The Impact of Market Price Information on Price Discovery in Privately Negotiated Markets

Currently many agricultural markets are experiencing increasing transactions that involve private negotiation as a trading institution. Currently, many commodity markets, including cattle markets, utilize market information regarding average trade prices in the price discovery process.  However, as direct negotiated sales transactions increase, the volume of trade in traditional spot markets from which reported cash market prices are derived is decreasing.

 

There is a paucity of empirical research related to how market information impacts the price discovery process where private negotiation is the trading institution of choice among market participants. Research in negotiation suggests average market price information should provide an important reference point for traders, but results indicate such information is insignificant in determining negotiated outcomes.

 

Agricultural economists indicate that past price information impacts expectations of market agents and therefore is important for price discovery in agricultural markets. Concerns have been expressed that thinning agricultural markets face increasing risks from using inaccurate market price information and the opportunity for market power to be exerted by buyers putting sellers at a further disadvantage in agricultural commodity markets.

 

 

The purpose of this research is to analyze the impact of previous period price information on price discovery and price levels in markets that are privately negotiated. We will test the impact of price information on forward and spot markets that are privately negotiated using laboratory market experiments.

 

Students engaged in this research will learn about experimental economics methods, particularly induced value experiments, market theory, and econometric techniques used to evaluate these types of experiments.