Spatial Price Discrimination in Agricultural Product Procurement Markets: A Computational Economics Approach

Significant transport costs and spatially distributed supply and processing create oligopsony power in agricultural markets. Price discrimination expressed in the form of partial or complete absorption of freight charges by processors is often observed in these environments, but we understand little about how these pricing decisions are made. Analytical approaches are often intractable. As an alternative, we propose a computational economics approach to analyze a general spatial competition model and study firms' choices of spatial pricing policy. Instead of the commonly presumed free-on-board pricing, we find that buyers choose price discrimination, either through uniform delivered pricing or through partial freight absorption. Copyright 2011, Oxford University Press.