The matching problem (and inventories) in private negotiation.

When the number of matches decreases for the buyer, as in the 2S5M case, the estimated price convergence level is not significantly different from that predicted by the competitive model. Nor is the price in this market environment significantly different from that in the 5M treatment. There is a contrast between buyer and seller concentration in these bargaining treatments. Compared to the 5M treatment, the concentration of buyers substantially decreases price, while the concentration of sellers does not generate a price increase. Although not conclusive from the experimental results reported here, the risk of holding inventory may work against the potential monopoly power of sellers. Still, prices in the 2S5M treatment generally are higher or not statistically different from levels in the other treatments, contributing to higher seller earnings.

Comparing average prices across bargaining rounds for periods sixteen to twenty (table 4), treatments containing five bargaining rounds (5M, 2B5M, 2S5M) all have a tendency toward higher prices in the first three rounds. The fourth round yields a modest price reduction. Prices are consistently lowest in the fifth bargaining round. Buyers are aware that sellers cannot hold over units and learn that sellers will accept lower bids to offset at least some production costs in the final round. These results suggest that in the last round sellers with unsold units are at the mercy of buyers in the market, even when there are two sellers. This appears to spill backward into earlier bargaining rounds particularly in the 3M and 2B5M treatments.

From the percent trades and average prices by round presented in table 4, there is support for the theoretical argument made earlier. That is, buyers and sellers have the incentive to trade early, diluting some of the buyers' bargaining power associated with advance production. In later rounds, the buyer has the advantage when matched with a seller having inventory in stock and facing the risk of losing the sunk unit production costs. When the matching problem is reduced for the buyers, as in the 2B5M treatment, they gain a bargaining advantage and monopsony power. Prices over all five bargaining rounds in this treatment are lower than in any other treatment. In the last bargaining round of this treatment, the price of 58.70 tokens is near the breakeven level for sellers, considering the average units traded are between three and four units for each seller.

We believe that the perception of price from the last round in the 3M treatment is more transparent for rounds one and two than in the 5M treatment, and prices in the 3M treatment are generally depressed below those in the 5M treatment. In the three-round treatment it is certainly more imperative to move the inventory, and at least a third is sold in each of the first two rounds. So, why do buyers trade during the early bargaining rounds in 5M, 3M, and 2B5M? Why not wait until the last rounds? It is because they never escape the matching problem and run the risk of losing gains from trade if in later bargaining rounds they are matched with a seller out of inventory.

Summary and Implications

Results of selected laboratory research reviewed and presented in this study are summarized in table 5. In general, auctions (double and English), with or without advance production, result in prices favorable to sellers, relative to other market environments. When there are many matches, as in a double auction, prices tend toward the competitive level. Reduced quantities traded, as compared to the competitive quantity, are consistently reported under each trading institution when there is advance production. This suggests a reduction in market efficiency, as measured by total surplus. Bilateral negotiation without advance production results in price near the competitive norm. Fewer trades, relative to the competitive level, have been reported for this trading institution. Increasing the number of matches in bilateral trading with advance production moves prices, although still lower, toward the competitive level. Sellers in a seller-concentrated market are able to negotiate for prices at the competitive norm. Advance production, combined with limited matches in private negotiation, can greatly disadvantage the bargaining position of sellers relative to buyers.

A lack of bargaining opportunities alone does not impact the bargaining advantage of one side of the market or the other in negotiating prices (Menkhaus et al. 2003). When sellers must produce in advance and have limited matches, the bargaining advantage and market power shifts to the buyer. The greater the matching problem faced by sellers in private negotiation markets with advance production, the greater the advantage to buyers. Further, advance production and the associated risk of inventory loss faced by producers of perishable products may keep buyers from losing bargaining power, even when there are fewer matches for them in a seller concentrated market.

It is not surprising that firms are eager to enter into vertical relations to avoid matching problems and sunk inventory costs. These arrangements are often beneficial to both buyers and sellers in reducing transaction costs. Nevertheless, the results of this study, given the parameters of the experiment, suggest the buyer has the advantage in specifying the terms of the vertical relations. Sellers who do not or cannot enter into vertical relations for private negotiation trading face matching and inventory loss risks. These sellers may, as a result, exchange commodities/products through other trading institutions such as auctions. Alternative institutions of exchange potentially could be thin or not exist, however, given that supplies for buyers are captive via vertical relations.

The results of experiments conducted in this study suggest that buyers in a concentrated market with private negotiation trading and advance production can exercise market power and extract monopsony rent. Prices are about 23% below the predicted competitive equilibrium and close to the monopsony price level. These lower prices are the result of tacit coordination enjoyed by buyers resulting from limited access and potential inventory loss from advance production faced by sellers, rather than collusive activities. The seller in a seller concentrated market is not as successful in extracting monopoly rent, although the price level is higher than when seller access is increased. Sellers can benefit by creating alliances or cooperatives to increase their bargaining position for price and overcome poor access to buyers. Changes in communication technology, such as electronic markets, can improve matches for both buyers and sellers.

These results provide evidence that can be useful to researchers investigating agent behavior in markets said to be concentrated and dominated by private negotiation. One such example, as identified above, is the issue of captive supplies in the fed cattle markets. Moreover, study results may provide a basis for evaluating potential regulations aimed at addressing alleged market power issues in commodity markets. Two industry practices that can contribute to reduced matches available to agricultural producers are shifts to grid marketing and short trading windows. The trend toward grid marketing may have shifted bargaining power to buyers by reducing the number of matches. Also, producers have alleged that there is a short period of time, or window, during which trading of fed cattle occurs--reducing the number of possible matches. Increased market concentration alone may not necessarily result in the use of market power by firms purchasing agricultural commodities/products. At issue are factors or influences that potentially facilitate the use of monopsony power, such as matching risk.

Finally, we have provided buyers with a bargaining advantage, because inventory must be sold. It is possible that buyers of inputs, for example, can face similar risks, such as filling fixed plant capacities. In such cases, the bargaining advantage of the buyer would be dampened, relative to those found and reported in this study. We also recognize that firms can be buyers at one stage of the food supply chain and sellers at another level.

[Received June 2006; accepted March 2007.]

References

Akerlof, G. 1970. "The Market for Lemons: Quality Uncertainty and the Market Mechanism." Quarterly Journal of Economics 84:488-500.

Davis, D.D. 1999. "Advance Production and Cournot Outcomes: An Experimental Investigation." Journal of Economic Behavior and Organization 40:59-79.

Goodwin, D., and S. Mestelman. 2006. "Quantity Precommitment with Posted Prices or Market-Prices." Working Paper, Department of Economics, McMaster University, Hamilton, Ontario, Canada.

Hong, J.T., and C.R. Plott. 1982. "Rate Filing Policies for Inland Water Transportation: An Experiment and Approach." Bell Journal of Economics 13:1-19.

Kreps, D.M., and J.A. Scheinkman 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes." Bell Journal of Economics 14:326-37.

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 85:1323-29.

Menkhaus, D.J., O.R. Phillips, C.T. Bastian, and L.B. Gittings. 2007. "AJAE Appendix: The Matching Problem (and Inventories) in Private Negotiation." Unpublished. Available at http//agecon.lib.umn.edu/.