Date: 30.11.2021 from 18:00 to 19:30 (online)

Title: Pulp Friction: The Value of Quantity Contracts in Decentralized Markets

Speaker: Juha Tolvanen (University of Vienna)

Abstract: Firms in decentralized markets often trade using quantity contracts, agreements that specify quantity in advance of trade. We show that firms use quantity contracts to reduce the costs of trading frictions. Specifically, quantity contracts are valuable for two reasons. First, they increase trade between high surplus trading partners because they lock in trade prior to the point of sale. Second, they provide quantity insurance — we show that buyers and sellers are endogenously risk averse with respect to quantity. However, quantity contracts are costly due to their inflexibility to market conditions. Using proprietary invoice data from a large seller, we estimate a model of quantity contracts in the pulp and paper industry. We find that the median value of a quantity contract is 10% of net price. The median value would be 25% lower without quantity insurance and 84% higher without the cost of inflexibility. As trading frictions diminish, the seller uses fewer quantity contracts and profits increase.

The Klaus Liebscher Economic Research Scholarship gives outstanding researchers the opportunity to contribute to the broad range of research activities at the Economic Analysis and Research Department of the Austrian National Bank (OeNB) by providing consultancy services. We congratulate Michael Pfarrhofer for being awared the scholarship.

Hannes Winner (PLUS) and  Harald Oberhofer (WU Vienna) discuss the impact of sponsorship on professional sports, particularly on the competitiveness in European league sports, in a newspaper article published in „Die Presse“.