Signaling among farmers : market power, information, and social welfare

Abstract

Abstract: In reality, the production operations for the agriculture commodities are not rigorously made simultaneously, as farmers may strategically time their production decision. In this paper, we consider the situation in which farmers endowed with private signal engage in quantity competition under market price uncertainty. During the production cycle, farmers first commit when to make their production decision in a binary choice, then each of the leaders determine the production quantities based solely on her private signal, while each of the followers condition his production decision on his own privates signal as well as the observable leaders' production quantities. We characterize the optimal decision strategies for the ex-ante homogeneous farmers in the market under the perfect revealing equilibrium where farmers' private signal could be inferred by their production quantity. We show numerically that when farmers can timing their decision, they enjoy higher personal profit t as well as social welfare compared with the standard Cournot competition. Moreover, government can further control the number of leaders and followers to improve the social welfare through a transfer payment policy that levying from one group of farmers and subsidizing the other. Finally, we check the extreme case where farmers make decision one by one, where we find the strategic substitution effect overwhelms the benefit of information revealing, which decreases the welfare and hurt the followers even more.

Date of Award	2016
Original language	English
Awarding Institution	The Hong Kong University of Science and Technology