THE EFFECT OF CONTRACTING ON PRICING DYNAMICS IN THE FED CATTLE MARKET: AN EXPERIMENTAL SIMULATION APPROACH

The increased amount of contracting in many agricultural markets continues to be a source of considerable controversy. Some research indicates that increased levels of contracting lead to better prices for processors/users while other research is inconclusive. This article uses an experimental economics approach to study the effects on prices of systematic variations in contracting levels using an experimental model of the fed cattle market. Using experimental economics allowed the control of contracting levels and other variables (e.g. supply levels) that are not possible using industry data. Pricing dynamics changed considerably with increased levels of contracting, but the mean price level was found to be not related to contracting levels. The response of price to a given supply was found to increase as contracting levels increase. In addition, price variability with high levels of contracting showed long periods with relatively little adjustments followed by short periods of abrupt changes.