Story, Robert P.

Thomas, Marion D.

English

Research Papers in Economics

Approach  D
MULTIPLE  PRICING
Marion D. Thomas, Extension Agricultural Economist,
Oregon State  College; and Robert P.  Story,  Associate
Professor of  Marketing, Cornell University*
The  major  objectives  commonly  associated  with  multiple  pricing
are to:  ( 1)  maximize total returns to farmers,  (2)  stabilize total returns
to  farmers,  (3)  minimize  the supply  response  by  producers  to an  in-
creased  level  of  price,  and  (4)  encourage  a  desired seasonal  pattern
of production.  Unlike  most other types of farm programs  in this  coun-
try,  the  objectives  of  multiple  pricing  are  achieved  primarily  within
the market place.
GENERAL  FEATURES
The  multiple  pricing  approach  divides  the market  into  segments
according  to differences  in the rates at which  prices respond to changes
in  supply. No attempt is made to increase  demand, but the existing de-
mand  schedule  is  segmented  according  to  differences  in elasticity.  In
fact,  the applicability  of multiple  pricing  depends  upon the degree  to
which  the  total  market  can be  administratively  divided into  segments
having  different  demand  elasticities.  The  segment  of  the market with
the less  elastic  demand  is  referred to  as  the "primary  market"  and the
segment with the more elastic demand as  the "secondary market."  This
division  is  made  either  on  the basis  of location  such  as  domestic  and
foreign markets,  or on  the basis  of  utilization,  such as  food  and  feed
uses  of a product.
Prices  and/or  supplies  in  the  primary market  are  fixed  adminis-
tratively to take advantage  of the less  elastic  demand for this  segment
of  the  market.  Prices  in  the secondary  market are  usually  allowed  to
fluctuate  in  response  to supply  and  demand  with  a minimum  of ad-
ministrative  interference.  Annual  or  seasonal  changes  in  supply  are
thus  reflected  mainly in  the  secondary  market where  demand  is more
elastic  and  the  price  response  to changes  in  supply is  smaller  than in
the  primary  market.  Isolating the primary market in this manner from
changes  in production and total supply makes it possible to stabilize or
to  increase  returns  to producers.
One  method  is  to establish  prices  in  the  primary  market  admin-
istratively;  then  allow supplies  to flow  to  this market in the quantities
:The  other members  of  the  work  group  who  reviewed  the  preliminary  draft  and
assisted  in the development  of  the final report  were:  T. E. Atkinson  (Chairman),  Harry
Anderson,  Wallace  Barr,  G. Max  Beal,  Karl  Shoemaker,  and  C.  O.  Youngstrom.
44demanded  at the  established  price.  The  remaining  supply flows  to  the
secondary  market  for  whatever  price  this  market  will  return.  With
this  type  of  multiple-price  program,  proportionate  shares  of  the  pri-
mary  and  secondary  market  sales  are  usually  allocated  to  individual
producers  by  some  type  of pooling mechanism.
Another  method is to allocate supplies to the primary market to in-
crease  returns  from this  market;  then,  the remaining  supply is allowed
to flow  to the  secondary  market  at whatever  price this market will  re-
turn.  With this  type  of multiple  pricing, shares  in the  primary  market
are  usually  allocated  to  producers  on  the  basis  of  production  in  an
administratively  selected  base period.
A  wide  range  can  exist  in  prices  between  the  primary  and  sec-
ondary  markets  and  in the  proportion of total supply  that is  allocated
to  the primary  and secondary  markets.  These  variations  influence  the
effect that multiple pricing has upon producer returns.  The procedures
followed  and  the  effects  of the program  will vary  from  commodity  to
commodity  and  with  the  objectives  of  the program.  The  effects  of  a
multiple-price  program  for  a  given  commodity  also  depend  not only
on the characteristics  of its markets  but also  upon whether production
restrictions,  import  quotas,  price  supports,  and  other  devices  are em-
ployed  at the same  time.
Multiple  pricing can be applied  to producers  as well  as to the mar-
ket.  The  primary  objectives  of multiple  pricing  to  producers  are:  to
minimize  the supply response to an increased level  of price and to  shift
production  toward  a particular seasonal pattern.  Individual  producers
are  paid  a higher price  that  reflects  returns  in the primary market for
part of their production,  and  a lower price  that reflects  returns  in the
secondary  market for  their remaining production.  In this manner,  the
price of the share of the product flowing to the lower priced secondary
market is reflected to the individual producer.  The return for added pro-
duction  thus is less than if all producers were paid a single unit or blend-
ed price for their total production.
Multiple  pricing  to producers  is  employed  seasonally  for  milk  to
influence  the seasonal pattern of production.  With this type of multiple-
price program,  the returns from the highest priced segment of the mar-
ket are allocated to individual producers  according to their production
in a base period.
SOME  EXAMPLES
The  McNary-Haugen  plan,  twice  passed  and  twice  vetoed  in  the
1920's, is evidence of the early interest and great controversy in multiple
pricing.  The proposal  would  have utilized the domestic feed grain and
foreign export outlets as  secondary markets  for wheat.
45The  multiple  pricing  principle  is  practiced  in  marketing  some
manufactured  goods, and in establishing transportation rates and public
utilities charges.  It has also been  included in various forms and degrees
in farm  legislation during the past twenty-five years.  Examples include:
Domestic  Allotment  Act  of  the  early  1930's;  International  Wheat
Agreement; various  forms of export subsidies; non-systematic  arrange-
ments  for  surplus  disposal,  including  Section  32  export  operations;
Public  Law  480  and other  CCC disposal programs.
Most  purchase  and  storage  programs  in  this  country  have  de-
veloped  into  multiple-price  programs.  As  stocks  have  accumulated
through the purchase  program,  disposal programs have been developed
to move stocks  at less than  domestic market prices.
Marketing  agreements  and  orders  are  probably  the  best  example
of the continued  use of multiple-price  programs in this country.  Under
these  orders,  prices  are  established  administratively  and  applied  ac-
cording to the  utilization  of the milk.
A  number of fruit and  vegetable  marketing  agreements are  also in
effect throughout the country.  These programs do not establish multiple
prices directly,  but are  used  to allocate  supplies  to various  uses or seg-
ments  of the  market  in a  manner that will stabilize  or increase  returns
to  producers.  The  allocation  of tree nuts  between  in-shell and  shelled
outlets  is  an example  of the  use of the multple-price  principle  in mar-
keting  agreements.
EFFECTS  ON  FARMERS
Returns  to  producers  of  some  commodities  can  be  increased  by
multiple pricing.  The  possibilities  for increasing  returns  are  greater  in
the  short  run  than in  the long  run.  Long-run  gains  are  possible,  how-
ever,  when  the  market  can  be  effectively  divided  into elastic  and  in-
elastic segments.  The price effect of increased supply can be minimized
when  the  increase  can  be  directed  to the  more elastic  segment  of the
market.  Producers  receive higher returns  for their resources  or market
more resources  at  the same  price when  multiple pricing  is used in this
manner.
For many  commodities,  the  market  cannot  be  effectively  divided
into  elastic  and inelastic  segments.  (Political  considerations  often  pre-
vent  extensive  use  of  secondary  markets  to absorb  greatly  increased
supplies.)  Increased  producer  returns  often  stimulate  output  so  that
income  benefits  to producers  are limited to the short run. The problem
of devising  and  enforcing  effective  supply restraints  is  just  as  difficult
with  multiple  pricing  as  with  other  programs  designed  to  increase  re-
turns  to  producers.
46Multiple  pricing  is  an  effective  means  of  stabilizing  returns  to
producers.  The  price  effect  of  supply  fluctuations  can  be  effectively
minimized.  When  multiple  pricing  is  used  to stabilize  returns  in  this
manner,  the  problem  of supply  response  is  reduced.
Marketing  orders  and  agreements  use  multiple  pricing  primarily
to  stabilize  rather  than  to increase  long-run  returns.  These  programs
have  been  used  over time  without direct  supply restraints.
Producers  who  rely  primarily  on  the  secondary  market  for  their
returns  are disadvantaged  by multiple-price  programs.  The additional
supplies  flowing to the secondary market reduce prices in the secondary
market.  The  reaction  by secondary  market  producers,  both  domestic
and foreign,  is one of the major factors  that limits the  use of multiple-
price  programs.  For example,  producers  of  milk  for  manufacturing
object to federal orders that increase supplies  of surplus or manufactur-
ing milk.  Canadian  wheat  producers  object  when  U.  S. wheat  stocks
are  sold  at  reduced  prices  on  world  markets  in  which  they compete.
Domestic  feed  grain  producers  would  likely  oppose  a two-price  pro-
gram  for wheat  that established  a relatively  high price for food wheat
and resulted  in a reduced market price for feed wheat.
Multiple-pricing  programs have been most acceptable  and effective
when production  is sufficiently concentrated  so that essentially  all pro-
ducers  of  a  particular  commodity  are  included  in  the  program,  and
none  are  wholly dependent upon  the secondary  market.
Marketing agreements  used for fruits  and vegetables  usually  apply
to  a major  production  area  of a  particular  fruit  or  vegetable  and  in-
clude  all of the producers  within the area. Fluid milk marketing orders
apply  to all producers  delivering milk to plants  which supply a particu-
lar  market.
Multiple  pricing  may be  equally  applicable  to  a commodity  with
widely scattered production, but it is difficult to develop a program sat-
isfactory  to widely scattered producers.
Multiple  pricing  is  most  effective  when  a  high  proportion  of  the
supply  moves to the  primary market.  The advantages  of multiple pric-
ing  are very limited for  a crop like corn,  which goes  so largely to feed
or secondary  market  use.  By contrast, a large part of U. S. wheat goes
to the  relatively  inelastic  domestic  food  market.
Allocating  returns  from  the  primary  market  is  one  of  the  major
difficulties  in  applying  multiple  pricing  and  determines  how one  pro-
ducer is  affected  as compared  with another.  Either pooling or primary
market  allotments  may be  used  to allocate  primary  market returns  to
producers.
47Pooling  is  used  in  milk  marketing  orders.  A  proportionate  share
of  primary  market  returns  is  allocated  to  each  producer  either  on  a
market-wide  or  individual  dealer  basis.
The  pooling  of primary  and secondary  market returns  tends to en-
courage  increased  production.  Returns  to individual  producers  for in-
creased  production  do not directly  reflect the lower  secondary market
prices.  Individual  producers  receive  a greater return for increased pro-
duction  than  the added  product actually returns in the secondary  mar-
ket. Producers  who increase  production thus receive an increased  share
of total primary market sales, unless the proceeds are distributed on the
basis  of past,  rather than  current,  production.  Primary market  returns
to producers  may  be  made  according  to  production  in  a  designated
base or quota period.  This reduces the incentive to increase production.
If the  same base  is used to  allocate  returns over  a period  of years,
producers  who  increase  production receive  a  decreasing  share of their
returns  from  the  primary  market.  Younger  farmers  who  are  in  the
process  of  expanding  the  size  of their farm  operation  tend  to  be  dis-
advantaged  relative  to older,  well  established farmers.
EFFECTS  ON  DOMESTIC  CONSUMERS
Multiple  pricing  usually  places the  cost of  income  benefits to pro-
ducers  mainly on primary market consumers.  This means of increasing
farm income,  therefore,  results  in more consumer opposition than  pro-
grams  which depend  upon tax revenue  as  the source of additional  pro-
ducer income.  Multiple pricing  is  not an  effective  means of increasing
producer  income unless  primary market demand  is relatively inelastic.
The  loss  of primary  market  sales  for commodities  which  have readily
available  substitutes  minimizes  or eliminates,  in  the long  run, the  in-
come  benefits  to producers  from  multiple pricing.  Production  of sub-
stitute  products  is  stimulated  by increased primary  market prices and,
in  the  long run,  competition  is  increased.  For example,  high  domestic
cotton  prices  stimulate  the development  and  production  of  synthetic
fibers  and over  time reduce  domestic cotton sales.
When multiple pricing  is applied  selectively  to different  commodi-
ties,  all consumers are not  equally  affected.  For example,  the  applica-
tion  of multiple  pricing  to wheat  would  increase  the cost  of bread  to
domestic  consumers.  Low-income  consumers  who  are  the  heaviest
users  of bread  would  pay more  than high-income  consumers.
Multiple pricing reduces prices to secondary market consumers, but
increases  price fluctuations.  With multiple pricing  of wheat,  the  price
of wheat  used for food could be increased  and the price of wheat used
48for  feed  would  decrease.  Bread  prices,  therefore,  would  tend  to  in-
crease  relative  to meat  prices.
Consumer  opposition  to  increased  prices  in  the  primary  market
is one  of the  major  factors which  limits  the  use of multiple-price  pro-
grams.
EFFECTS  ON  TAXPAYERS
Taxpayers  usually bear only  a  small portion of the cost of increas-
ing farm  income  by  multiple pricing.  The  administrative  costs may  be
wholly or partially borne by  taxpayers.
When  purchase  and  storage programs  develop  into  multiple-price
programs,  secondary  market  sales  usually are subsidized  from  tax rev-
enue and  thus  the cost  of this  indirect  type  of multiple-price  program
is borne by  taxpayers  as well as by primary market consumers.
Inasmuch as multiple-price programs do not normally depend upon
tax  funds,  these  programs  are  somewhat  less  subject  to  the  political
climate than  programs depending directly  on tax funds. Yet, the  sensi-
tivity of lawmakers  to their consumer constituents  does not entirely re-
lieve multiple-price  programs  of political hazards.
EFFECTS  ON  FOREIGN  COUNTRIES
Foreign  countries  are  affected  in  different  ways  by multiple-price
programs.  Consumers  in  importing  countries  tend  to gain where  for-
eign outlets  are used as secondary  markets, but producers in importing
countries  will  be  injured.  Producers  in  other  exporting countries  are
adversely  affected.  These  countries  frequently  attempt  to  offset  their
economic  disadvantage  by  taking  retaliatory  measures.
High domestic  or  primary market prices necessitate  import quotas
or  tariff  barriers  to  restrict  imports.  Thus,  multiple  pricing  between
domestic  and  foreign  markets  tends  to create  barriers  in the  free flow
of trade  and  to aggravate  international  relations.
In fact,  the reaction of foreign countries  to multiple pricing  is one
of the major factors that limits the use of this type of program for export
commodities.
SUMMARY
Multiple pricing  is  a possible  method  of increasing returns  to pro-
ducers  of  some  commodities.  This  method  of  pricing  is  effective  for
commodities  which  have markets  that can  be administratively  divided
into segments with different rates of price response to changes in supply.
49Reactions  of producers  competing  in secondary  markets, primary mar-
ket  consumers,  and  foreign  exporting  countries  are  all  major  factors
which limit the use of multiple pricing as a means of increasing domestic
producer returns.
Multiple  pricing  is  an  effective  means  of  stabilizing  producer  re-
turns  of some  commodities.  Here  again  it  must  be  possible  to  divide
markets  into segments  which have differing  demand  elasticities.  Short-
run price fluctuations  can be minimized,  and fluctuations  in production
and returns  can be stabilized  over time.
Multiple pricing  is not  a  panacea  for the  income problem  of com-
mercial  agriculture,  but  it  is  one  of  several  approaches  that may con-
tribute  to  the solution  of the  problem.
50

APPROACH D: MULTIPLE PRICING

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