Long-Term Marketing Contracts: Intra-Firm Optima and Inter-Firm Agreement

Long-term marketing contracts may be used to control risks associated with sales or purchase quantities, prices, or other trade terms. A model is here specified through which a firm may select portfolios of contract price clauses that maximize its expected utility. Offer curves are defined relating optimal portfolios to contract price parameter levels, and an equilibrium trade solution is developed among three vertically related agribusiness concerns. Price clauses considered for analysis-market price, cost-plus, and sales-minus-may be optimally utilized together, but only in restricted price parameter and utility function ranges.