Spatial Price Integration in Commodity Markets with Capacitated Transportation Networks

51 Pages Posted: 23 Mar 2020 Last revised: 17 May 2021

See all articles by John R. Birge

John R. Birge

University of Chicago - Booth School of Business

Timothy Chan

University of Toronto, Mechanical and Industrial Engineering Department

Michael Pavlin

Wilfrid Laurier University - School of Business & Economics

Ian Yihang Zhu

University of Toronto - Department of Mechanical and Industrial Engineering

Date Written: February 26, 2020

Abstract

Spatial price integration is extensively studied in commodity markets as a means of examining the degree of integration between regions of a geographically diverse market. Many commodity markets that are commonly studied are supported by a well-defined transportation network, such as the network of pipelines in oil and gas markets. In this paper, we analyze the relationship between spatial price integration, i.e., the distribution of prices across geographically distinct locations in the market, and the features of the underlying transportation network. We characterize this relationship and show that price integration is strongly influenced by the characteristics of the transportation network, especially when there are capacity constraints on links in the network. Our results are summarized using a price decomposition which explicitly isolates the influences of market forces (supply and demand), transportation costs and capacity constraints among a set of equilibrium prices. We use these theoretical insights to develop a unique discrete optimization methodology to capture spatiotemporal price variations indicative of underlying network bottlenecks. We apply the methodology to gasoline prices in the southeastern U.S., where the methodology effectively characterizes the effects of a series of well-documented network disruptions on market prices, providing important implications for operations and supply chain management.

Keywords: Commodity and Energy Operations, Price Integration, Spatial Price Equilibrium, Supply Chain Management, Network Disruptions, Congestion, Time Series Analysis, Mixed Integer Programming

Suggested Citation

Birge, John R. and Chan, Timothy and Pavlin, Michael and Zhu, Ian Yihang, Spatial Price Integration in Commodity Markets with Capacitated Transportation Networks (February 26, 2020). Available at SSRN: https://ssrn.com/abstract=3544530 or http://dx.doi.org/10.2139/ssrn.3544530

John R. Birge

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Timothy Chan

University of Toronto, Mechanical and Industrial Engineering Department ( email )

Toronto
Canada

Michael Pavlin

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
CANADA

Ian Yihang Zhu (Contact Author)

University of Toronto - Department of Mechanical and Industrial Engineering ( email )

Toronto, Ontario M5S 3G8
Canada

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