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Abstract

This paper seeks to reduce the gap between theoretical research that shows a potentially large price-depressing effect of captive supplies and empirical work that finds any pricedepressing effect of captive supplies is small. An agent-based model is developed that matches the results of Xia and Sexton (2004) as well as our generalization of their model. We relax Xia and Sexton’s (2004) assumption of no supply response by captive feeders, which reduces the price depressing effect of captive supplies. Finally, the agent-based model is used to simulate packers choosing both captive supply quantities and spot market quantities. Packers in the relaxed agent-based model choose no captive supplies and thus reach the Cournot solution. The research narrows the gap between theoretical models and the empirical work on captive supplies that shows little effect on prices, but a gap remains.

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