Contracting and Price Adjustment: An Application to Oil and Copper Markets

摘要

This paper characterizes price adjustment in markets where trade takes place through both contract and spot transactions. We develop a model of the effects of a two-price system on price adjustment to transitory shocks, demonstrating that the persistence effects of these shocks on prices depends on, the fraction of trades carried out through term contracts. In our applications, we focus on the copper and petroleum markets, though many other commodity and industrial product markets have experienced multiple-price regimes. Empirical tests of the model provide strong support for the notion that the increase in the importance of the spot market in the two markets is associated with a significant change in the price adjustment process. Some implications for public policies for price stabilization in commodity markets are discussed. 73 refs., 2 tabs. (ERA citation 13:030439)