Long-Term Contracting and Multiple-Price Systems
R. Glenn Hubbard
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Robert J. Weiner
George Washington University - Department of International Business
NBER Working Paper No. w3782
This paper examines product markets in which long-term contracts and spot transactions coexist. Such markets are characterized by "multiple-price systems," wherein adjustment to supply and demand shocks occurs through spot prices, while contract prices are fixed, or adjust slowly. We derive the existence of contracts, as well as the equilibrium fraction of spot trade, in the framework of an optimizing model, and analyze the effects of shocks on market equilibrium when some buyers and sellers are "locked in" contractually. The model is employed to interpret the change in the copper market from a multiple-price system to one characterized solely by spot trade.
Number of Pages in PDF File: 36
Date posted: July 3, 2007
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