An economic evaluation of the role of market price information in producer decision making

Abstract

Additional market information has been identified by horticultural producers as an important input into their production and marketing decisions. One source of such information is a public market information service. The provision of such a service may be justified if it can be shown that the information to be provided would actually be used by producers to improve their decision making, and if market failure occurs due to imperfections in the information that is currently available. The issue of whether to provide an information service is examined, first by determining how producers use information to make their production and marketing decisions, and secondly, by looking for evidence of market failure due to lack of information.

Time lags between the decision to plant a crop and the outcome of that decision require producers to make predictions about likely future prices. A dynamic aggregate supply model is fitted to time series data for the strawberry industry in the Auckland region and two competing hypotheses for the formation of price expectations are examined and tested. The results suggest that expectations are formed rationally (in the Muth sense). This implies that producers have sufficient information on which to base their production decisions.

Market failure may occur in circumstances where producers misallocate supplies to different markets because of a lack of information about the state of supply and demand in each market (as reflected in prices). A static supply and demand model of the strawberry market is constructed and predictions made about the relationships between prices in each of three different markets in which strawberries can be sold. No evidence was found in the domestic market for the persistence of any substantial disequilibrium. This implies that there is little scope for a public service to report market information.

It is concluded that in the domestic strawberry market there is little justification for the provision of a public market information service. It is not known to what extent this applies to other horticultural markets, but in any primary produce market which approximates a perfectly competitive situation, the conditions may not be very different.