considerations on market transparency - europa

Carlo Russo Market Transparency EC JRC seminar May 31, 2018Market Transparency EC JRC seminar May 31, 2018

Considerations on Market Transparency

A Lit Review on Pros and Cons of Market Transparency

Carlo Russo

University of Cassino and Lazio Meridionale

Carlo Russo Market Transparency EC JRC seminar May 31, 2018

They are good for you

A Perspective on Market TransparencyMarket Transparency

Is like vegetables

There are medical conditions advising against eating them

Possible market allocationsDistortion

Perfect Competition

Market ‘Opacity’

✗

MagnitudeEmpirical question

(little attention)

InteractionTheory

ExistenceEmpirical question

Supporting MT is a concern if:

Another distortion is in place

Price opacity and the other distortion ‘pull’ into different

direction

The magnitude of the interaction is

non-negligible


Outline

IntroMarket Opacity

Interaction Magnitude ConclusionsExistence✗


Market Transparency

Value chain

Asymmetric information

Market transparency can be defined as the availability of relevant market information (e.g. concerning prices, weather,

production, trade, consumption and stocks) for all market participants.

Perfect, symmetric information

Reducing uncertainty about ‘average prices’ (Azzam 2003)

Sharing private Information (Lamming 1993)


Price Transparency: key distinctions

Prices are public knowledge

The way prices are determined

is public knowledge

Price Discovery Issue(What)

Whom shouldI sell to?

Price Determination Issue(Why)

What will prices be if …?

Symmetric vs. AsymmetricMarket Opacity

Downstream Firm

Farm

er

Opaque Transparent

Op

aqu

eTr

ansp

aren

t

AMTF

Types of Transparency


ProductionPolicy

Arbitrage

Outline

IntroMarket Opacity



Better Production Decisions

ICT (especially developing countries)

Jensen 2010Lokanathan et al. 2012Deichmann et al. 2016

Making information available to farmers

Using markets to facilitate price discovery

Financial marketsThomas 2003 (India)

Easwaran & Ramasundaram 2008Sendhil et al. 2013

Big data for demand forecasting

Ji, Hu & Tan 2017Data Integration

(prices + auxiliary info)

Long term production decisions

InnovationProduction capacity(US Health Industry)

Stadler et al. 2016 (consumers)

Short term production decisions

Risk & InformationSandmo 1974

Azzam 2003Moschini & Hennessy 2001

Svensson & Drott 2010


Monitoring & Policy Design

Policy Transparency

Design Enforcing

Data-Driven PolicyYou know this

better than I do


Price Transparency and Arbitrage

Local Market 1

Local Market 2

q1

p1

q2

p2

Opacity

q

p

Jensen 2010(Spatial model)

Does this increase competition?

(better prices for farmers)Is this something we want?

No clear predictionLambrecht et al. 2018

Healthcare studies(prices go up in poor areas)

It depends on other distortions

(OECD 2012)


Barg. PowerCollusion

Info Ineffic.

ProductionPolicy

Arbitrage

Outline

IntroMarket Opacity



Bargaining with Incomplete Information

Bargaining with incomplete information(Ausbel et al. 2001)

Market transparency helps less informed farmers bargaining more

effectively

Price transparency offers only incomplete information

(costs are missing). Distorted information can be worse than no

information

LaterAMTF

Courtois & Subervie 2014(developing countries, mostly)


Bargaining with Complete Information

Supplier’sCost of

Production

ConsumerPrice

Consumer PriceMinus MKTG

Costs

Total gain from trade

Price Paid by an Alternative

Buyer

Price paid to an alternative

Supplier

Buyer’s ShareSupplier’s Share

Negotiation Space

AgreedPrice

Price Paid by Buyer to Supplier


Bargaining with Incomplete Information

Supplier’sCost of

Production

ConsumerPrice


Costs



Buyer


Supplier


Negotiation Space

AgreedPrice



Bargaining under Incomplete information

Assumption:Downstr. firm

designs the contracts

Screening:Laffont & Tirole 1988Riley 2001 (review)

Using quality standards and RMP to select ‘efficient’ suppliers

Russo et al. 2014Fulponi 2006

Large buyer are already using contracts to solve the information asymmetries regarding suppliers’ cost structure

Market Transparency EC JRC seminar May 31, 2018

Bargaining with Information

Supplier’sCost of

Production

ConsumerPrice


Costs



Buyer


Supplier


Negotiation Space

AgreedPrice



Bargaining under Incomplete Information

Pricepaid by

alt. buyer

Pricepaid to

alt. supplier

Mitchell 2017 Farmers’ switching

costsreduce the value of PT

Ranjan 2017 Fear of buyer’s exit

reduce the value of PT

PT is valuable if farmers have

non-zero bargaining power under perfect

information

Hueth & Marcoul 2006


Relative Magnitude is an empirical question

Can be costlyInfo can be imperfect

Bargaining under Incomplete Information

Leading firms(principals)

have several ways to deal with opacity

Transparency benefits for farmers can be small if buyers have strong bargaining

power under perfect information

Unlike collusion(static vs. dynamic)

Opacity may help buyer power


Barg. Power

CollusionInfo Ineffic.

ProductionPolicy

Arbitrage

Outline

IntroMarket Opacity



Collusion

Collusion:Effects of PT(Information disclosure)

(Albæk et al. 1997)

Convergence of prior conjectures (Njoroge 2003)

Monitoring & enforcing

Genesove & Mullin, 2001Compte 1988

Focal point & Tacit collusion(Levenstein

& Suslow 2006)

Easier to reach an agreement because

all have the same information

No one offers more than the

‘official price’

Defecting firms are detected.

Retaliation is expected

Collusive agreementStigler 1964Tirole 1988

Carlton & Perloff 1990

Monitor each other behavior

Agree on a common strategy

Enforce / Retaliate


Do Firms Need PT to Collude?

What if firms do not know

prices?

Dynamic games of iimperfect

information (1980’s)

Green & Porter 1984Rotemberg & Saloner 1986

Collusion is sustainable but

‘less severe’

Use of alternative mechanisms

Non-linear pricesPiccolo & MiklósThal (2012)*

Gilo & Yehezkel (2015)Gilo & Yehezkel (2017)

Collusion is sustainable and not necessarily

‘less severe’

«industries continue to collude successfully after

communication is disabled»Fonseca & Normann 2012.

Non-price collusionGeorgantzís & Sabater

Grande(2002)

Price Discovery Strategies(e.g., matching prices)


Harrington 2004Harrington 2005Block et al. 1981

MT, Collusion and Anti-Trust Authority

PT helps detecting collusion.Implicit in:

Harrington 2006Porter 2005

A more efficient Anti-Trust Authority may mitigate the intensity of

collusion

The net effect of MT on collusionis an empirical question

Dynamic vs. static

Effectiv. Anti-Trust

Non-price collusion

Altern. enforcing

Block et al. 1981


Barg. PowerCollusion

Info Ineffic.

ProductionPolicy

Arbitrage

Outline

IntroMarket Opacity



Hviid & Møllgaard(2006)

Adjemian et al. 2016 (competition

in thin markets)

Information Inefficiency

Information Inefficiency

Incomplete information

Thinning markets

Prices from thin markets might be

‘misleading’

Prices are just a subset of relevant

info. PT might induce a bias

Releasing Unreliable

Information

Releasing Incomplete Information

Non-price elements in procurement

contracts


EmpiricsBarg. Power


ProductionPolicy

Arbitrage

Outline

IntroMarket Opacity



Net Benefits of PT under Market Power: Empirical Evidence

Does Mandatory Disclosure Lead to

“More Competitive” Prices?

Danish Concrete Industry

(Albaek et al. 1997)

Quite the OppositeGov’t Assisted

Oligopoly

Capacity(partial data)

US Railroads (Grain Fares)

(Schmitz & Fuller. 1995)

Depends on Competition Model

Infrastructure and Availability of

Waterways

US Livestock Mandatory

Price Report(several)

It’s complicated


Net Benefits of PT: Empirical Evidence

Livestock Mandatory

Reporting ActUSA 2001

Koontz & Ward (2011)

Farmers’ mixed opinion

(‘unrealistic expectations’)

Grunewald et al 2004

Overestimated price variability

(no ‘secret deals’)Ward 2004

Anti-competitive effects?

No Evidence

(Null hyp.)

Azzam & Salvador 2004Pendell & Schroeder 2006 cointegration ↑

Fausti & Diersen 2004

YESGrimes & Plain 2006 Strategic pricing (timing)

Cai et al. 2011 (other factors are possible)Fausti et al. 2015

Gain over voluntary system?No, on average (Fausti et al. 2007)

Yes, discount & premiums(Fausti et al. 2010)

Yes, overall (Mathews et al. 2015)

Theory: Positive Net EffectBoyer & Brorsen,

2013Njoroge et al.

2007

Price reductionWachenheim & DeVuyst 2001

NOKoontz 2007 p.trasmission ↑ volatility ↑

Chung et al. 2017 p.trasmission ↑ asymm. ?


EmpiricsBarg. Power


ProductionPolicy

Arbitrage

Outline

IntroMarket Opacity



Do we overestimate benefits?What is the magnitude ofthe interaction with collusion?

Opacity can be Asymmetric

(not nec. one-way)

Easier, not easy

Do we have collusion?Are price signals efficient?

Dynamic collusionInformation ineff.

Conclusions

ConsensusMore studies

needed

MT is good per se

Problems with interaction with a specific subset

of distortions

Existence of distortions

MT makes collusion easier

to detect

Principals have ways to screen

agents

Impact of disclosure

Is partial informationharmful or good?How to minimize negativeimpact?

Distortive public disclosure


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