Producer’s Preference for Price Instability: Revisited

Abstract

In the debate over producer preference for price instability, Oi argues that producers prefer price instability to stability using only the case where demand shocks generate instability. In this case, storage hurts producers. We use the classic welfare economic framework to consider the more likely scenario where instability is generated by supply shocks and, in the absence of storage, producers prefer production and price instability. However, producers can increase their profits by storing part of the production in the low-price period and releasing stocks in the high-price period. The strong conclusion is that producers prefer, on net, price stability to instability when the possibility for storage exists. Under profit maximization, producers, not governments, engage in storage. Producers prefer to produce under unstable prices, but to sell at stable prices. On net, producers prefer price stability.