A spatial-dynamic approach to land rental markets
Final Report Abstract
This project investigated pricing and competition on land rental markets, with an emphasis on local market power. The importance of land for agricultural production, its relevance for agricultural policy, as well as increased public attention with respect to land prices necessitates our understanding of price formation mechanisms on this market. Due to the specific characteristics of land, we use a spatial-imperfect competition framework to explicitly address the spatial dimension of land (rental) markets. The developed framework accommodates different features of the land market including alternative price and competition strategies by farms, economies of size, or the presence of largehorizontally integrated agricultural enterprises. While the consideration of space in competition models is often plagued by analytical difficulties, we complement theoretical investigations with computational economics approaches. In particular, an agent-based modelling framework is used where spatially distributed agents (farms) optimize their price and location decisions by means of genetic algorithms—a method based on artificial intelligence. The simulation model allows flexible applications with respect to spatial price competition in output and input markets and under alternative model specifications. The results of this project contribute to theoretical and methodological advances in the context of horizontal product differentiation in general and spatial competition in land rental markets in particular. From a methodological perspective, we show that genetic algorithms are able to approximate different kind of Nash-equilibria (in pure, mixed, or asymmetric strategies) with high precision. The computational approach also allows for the simultaneous analysis of price discrimination and product differentiation, which contributes to the literature of spatial economics. For instance, we identify Nashequilibria in asymmetric strategies both in the firm’s price policy and location choice. These findings highlight that higher spatial price discrimination can compensate for less beneficial locations, i.e., locations of fierce competition. In the context of the land (rental) market, we investigate the farm’s choice of its spatial rental price strategy under non-constant marginal costs, the effect of direct payments on land rental prices, and whether large farm enterprises can exploit local market power. These issues are especially relevant for transitions economies where land rental is important and there is a large farm but fragmented landownership structure. The theoretical results show that landowners are typically worse off if farms use price discrimination (e.g., in terms of a uniform rental price) while farm profit is higher compared to non-discriminatory pricing, i.e., rental prices that decrease with the distance to the farmstead. In contrast, if farms operate under decreasing marginal costs, landowners might also benefit from price discrimination because this allows the farm to access remote locations and keep more land in production. Because direct payments are a major tool of agricultural policy to support farm income and these payments are tied to land, the question arises as to who benefits from them when farmers are not the landowners. While theoretical models commonly predict that most of the payments transfer to land prices, empirical findings show that this incidence is low instead. In this project, we present theoretical results that are consistent with the empirical evidence in the literature. The subsidy incidence varies with the competitiveness of the market, ranging from perfect subsidy transfer under specific conditions to low or zero incidence for most of the cases considered. Furthermore, we investigate the role of large, horizontally integrated farm enterprises (so-called agroholdings). We present a theoretical framework that accounts for the presence of multi-farm agroholdings and derive equilibrium prices under alternative spatial competition settings. The results show that farms affiliated with an agroholding possess (ceteris paribus) more land and set higher land rental prices compared to independent farms. Based on an application to the Ukrainian land rental market, we find empirical support for the theoretical findings and the results also indicate that agroholdings can act as price leaders in local land markets.
Publications
- (2018). Lost in space? The effect of direct payments on land rental prices. European Review of Agricultural Economics 45 (2): 143–171
Graubner, M.
(See online at https://doi.org/10.1093/erae/jbx027) - (2018). Stützen Direktzahlungen landwirtschaftliche Einkommen oder Pachtpreise?
Graubner, M.
- Wie die Direktzahlungen auf die Pachtpreise wirken. Bauernzeitung 2018 (33): 42-43
Graubner, M.
