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. M arkets in agriculture involve numerous institutional arrangements and allow alternative methods of delivery (Tomek). A trading institution consists of rules and conventions that govern exchange. Auction and private negotiation are two trading institutions studied in this paper. The auction, specificall a double auction, consists of buyers and sellers announcing bid and ask prices that converge to an eventual trade price. Private negotiation is akin to this for one buyer and one seller, rather than the interaction of many buyers and sellers, in the price discovery process. 1 Interestingly, world wide web trading sites have been organized as either auctions or message boards that facilitate private negotiation.
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