413, August.
    7. Ji, Inbae & Chung, Chanjin, 2016. "Assessment Of Market Power And Cost Efficiency Effects In The U.S. Beef Packing Industry," Journal of Rural Development/Nongchon-Gyeongje, Korea Rural Economic Institute, vol. 39(Special, ), pages 1-24, December.
    8. Granlund, David & Meens-Eriksson, Sef, 2022. "Firms price discriminate based on suppliers’ relative distances to competitors," Umeå Economic Studies 1006, Umeå University, Department of Economics, revised 05 Feb 2024.
    9. Stephen R. Koontz & John D. Lawrence, 2010. "Impacts of alternative marketing agreement cattle procurement on packer costs, gross margins, and profits: evidence from plant-level profit and loss data," Agribusiness, John Wiley & Sons, Ltd., vol. 26(1), pages 1-24.
    10. Katchova, Ani L., 2013. "Agricultural Contracting and Agrifood Competition," Staff Papers 164515, University of Kentucky, Department of Agricultural Economics.
    11. Charles Kunaka, 2011. "Logistics in Lagging Regions : Overcoming Local Barriers to Global Connectivity," World Bank Publications - Books, The World Bank Group, number 2543, December.
    12. Brorsen B. Wade & Fain James R. & Maples Joshua G., 2018. "Alternative Policy Responses to Increased Use of Formula Pricing," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 16(1), pages 1-11, January.
    13. Mérel, Pierre & Sexton, Richard J., 2017. "Buyer power with atomistic upstream entry: Can downstream consolidation increase production and welfare?," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 259-293.
    14. Marten Graubner & Richard J. Sexton, 2023. "More competitive than you think? Pricing and location of processing firms in agricultural markets," American Journal of Agricultural Economics, John Wiley & Sons, vol. 105(3), pages 784-808, May.
    15. Jinho Jung & Juan Sesmero & Ralph Siebert, 2022. "A structural estimation of spatial differentiation and market power in input procurement," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(2), pages 613-644, March.

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