Production Uncertainty and Factor Price Disparity in the Slaughter Cattle Market: Theory and Evidence

A model of a competitive firm facing uncertainty with respect to input quality is applied to the issue of price differentials existing between slaughter cattle marketing alternatives. The marketing alternatives are live weight, dressed weight, and dressed weight and grade. The model demonstrates that price differentials between marketing alternatives are the result of buyer uncertainty over cattle quality. If buyers are assumed risk averse, then the price differential between alternatives increases. These results lead to the proposition of a theory of factor price disparity, and empirical evidence is presented in support of this theory.