Producer Welfare and the Preference for Price Stability

The last few years have witnessed a phenomenal increase in price instability for final goods produced and consumed as well as inputs into production processes. As a result, an extensive literature has developed analyzing the welfare consequences of price stabilization brought about by buffer stock activities. This discussion has focused on the dis-tribution of gains between producers and consum-ers as well as on the overall benefits to the econ-omy. (For a recent survey of this literature, see Tumovsky 1978.) Much of the theoretical basis for the empirical work on the effects of stabilization policies appeared in the seminal papers by Waugh and Oi. Waugh examined the welfare effects of price instability on consumers while Oi addressed the issue of whether or not producers prefer price instability. For policy makers, the conclusion reached by Oi that producers prefer price instability to stability is somewhat disturbing because most policies-s-especially those in agriculture-have been aimed at creating price stability. Recently, Tisdell (1978) extended Oi's analysis in two directions. First, he has shown that precisely the same conclusions hold with respect to instabil-ity in input prices. Moreover, under the same con-ditions to those assumed by Oi for the single-prod-uct case, commodity price instability (either in out-puts or inputs) raises the expected profit of a mul-ticommodity firm. Thus, the thrust of these con-tributions is to suggest that, insofar as producers are concerned with expected profit, they will prefer price instability-a result which greatly weakens the argument that producers should support price stabilization policies or any form of marketing ar-rangement where "pooled pricing " is used. The purpose of this paper is to generalize the conditions under which producers prefer price sta-bility. A single-product firm is first considered, and results are obtained, opposite to those of Oi, which show that a producer may prefer stability to price instability. Furthermore, this paper explores the welfare implications of price instability for a multi-product firm, to determine whether or not a theoreti-cal argument can be made that a firm engaged in the Andrew Schmitz is a professor of agricultural and resource eco