Long-Term Contracting and Multiple-Price Systems

36 Pages Posted: 3 Jul 2007 Last revised: 3 Nov 2022

See all articles by R. Glenn Hubbard

R. Glenn Hubbard

Columbia University - Columbia Business School, Finance; 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, Robert Glenn and Weiner, Robert Jonathan, 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 University - Columbia Business School, Finance ( email )

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Robert Jonathan Weiner

George Washington University - Department of International Business ( email )

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