Bilateral bargaining between chicken producers and processing firms determined chicken prices in Ontario from 1995 to 2002. A significant reform in 2003 introduced a formula-based live price that is function of chicken producers’ costs. The latter pricing mechanism reduces the risk faced by processing firms and producers because the chicken price is known when output decisions are made. However, the pricing formula also involves some risk in that the cost components may be far removed from actual costs when production is carried out. Expected farm prices under the two different pricing mechanisms are also not identical. The producers’ and processors’ expected utility of profits under each pricing mechanism is computed. The bargaining pricing mechanism generally yields higher expected utility for producers than the formula-based price. Conversely, processing firms obtain a higher expected utility under the formula-based pricing than under the bargaining framework. These conclusions critically hinge on the size of the producers’ margin component in the formula-based price. In that sense, the formula-based pricing mechanism did not lessen the significance of relative bargaining strengths in establishing the distribution of welfare in the chicken industry.
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