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Long-Term Contracting and Multiple-Price Systems

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  • R. Glenn Hubbard
  • Robert J. Weiner

Abstract

This paper examines product markets in which long-term contracts and spot transactions coexist. Such markets are characterized by "multiple-price systems," wherein adjustment to supply and demand shocks occurs through spot prices, while contract prices are fixed, or adjust slowly. We derive the existence of contracts, as well as the equilibrium fraction of spot trade, in the framework of an optimizing model, and analyze the effects of shocks on market equilibrium when some buyers and sellers are "locked in" contractually. The model is employed to interpret the change in the copper market from a multiple-price system to one characterized solely by spot trade.

Suggested Citation

  • R. Glenn Hubbard & Robert J. Weiner, 1991. "Long-Term Contracting and Multiple-Price Systems," NBER Working Papers 3782, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3782
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    1. Hubbard, R. Glenn & Weiner, Robert J., 1986. "Oil supply shocks and international policy coordination," European Economic Review, Elsevier, vol. 30(1), pages 91-106, February.
    2. Margaret E. Slade, 1991. "Strategic Pricing with Customer Rationing: The Case of Primary Metals," Canadian Journal of Economics, Canadian Economics Association, vol. 24(1), pages 70-100, February.
    3. John W. Pratt & David A. Wise & Richard Zeckhauser, 1979. "Price Differences in almost Competitive Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 93(2), pages 189-211.
    4. Carlton, Dennis W, 1979. "Vertical Integration in Competitive Markets under Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 27(3), pages 189-209, March.
    5. R. Glenn Hubbard, 1986. "Supply Shocks and Price Adjustment in the World Oil Market," The Quarterly Journal of Economics, Oxford University Press, vol. 101(1), pages 85-102.
    6. James G. MacKinnon & Nancy D. Olewiler, 1980. "Disequilibrium Estimation of the Demand for Copper," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 197-211, Spring.
    7. Gould, John P, 1978. "Inventories and Stochastic Demand: Equilibrium Models of the Firm and Industry," The Journal of Business, University of Chicago Press, vol. 51(1), pages 1-42, January.
    8. Carlton, Dennis W, 1978. "Market Behavior with Demand Uncertainty and Price Inflexibility," American Economic Review, American Economic Association, vol. 68(4), pages 571-587, September.
    9. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    10. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
    11. McCafferty, Stephen & Driskill, Robert, 1980. "Problems of Existence and Uniqueness in Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 48(5), pages 1313-1317, July.
    12. Newbery, David M., 1988. "On the accuracy of the mean-variance approximation for futures markets," Economics Letters, Elsevier, vol. 28(1), pages 63-68.
    13. Hubbard, R Glenn & Weiner, Robert J, 1989. "Contracting and Price Adjustment in Commodity Markets: Evidence from Copper and Oil," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 80-89, February.
    14. George J. Stigler & James K. Kindahl, 1970. "The Behavior of Industrial Prices," NBER Books, National Bureau of Economic Research, Inc, number stig70-1, June.
    15. Masahiro Kawai, 1983. "Spot and Futures Prices of Nonstorable Commodities Under Rational Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 235-254.
    16. Turnovsky, Stephen J, 1983. "The Determination of Spot and Futures Prices with Storable Commodities," Econometrica, Econometric Society, vol. 51(5), pages 1363-1387, September.
    17. Robert E. Hall, 1984. "The Inefficiency of Marginal-Cost Pricing and The Apparent Rigidity of Prices," NBER Working Papers 1347, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Gine,Xavier & Jacoby,Hanan G. & Gine,Xavier & Jacoby,Hanan G., 2016. "Markets, contracts, and uncertainty in a groundwater economy," Policy Research Working Paper Series 7694, The World Bank.
    2. repec:dau:papers:123456789/5372 is not listed on IDEAS
    3. ABADA, Ibrahim & EHRENMANN, Andreas & SMEERS, Yves, 2014. "Endogenizing long-term contracts in gas market models," CORE Discussion Papers 2014036, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Glachant, Jean-Michel & Hallack, Michelle & Vazquez, Miguel, 2014. "Gas network and market “à la Carte”: Identifying the fundamental choices," Utilities Policy, Elsevier, vol. 31(C), pages 238-245.
    5. Pinelopi K. Goldberg & Rebecca Hellerstein, 2009. "How rigid are producer prices?," Staff Reports 407, Federal Reserve Bank of New York.
    6. Mahapatra, Santosh & Levental, Shlomo & Narasimhan, Ram, 2017. "Market price uncertainty, risk aversion and procurement: Combining contracts and open market sourcing alternatives," International Journal of Production Economics, Elsevier, vol. 185(C), pages 34-51.
    7. João Teixeira, 2014. "Outsourcing with long term contracts: capital structure and product market competition effects," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 327-356, February.
    8. Jean-Michel Glachant & Michelle Hallack & Miguel Vazquez, 2014. "Gas network and market diversity in the US, the EU and Australia: A story of network access rights," RSCAS Working Papers 2014/33, European University Institute.
    9. Miguel Vazquez & Michelle Hallack & Jean-Michel Glachant, 2013. "Gas Network and Market: à la carte?," RSCAS Working Papers 2013/73, European University Institute.
    10. Robert Amano & Scott Hendry, 2003. "Inflation persistence and costly market share adjustment: a preliminary analysis," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 134-146 Bank for International Settlements.
    11. Radetzki, Marian, 2013. "The relentless progress of commodity exchanges in the establishment of primary commodity prices," Resources Policy, Elsevier, vol. 38(3), pages 266-277.

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