Production Uncertainty and Factor Price Disparity in the Slaughter Cattle Market: Theory and Evidence

The theoretical analysis of competitive firm behavior under economic uncertainty has been explored in the areas of input and output price uncertainty in the papers by Baron (1970), Sandmo (1971), Batra and Ullah (1974), and Blair (1974) among others. The issue of the competitive firm facing production uncertainty generated by input quality variability was addressed in a paper by Ratti and Ullah (1976). Other papers applied their approach to specific areas, such as, wage discrimination being explained by labor quality variability.1 A simple model of a competitive firm confronting production uncertainty, generated by the variability in the flow of factor service (input), is presented below. The authors believe that the assumptions of the model developed in this paper provides a realistic description of the short run behavior of firms engaged in meat packing operations in the upper Midwest and purchasing cattle in the slaughter cattle market. This paper follows the approach used to analyze production uncertainty developed by Ratti and Ullah. The purpose of our study is to analyze firm behavior when it must purchase its input (steers) in an auction market under two different informational conditions. This in essence, creates two submarkets for the purchasing of the input. The firm has either complete information or incomplete information concerning the contribution to production of the input it is purchasing.2 Incomplete information implies that there is uncertainty over the contribution to production of the input when purchased. The term contribution to production , will be denoted CTP throughout the rest of the paper