The Adequacy of the Independence of Markets Assumption in Interregional Competition Models

An important function of agricultural economics is to determine the competitive potential for beginning or expanding production of a commodity in a specified area. This problem is approached through budgeting techniques and/or more sophisticated models such as linear or reactive programming. Many examples using LP or reactive programming algorithms are available. In two recent studies, reactive models were used to examine the market for potatoes and sweet cherries. These studies provided an insight into the relative competitive position among producing areas and among consuming centers. To reach a solution, the competitive assumption of LP or reactive models requires independence of supply functions for producing regions and demand functions for consuming markets. Thus, frequently the demand price for a given commodity in a market is estimated as a function of volume in that market and perhaps time, income or other variables. The resulting equation is used by inserting the mean value of all explanatory variables except volume, resulting in an equation that has price as a function of volume, plus a constant, and is compatible reactive programming.