Abstract

This paper analyzes a Hotelling duopsony model with location-based price discrimination and procurement contracts pegged to the average spot-market price. This setup captures key features of US beef processors’ procurement of cattle supplies, which relies heavily on (controversial) spot-price contracts known as Alternative Marketing Arrangements. We show that use of these contracts increases the equilibrium price markdown in the market; and, as spot-price contracts become more prevalent, the markdown increases at an increasing rate. Both of these conclusions also apply to the standard case of uniform mill pricing.