Contact: Jim Kearns, 307-766-2670, [email protected]

ECONOMISTS STUDY FORWARD/SPOT MARKETING BEHAVIOR

Which are more profitable to sellers, spot markets or forward markets? Where do buyers find the lowest prices? How do fluctuating costs and demand move buyers and sellers between these two market types?

These questions are being answered in an experimental market behavior study being conducted at the University of Wyoming.

The project "An Experimental Analysis of the Impact of Uncertainty in Forward and Spot Markets" will help to shed new light on marketing options, particularly in the agricultural and mineral industries, according to the researchers who are conducting the study. They are Owen Phillips, professor of economics in the College of Business; and Dale Menkhaus, professor, and Chris Bastian, marketing specialist, both with the Department of Agricultural Economics in the College of Agriculture. The study is funded with a $120,000 grant from the U.S. Department of Agriculture's National Research Initiative Competitive Grants Program.

In a forward market, a product such as coal is sold at a predetermined price before it is mined. Phillips points out that for coal sales, electric utilities benefit from long term forward contracts because they know what they will pay for coal, allowing them to establish electricity prices in advance. The seller benefits by knowing what prices they will receive for coal, even while it is still in the ground.

Forward markets are becoming more commonplace in the agricultural industry, Menkhaus says. For example, he says a growing number of feedlots sell their animals to packing firms at a price that has been determined well in advance. Such sales often are negotiated privately, so the terms of the sale are not made public. This is not the case when selling cattle at auctions or terminal markets, where prices are reported and available to help in making marketing decisions.

The U.S.D.A. is very interested in the results of the study because forward contracting has been implicated as a contributor to an alarming concentration in the meat packing industry, Menkhaus says. There is concern that a few meat packers are locking up cattle markets through forward contracting, creating a "thinness" in the spot cattle market. Some industry observers worry that this is an antitrust issue that may result in actions to limit forward contracting in the meat packing industry.

The researchers have designed an experimental market to observe how buyers behave in both forward and spot marketing systems. Menkhaus says the project should help to gauge buyer behavior, resulting in a better understanding of how markets operate.

"We are trying to determine who gains in the market, who is better off," says Phillips. "We are looking at profitability in this market for both sellers and buyers. We are examining shifting demands and shifting supplies to see who earns the most profit. How will producers behave if demand goes down? Would they rather be in a spot market, or lock the price up in a forward market?"

To answer such questions, an experimental market has been established in which college students actually buy and sell in a simulated market situation. The participating students are paid for their successful transactions, so their incentives closely resemble a real-world market.

"We will observe how they behave as they negotiate contracts under varying conditions on both the supply side and the demand side," says Menkhaus. "We will determine factors that bring the selling price to a level agreeable to both buyers and sellers."

Faculty members in UW's Department of Economics and Finance have published many professional journal articles based on research in simulated markets. Researchers in the Department of Agricultural Economics also have created such markets to answer research questions. For example, simulation was used to assess consumer attitudes in a project to determine the marketability of a product called Wyoming Lean Beef.

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