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Carlo Russo Market Transparency EC JRC seminar May 31, 2018Market Transparency EC JRC seminar May 31, 2018
Considerations on Market Transparency
A Lit Review on Pros and Cons of Market Transparency
Carlo Russo
University of Cassino and Lazio Meridionale
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
They are good for you
A Perspective on Market TransparencyMarket Transparency
Is like vegetables
There are medical conditions advising against eating them
Possible market allocationsDistortion
Perfect Competition
Market ‘Opacity’
✗
MagnitudeEmpirical question
(little attention)
InteractionTheory
ExistenceEmpirical question
Supporting MT is a concern if:
Another distortion is in place
Price opacity and the other distortion ‘pull’ into different
direction
The magnitude of the interaction is
non-negligible
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Outline
IntroMarket Opacity
Interaction Magnitude ConclusionsExistence✗
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Market Transparency
Value chain
Asymmetric information
Market transparency can be defined as the availability of relevant market information (e.g. concerning prices, weather,
production, trade, consumption and stocks) for all market participants.
Perfect, symmetric information
Reducing uncertainty about ‘average prices’ (Azzam 2003)
Sharing private Information (Lamming 1993)
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Price Transparency: key distinctions
Prices are public knowledge
The way prices are determined
is public knowledge
Price Discovery Issue(What)
Whom shouldI sell to?
Price Determination Issue(Why)
What will prices be if …?
Symmetric vs. AsymmetricMarket Opacity
Downstream Firm
Farm
er
Opaque Transparent
Op
aqu
eTr
ansp
aren
t
AMTF
Types of Transparency
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
ProductionPolicy
Arbitrage
Outline
IntroMarket Opacity
Interaction Magnitude ConclusionsExistence✗
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Better Production Decisions
ICT (especially developing countries)
Jensen 2010Lokanathan et al. 2012Deichmann et al. 2016
Making information available to farmers
Using markets to facilitate price discovery
Financial marketsThomas 2003 (India)
Easwaran & Ramasundaram 2008Sendhil et al. 2013
Big data for demand forecasting
Ji, Hu & Tan 2017Data Integration
(prices + auxiliary info)
Long term production decisions
InnovationProduction capacity(US Health Industry)
Stadler et al. 2016 (consumers)
Short term production decisions
Risk & InformationSandmo 1974
Azzam 2003Moschini & Hennessy 2001
Svensson & Drott 2010
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Monitoring & Policy Design
Policy Transparency
Design Enforcing
Data-Driven PolicyYou know this
better than I do
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Price Transparency and Arbitrage
Local Market 1
Local Market 2
q1
p1
q2
p2
Opacity
q
p
Jensen 2010(Spatial model)
Does this increase competition?
(better prices for farmers)Is this something we want?
No clear predictionLambrecht et al. 2018
Healthcare studies(prices go up in poor areas)
It depends on other distortions
(OECD 2012)
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Barg. PowerCollusion
Info Ineffic.
ProductionPolicy
Arbitrage
Outline
IntroMarket Opacity
Interaction Magnitude ConclusionsExistence✗
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Barg. PowerCollusion
Info Ineffic.
ProductionPolicy
Arbitrage
Outline
IntroMarket Opacity
Interaction Magnitude ConclusionsExistence✗
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Bargaining with Incomplete Information
Bargaining with incomplete information(Ausbel et al. 2001)
Market transparency helps less informed farmers bargaining more
effectively
Price transparency offers only incomplete information
(costs are missing). Distorted information can be worse than no
information
LaterAMTF
Courtois & Subervie 2014(developing countries, mostly)
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Bargaining with Complete Information
Supplier’sCost of
Production
ConsumerPrice
Consumer PriceMinus MKTG
Costs
Total gain from trade
Price Paid by an Alternative
Buyer
Price paid to an alternative
Supplier
Buyer’s ShareSupplier’s Share
Negotiation Space
AgreedPrice
Price Paid by Buyer to Supplier
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Bargaining with Incomplete Information
Supplier’sCost of
Production
ConsumerPrice
Consumer PriceMinus MKTG
Costs
Total gain from trade
Price Paid by an Alternative
Buyer
Price paid to an alternative
Supplier
Buyer’s ShareSupplier’s Share
Negotiation Space
AgreedPrice
Price Paid by Buyer to Supplier
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Bargaining under Incomplete information
Assumption:Downstr. firm
designs the contracts
Screening:Laffont & Tirole 1988Riley 2001 (review)
Using quality standards and RMP to select ‘efficient’ suppliers
Russo et al. 2014Fulponi 2006
Large buyer are already using contracts to solve the information asymmetries regarding suppliers’ cost structure
Market Transparency EC JRC seminar May 31, 2018
Bargaining with Information
Supplier’sCost of
Production
ConsumerPrice
Consumer PriceMinus MKTG
Costs
Total gain from trade
Price Paid by an Alternative
Buyer
Price paid to an alternative
Supplier
Buyer’s ShareSupplier’s Share
Negotiation Space
AgreedPrice
Price Paid by Buyer to Supplier
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Bargaining under Incomplete Information
Pricepaid by
alt. buyer
Pricepaid to
alt. supplier
Mitchell 2017 Farmers’ switching
costsreduce the value of PT
Ranjan 2017 Fear of buyer’s exit
reduce the value of PT
PT is valuable if farmers have
non-zero bargaining power under perfect
information
Hueth & Marcoul 2006
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Relative Magnitude is an empirical question
Can be costlyInfo can be imperfect
Bargaining under Incomplete Information
Leading firms(principals)
have several ways to deal with opacity
Transparency benefits for farmers can be small if buyers have strong bargaining
power under perfect information
Unlike collusion(static vs. dynamic)
Opacity may help buyer power
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Barg. Power
CollusionInfo Ineffic.
ProductionPolicy
Arbitrage
Outline
IntroMarket Opacity
Interaction Magnitude ConclusionsExistence✗
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Collusion
Collusion:Effects of PT(Information disclosure)
(Albæk et al. 1997)
Convergence of prior conjectures (Njoroge 2003)
Monitoring & enforcing
Genesove & Mullin, 2001Compte 1988
Focal point & Tacit collusion(Levenstein
& Suslow 2006)
Easier to reach an agreement because
all have the same information
No one offers more than the
‘official price’
Defecting firms are detected.
Retaliation is expected
Collusive agreementStigler 1964Tirole 1988
Carlton & Perloff 1990
Monitor each other behavior
Agree on a common strategy
Enforce / Retaliate
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Do Firms Need PT to Collude?
What if firms do not know
prices?
Dynamic games of iimperfect
information (1980’s)
Green & Porter 1984Rotemberg & Saloner 1986
Collusion is sustainable but
‘less severe’
Use of alternative mechanisms
Non-linear pricesPiccolo & MiklósThal (2012)*
Gilo & Yehezkel (2015)Gilo & Yehezkel (2017)
Collusion is sustainable and not necessarily
‘less severe’
«industries continue to collude successfully after
communication is disabled»Fonseca & Normann 2012.
Non-price collusionGeorgantzís & Sabater
Grande(2002)
Price Discovery Strategies(e.g., matching prices)
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Harrington 2004Harrington 2005Block et al. 1981
MT, Collusion and Anti-Trust Authority
PT helps detecting collusion.Implicit in:
Harrington 2006Porter 2005
A more efficient Anti-Trust Authority may mitigate the intensity of
collusion
The net effect of MT on collusionis an empirical question
Dynamic vs. static
Effectiv. Anti-Trust
Non-price collusion
Altern. enforcing
Block et al. 1981
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Barg. PowerCollusion
Info Ineffic.
ProductionPolicy
Arbitrage
Outline
IntroMarket Opacity
Interaction Magnitude ConclusionsExistence✗
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Hviid & Møllgaard(2006)
Adjemian et al. 2016 (competition
in thin markets)
Information Inefficiency
Information Inefficiency
Incomplete information
Thinning markets
Prices from thin markets might be
‘misleading’
Prices are just a subset of relevant
info. PT might induce a bias
Releasing Unreliable
Information
Releasing Incomplete Information
Non-price elements in procurement
contracts
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
EmpiricsBarg. Power
CollusionInfo Ineffic.
ProductionPolicy
Arbitrage
Outline
IntroMarket Opacity
Interaction Magnitude ConclusionsExistence✗
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Net Benefits of PT under Market Power: Empirical Evidence
Does Mandatory Disclosure Lead to
“More Competitive” Prices?
Danish Concrete Industry
(Albaek et al. 1997)
Quite the OppositeGov’t Assisted
Oligopoly
Capacity(partial data)
US Railroads (Grain Fares)
(Schmitz & Fuller. 1995)
Depends on Competition Model
Infrastructure and Availability of
Waterways
US Livestock Mandatory
Price Report(several)
It’s complicated
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Net Benefits of PT: Empirical Evidence
Livestock Mandatory
Reporting ActUSA 2001
Koontz & Ward (2011)
Farmers’ mixed opinion
(‘unrealistic expectations’)
Grunewald et al 2004
Overestimated price variability
(no ‘secret deals’)Ward 2004
Anti-competitive effects?
No Evidence
(Null hyp.)
Azzam & Salvador 2004Pendell & Schroeder 2006 cointegration ↑
Fausti & Diersen 2004
YESGrimes & Plain 2006 Strategic pricing (timing)
Cai et al. 2011 (other factors are possible)Fausti et al. 2015
Gain over voluntary system?No, on average (Fausti et al. 2007)
Yes, discount & premiums(Fausti et al. 2010)
Yes, overall (Mathews et al. 2015)
Theory: Positive Net EffectBoyer & Brorsen,
2013Njoroge et al.
2007
Price reductionWachenheim & DeVuyst 2001
NOKoontz 2007 p.trasmission ↑ volatility ↑
Chung et al. 2017 p.trasmission ↑ asymm. ?
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
EmpiricsBarg. Power
CollusionInfo Ineffic.
ProductionPolicy
Arbitrage
Outline
IntroMarket Opacity
Interaction Magnitude ConclusionsExistence✗
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
Do we overestimate benefits?What is the magnitude ofthe interaction with collusion?
Opacity can be Asymmetric
(not nec. one-way)
Easier, not easy
Do we have collusion?Are price signals efficient?
Dynamic collusionInformation ineff.
Conclusions
ConsensusMore studies
needed
MT is good per se
Problems with interaction with a specific subset
of distortions
Existence of distortions
MT makes collusion easier
to detect
Principals have ways to screen
agents
Impact of disclosure
Is partial informationharmful or good?How to minimize negativeimpact?
Distortive public disclosure
Carlo Russo Market Transparency EC JRC seminar May 31, 2018
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