Captive supplies and the cash market price: A spatial markets approach

Exclusive contracts (often called "captive supplies") between processors an d farmers are an increasingly important feature of modern agriculture. We s tudy an interesting empirical regularity occurring in markets that feature both contract and spot exchange: the spot price is inversely related to the incidence of contract use in the market. We use a spatial model and a nonc ooperative game approach to show that processors can use exclusive contract s to manipulate the spot price in certain situations. Captive supplies in t hese settings represent geographic buffers that reduce competition among pr ocessors. However, in markets where the spatial dimension is less important , captive supplies are ineffective as barriers to competition because firms have incentive to "jump" across a captive supply region to procure the far m product.