Oligopolistic Supply on the World Cocoa Market

Abstract

Price formation on commodity markets is sometimes erratic and appears to defy rational explanation, at least in the short run. Econometric models of these markets, mostly constructed with the intention to forecast commodity prices in the long run, in general fail to yield reliable forecasts and are therefore inapplicable in the short run. In recent years, it has become fashionable to regard the short run price prediction on a commodity market as impossible since, as it has been claimed, many spot and future markets are efficient in the sense that “prices fully reflect all available information” [Praetz]. Since I personally have difficulties to understand what is meant by this phrase, as well as by the statistical “tests” purporting to show that observed price changes are serially uncorrelated, I do not share this pessimistic attitude. Since some investigations clearly do not present an adequate picture of the institutional conditions on a market, it may be worthwhile to model markets more closely to reality. On the other hand, short run price forecasts may be difficult to obtain even with a more realistic model.

An oligopoly model is developed for application on the world cocoa market The equilibrium points of the resulting supergame are characterized theoretically. Then, the actual behaviour of the five most important suppliers on this market is compared with the set of equilibrium points derived from the model A tentative explanation is offered for the discrepancies between the theoretical and the empirical results. In addition, the likelihood of a stable agreement among the cocoa producing countries which does not involve the demanding countries is investigated. Reasons are provided why such an agreement probably is not stable over time.