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Complex price dynamics in vertically linked cobweb markets

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  • Chaudhry, Muhammad Imran
  • Miranda, Mario J.

Abstract

We enrich the traditional cobweb model by explicitly modelling interdependencies between upstream and downstream farmers in a vertically linked agricultural supply chain. Analysis of the system of nonlinear difference equations characterizing price dynamics in the underlying model reveal complex, quasi-cyclical price fluctuations around the unique equilibrium state. We show that time-delays arising from the unequal lengths of upstream and downstream production cycles have profound effects on price dynamics. From a policy perspective, we find that improvements in downstream production technology and declines in consumers’ sensitivity to prices lead to chaotic price fluctuations. Simulations under reasonable model calibrations reproduce the stylized features of actual prices, including quasi-cyclical fluctuations, positive first-order autocorrelation and fat-tailed distributions. In doing so, we address a major criticism of the theory of endogenous price fluctuations: the failure of chaotic cobweb models to replicate positively autocorrelated prices.

Suggested Citation

  • Chaudhry, Muhammad Imran & Miranda, Mario J., 2018. "Complex price dynamics in vertically linked cobweb markets," Economic Modelling, Elsevier, vol. 72(C), pages 363-378.
  • Handle: RePEc:eee:ecmode:v:72:y:2018:i:c:p:363-378
    DOI: 10.1016/j.econmod.2018.02.012
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    References listed on IDEAS

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    More about this item

    Keywords

    Nonlinear cobweb models; Time-delays; Chaos; Agricultural commodity price fluctuations; Vertically linked agricultural supply chains;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices

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