Book contents
- Frontmatter
- Contents
- Preface
- Acknowledgments
- 1 Introduction
- Part I The basic model
- 2 Competitive equilibrium with storage
- 3 Solving for the storage equilibrium
- 4 The effects of storage on production, consumption, and prices
- 5 Convergence to the steady state
- Part II Implications of storage for research on time series
- Part III Extensions of the model
- Part IV Public interventions
- Part V Epilogue
- References
- Author index
- Subject index
2 - Competitive equilibrium with storage
Published online by Cambridge University Press: 03 February 2010
- Frontmatter
- Contents
- Preface
- Acknowledgments
- 1 Introduction
- Part I The basic model
- 2 Competitive equilibrium with storage
- 3 Solving for the storage equilibrium
- 4 The effects of storage on production, consumption, and prices
- 5 Convergence to the steady state
- Part II Implications of storage for research on time series
- Part III Extensions of the model
- Part IV Public interventions
- Part V Epilogue
- References
- Author index
- Subject index
Summary
The general simplicity of the storage technology for bulk commodities means that it offers no notable economies of scale and requires no special technical skills. Because of the minimal fixed costs and ease of entry and exit, it is reasonable to assume the number of firms in the storage industry is sufficient for each to be a price-taker. In contrast to some mining activities where large firms dominate, size is not necessarily an advantage in storage operations. In contrast to many types of agricultural production where single-family farms are the dominant form, there are no great advantages to owner operation of storage facilities. Monitoring of managerial agents by owners is relatively easy since unsatisfactory management of the physical stocks cannot be obscured by the vagaries of the natural environment. Hence, it is reasonable to assume that ownership of stocks can be sufficiently diversified for their managers to be taken to behave in a risk-neutral fashion. Thus, in this chapter we specify the competitive equilibrium resulting from the decisions of many risk-neutral, price-taking storers.
Exercises concerned with deducing and studying competitive equilibria are the bread and butter of economists. With storage, however, a four-course banquet is a better analogy:
Aggregate storage cannot be negative: As a result, in any particular period the whole storage industry may not be in operation.
Because the problem involves uncertainty, the way in which expectations are generated is important; in equilibrium, “rational” expectations would be forward-looking, internally consistent expectations.
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- Storage and Commodity Markets , pp. 23 - 49Publisher: Cambridge University PressPrint publication year: 1991