Price Discovery in an Experimental Market for Fed Cattle

Price discovery is a concept used frequently but seldom defined. Thomsen and Foote defined price discovery in 1952 as the process of buyers and sellers arriving at a transaction price for a specific quantity and quality of a commodity or product at a specific time and place. Their definition allows focusing on many interrelated components of the pricing process, and numerous topics may be categorized as price discovery research. Examples include studies of transaction prices and relationships with underlying supply and demand determinants; price relationships and dynamics between and among vertical stages in the marketing channel; spot versus forecasted or futures market prices; price impacts associated with market information, especially public reports; price and product characteristic relationships; spatial and temporal price patterns and dynamics; and price impacts associated with market structure and behavior changes. Price discovery research has become an increasingly important topic because of structural and behavioral changes in agriculture, both horizontal and vertical, and the resulting potential price and market information impacts. Structural and behavioral changes in meatpacking and related stages in the livestock-meat subsector have raised questions about price discovery for various species and classes of livestock (Purcell and Rowsell). Alternative approaches are available to study the interaction of firms and markets (Carlton and Perloff). Research examining linkages between market structure, firm behavior, and prices paid or received for fed cattle include studies following the traditional structureconduct-performance paradigm (Marion and Geithman; Menkhaus, St.Clair, and Ahmaddaud; Schroeder et al.; Ward 1981, 1982, 1992) as well as studies drawing on newer theories of industrial organization (Koontz, Garcia, and Hudson; Stiegert, Azzam, and Brorsen). A subset of the research examined transaction prices for fed cattle; while other research used more aggregated price data. Reasons for the relatively sparse literature involving transaction prices include difficulties and costs associated with collecting primary data. Access to selected types of data for research has declined as a result of structural and behavioral changes, both horizontal changes leading to increased concentration as well as vertical changes toward non-price forms of vertical coordination. Large agribusiness firms internalize much of the data needed for research and may not cooperate with public institutions that collect voluntarily reported data. Regulatory agencies collect transaction data for investigations, but are unwilling or legally unable to provide data for research. As cattle feedlots and meatpackers have increased in size and as more private marketing/procurement arrangements have been consummated between larger firms, primary data-gathering efforts result both in less data and less reliable data for economic research. Questions surrounding primary data collection led a team at Oklahoma State University to develop the Fed Cattle Market Simulator (FCMS). The FCMS allows experimental simulation of a specific market, thereby observing the interrelationships between individual firms and the entire market in which economic decisions are made and where economic behavior occurs. The FCMS allows Clement E. Ward is a Professor and Extension