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Price Discovery in Private Negotiation Trading with Forward and Spot Deliveries
Author(s) -
Menkhaus Dale J.,
Phillips Owen R.,
Johnston Allison F. M.,
Yakunina Alla V.
Publication year - 2003
Publication title -
applied economic perspectives and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.4
H-Index - 49
eISSN - 2040-5804
pISSN - 2040-5790
DOI - 10.1111/1467-9353.00047
Subject(s) - price discovery , negotiation , spot contract , business , spot market , forward contract , economics , financial economics , finance , futures contract , political science , electricity , electrical engineering , law , engineering
Advance production in spot markets increases seller costs because inventories must be held. This cost does not exist in production‐to‐demand (or forward) markets, for which production follows trading, and sales exactly match quantities produced. Data from laboratory‐computerized markets that trade through private negotiation are analyzed. For the experimental supply and demand conditions, price convergence patterns show spot prices 10.8% lower and the number of trades 12.4% fewer than forward outcomes. The adverse impact of advance production and private negotiation on seller earnings is emphasized when earnings are compared with those from double auction trading.