Title: Market Impacts of Alternative Trading Institutions, Delivery Methods and Policy Options Using Laboratory Markets

Funding:  USDA – NRI, Cooperative Agreement with ERS and Lowham Research Endowment

Research Description: Assess the impacts of alternative trading and delivery methods on the competitiveness of U.S. agricultural markets, as well as analyze the market effects of alternative agricultural policies.  (The latter research project is in its initial stages.  As a result, focus is given to the impacts of alternative trading institutions and methods of delivery in the discussion of the results that follows.)  Laboratory methods are used to generate and evaluate market outcomes under alternative trading institutions, delivery methods and policy options.  Further develop laboratory or experimental economics methods to investigate the structural change occurring in agricultural industries and ex-ante evaluation of policy alternatives.

Discussion: A diverse set of results have been reported under this research.  An English auction mechanism promotes a very competitive trading atmosphere among buyers, even when there are two buyers.  This trading institution, however, is susceptible to collusive activity among buyers.  Our laboratory results suggest that knowledge of quantity for sale, communication, repeated play and “more successful” traders each contribute to prices lower than observed in a more competitive market environment when production is exogenously determined.  Knowledge of quantity for sale was particularly effective in allowing two buyers to coordinate.  Communication facilitated coordination for six, as well as two, buyers.  Collusive behavior between two buyers cannot be maintained when production is endogenous. 

Inventory risk associated with spot delivery places sellers in a disadvantaged bargaining position relative to buyers in private negotiation trading.  Both buyers and sellers face a matching risk, which dissipates as the number of bargaining rounds in a production period increase.  The impacts of alternative information scenarios in private negotiation trading with spot delivery also were investigated.  Laboratory results suggest that public information seems to enhance the bargaining advantage of buyers in this market environment.  Quantity information, in particular, appears to reduce matching risk faced by buyers and reduces prices below the already lower (relative to those in auctions) prices in private negotiation spot trading when no information is presented.

There has been increasing concern among agricultural producers and policy makers about structural changes in agricultural markets and their impacts on competition.  Attention generally has focused on consolidation in agricultural industries and market power exerted by firms in concentrated industries.  The results of our laboratory markets suggest that the trading institution and the method of delivery, aside from the issues of concentration, can strongly influence market outcomes.  Thought should be given to preserving competitive auction institutions.  Total surplus is greater than private negotiation, and when there is spot production, seller earnings are strong.  There is at least one caveat, however.  Repeated English auctions are susceptible to cooperative behavior among buyers, which can severely damage seller earnings.

Decoupled payments to farmers are among reforms in US farm subsidy programs that have been advanced by policy analysts in government agencies and public institutions.  These reforms are an effort to increase the market orientation of the agricultural sector and to minimize the distorting effects associated with tying production decisions to government payments.  Decoupled payments, and new generation farm programs in general, are fixed income transfers that do not depend on the farmer’s production choices, output levels or market conditions.  Theoretically, these income transfers do not change per unit returns, so they have no direct effect on production decisions.

A “bond scheme” that has been proposed by policy analysts in the European Union and the United States is an example of a new generation farm program featuring decoupled payments.  Concerns have been expressed in domestic and international forums about the market impacts and effectiveness of such a program.   Significant analytical challenges exist with respect to understanding the impacts and effectiveness of a bond scheme, and other proposed programs for that matter. 

Both ex-ante and ex-post evaluations are of importance in the policy process.  Analyses based solely on ex post evaluation of policy impacts can ultimately result in a process of trial and error, which could be very costly.  Given that programs such as a bond scheme have not yet been implemented, ex-post evaluation of data is impossible and ex-ante analysis is warranted.  The objective of research being undertaken by researchers in the Department of Agricultural and Applied Economics at the University of Wyoming is to provide an ex-ante assessment of the potential market impacts and individual preferences for selected policy options using both laboratory market experiments and stated choice methods, with emphasis given to a bond scheme.

Publications and Presentations:
In Preparation:
Coatney, K.T., D.J. Menkhaus, O.R. Phillips, and J. Scheer, “Dominant Bidder Price Impacts in a Repeated English Auction”

Aadland, D.M., D.J. Menkhaus, and O.R. Phillips, “The Confluence of Market Power and Expectations: When Does Learning Matter?”

Bastian, C.T., S.R. Koontz, and D.J. Menkhaus, “Impacts of Forward Contract Information on Market Pricing and Production Efficiency in Fed Cattle Markets: Results from an Experiment”

Nagler, A., D.J. Menkhaus, and C.T. Bastian, “Ex-Ante Evaluation of New Generation Agricultural Policy Options Using Experimental Laboratory Markets and Stated Choice Methods”

Under Review: 
Phillips, O.R. and D.J. Menkhaus, “The Culture of Private Negotiation: Price Drift in Bilateral Bargaining,” Games and Economic Behavior

Phillips, O.R. and D.J. Menkhaus, “Inventories, Repeated Multiple-Unit Auctions, and Cournot Outcomes,” American Economic Review

Menkhaus, D.J., O.R. Phillips,C.T. Bastian, and Gittings, L.B., “The Matching Problem (and Inventories)  in Private Negotiation,” American Journal of Agricultural Economics 

Menkhaus, D.J., O.R. Phillips, and A.V. Yakunina, “Public Information and Bilateral Trading in Laboratory Markets,” Journal of Economic Behavior and Organization  

Phillips, O.R. and D.J. Menkhaus, “Maintaining Tacit Collusion in Repeated Ascending Auctions,” Journal of Law and Economics

Yakunina, A.V. and D.J. Menkhaus,“A Laboratory Study of the Impacts of Public Price Information in the Decentralized Spot Market,” Journal of Economics School, St. Petersburg, Russia (Russian)

Published:
Nagler, A..M., C.T. Bastian , and D.J. Menkhaus. Spring 2006. “2005 National Agricultural, Food, and Policy Survey: Summary of Wyoming Results.” Working Paper, Department of Agricultural and Applied Economics, University of Wyoming, Laramie, WY.

Menkhaus, D.J., C.T. Bastian, and N.S. Ballenger. April 2005. “Ex-Ante Evaluation of New Generation Agricultural Policy Options Using Experimental Laboratory Markets and Stated Choice Methods.” Working Paper, Department of Agricultural and Applied Economics, University of Wyoming, Laramie, WY.

Menkhaus, D.J., O.R. Phillips, and C.T. Bastian. 2003.  “Impacts of Alternative Trading Institutions and Methods of Delivery on Laboratory Market Outcomes.” American Journal of Agricultural Economics Vol. 85, No. 5, pp. 1323-1329.

Phillips, O.R., D.J. Menkhaus, and K.T. Coatney. 2003.  “Collusion in Laboratory English Auctions: Experimental Evidence of Bidding Rings.” American Economic Review, Vol. 93, No. 3, pp. 965 -79.

Menkhaus, D.J., O.R. Phillips, and K.T. Coatney. 2003.  “Shared Agents and Competition in Laboratory English Auctions.” American Journal of Agricultural Economics, Vol. 85, No. 4, pp. 829-39.

Menkhaus, D.J., O.R. Phillips, A.F.M. Johnston, and A.V. Yakunina. 2003.  “Price Discovery in Private Negotiation Trading with Forward and Spot Deliveries.”  Review of Agricultural Economics, Vol. 25, No. 1, pp. 89-107.

Presentations:
Phillips, O.R. and D.J. Menkhaus. “The Culture of Private Negotiation: Price Drift in Bilateral Bargaining.” Selected Paper Presented, American Agricultural Economics Association Annual Meeting, Long Beach, CA, July 23-26, 2006.

Menkhaus, D.J., C.T. Bastian, N.S. Ballenger, C.E. Young, E. O’Donoghue, and K.Smith. “Ex-Ante Evaluation of New Generation Agricultural Policy Options Using Experimental Economics Methods.” American Agricultural Economics Association Organized Symposium, Do We Have the Right Analytical Data and Tools for Evaluating the New Generation Farm Programs?, Providence, RI, July 2005.

Menkhaus, D.J., O.R. Phillips, C.T. Bastian, and L.B. Gittings. “Matching and Inventory Loss Risks as Facilitators of Market Power in Private Negotiation Spot Trading.” Selected Paper Presented, American Agricultural Economics Association Annual Meeting, Denver, CO, August 1-4, 2004.

Menkhaus, D.J., O.R. Phillips, and C.T. Bastian.  “Impacts of Alternative Trading Institutions and Methods of Delivery on Laboratory Outcomes.”  Principal Paper Presented, American Agricultural Economics Association Annual Meeting, Montreal, Quebec, July 2003.  Also presented as a seminar to USDA, ERS, Market and Trade Economics Division, September 2003.

Menkhaus, D.J., A.V. Yakunina, and O.R. Phillips.  “Bilateral Trading and the Curse of Knowledge: an Experimental Economics Study.”  Paper Presented, Western Agricultural and Economics Association Annual Meeting, Logan, Utah, July 8-11, 2001.  Abstract in Journal of Agricultural and Resource Economics, Vol. 26, No. 2, p. 557.

Phillips, O.R., D.J. Menkhaus, K.T. Coatney.  “Collusive Practices in Repeated English Auctions.”  Paper Presented , The Public Choice Society and Economic Science Association Annual Meeting, San Antonio, Texas, March 9-11, 2001.

Theses Completed:
Gittings, L.B.  2002.  “The Effects of Market Concentration in Private Negotiation Trading with Spot Delivery”, M.S. Thesis, Department of Agricultural and Applied Economics, University of Wyoming.

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