TRADING PRACTICES IN THE COAL MARKET - APPLICATION OF THE THEORY OF BILATERAL MONOPOLY TO THE AUSTRALIA-JAPAN COAL TRADE

One of the better-known anomalies of the international coal trade is t he wide disparity in delivered coal prices into major markets. This di sparity is particularly noticeable in Japan, the largest market. In Au stralia, the largest supplier to Japan (and the world), the dominant t heory explaining the significantly lower delivered price for Australia n coal relative to other major supplying nations has been the 'bilater al monopoly' theory. This postulates that an increased surplus availab le from the trade due to savings in freight costs because of proximity is shared between Japanese buyers and Australian sellers. This articl e examines the application of the theory made by Bow en and Gooday (19 93) which shows a roughly equal distribution of the surplus from the t rade in the period 1980-1990. This examination shows that major assump tions with respect to exogenously determined upper and lower prices wi thin which bargaining between the parties occurs cannot be sustained. Small adjustments to the bargaining range produce results which show a n unequal distribution of the surplus which consistently favours buyer s over the period. The latter part of the article examines a series of trading practices and differences in the composition of capital which may explain the long-term differences in bargaining power between the parties. (C) 1998 Elsevier Science Ltd. All rights reserved.