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Long-Term Contracting and Multiple-Price Systems

36 Pages Posted: 3 Jul 2007  

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

Date Written: July 1991

Abstract

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.

Suggested Citation

Hubbard, R. Glenn and Weiner, Robert J., Long-Term Contracting and Multiple-Price Systems (July 1991). NBER Working Paper No. w3782. Available at SSRN: https://ssrn.com/abstract=473942

Robert Glenn Hubbard (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://www.gsb.columbia.edu/faculty/ghubbard

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert Jonathan Weiner

George Washington University - Department of International Business ( email )

2023 G Street NW
Washington, DC 20052
United States

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