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The Competitive Implications of Top‐of‐the‐Market and Related Contract‐Pricing Clauses

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  • Tian Xia
  • Richard J. Sexton

Abstract

This article examines the competitive implications of contract pricing arrangements, which link the contract price to the subsequent cash price. We focus on so‐called “top‐of‐the‐market pricing” (TOMP) in cattle procurement. The TOMP clause is shown to have anticompetitive consequences when the same buyers who purchase contract cattle with the TOMP clause also compete to procure cattle in the subsequent spot market. The TOMP clause reduces packers' incentives to compete aggressively in the spot market. Although TOMP pricing is not in producers' collective interest, rational sellers may nonetheless sign these contracts with little or no financial inducement.

Suggested Citation

  • Tian Xia & Richard J. Sexton, 2004. "The Competitive Implications of Top‐of‐the‐Market and Related Contract‐Pricing Clauses," American Journal of Agricultural Economics, John Wiley & Sons, vol. 86(1), pages 124-138, February.
    • Handle: RePEc:wly:ajagec:v:86:y:2004:i:1:p:124-138
    DOI: 10.1111/j.1467-8276.2004.tb18461.x
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    1. Love, H. Alan & Burton, Diana M., 1999. "A Strategic Rationale For Captive Supplies," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(01), pages 1-18, July.
    2. Richard T. Rogers & Richard J. Sexton, 1994. "Assessing the Importance of Oligopsony Power in Agricultural Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(5), pages 1143-1150.
    3. Ted C. Schroeder & Rodney Jones & James Mintert & Andrew P. Barkley, 1993. "The Impact of Forward Contracting on Fed Cattle Transaction Prices," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 15(2), pages 325-337.
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