Empirical analysis of producers' price expectations

One of the key elements in cobweb models describing the dynamic behaviour of markets is the way the producers estimate the future price for the product. The adaptive and the extrapolative expectations models are well known in the market model theory. When either the market demand or the market supply is a nonlinear function of the true or the expected price respectively, then the market may exhibit chaos in the long run. A chaotic system is highly sensitive for the smallest change in its influencing factors. In order to establish a reliable model it is crucial to know how producers estimate the expected market prices. The aim of the present paper is to study this estimation method. A survey was completed in 1998 in Western Hungary with the participation of 265 rural entrepreneurs. In a questionnaire the producers were asked to estimate future market prices knowing the prices of the past few years. Results showed high variances indicating that the producers have many not easily quantifiable views and expectations about the future. Dynamic models aimed at accurate market forecasting must consider this fact seriously.