Linking the different modules – the price mechanism
Iterative solution method
As hinted at above several times, the market modules and the regional programming models interact with each other in an iterative way. Basically, the market modules deliver prices to the supply module, and the supply module information to update the supply and feed demand response from the market models.
For the market module for agricultural outputs, the update of the supply and feed demand response is put to work by changing the constant terms in the behavioural equations such that supply and demand quantities simulated at prices used during the last iteration in the supply module would be identical to the quantities obtained from the market module at that prices. However, the “functional form” of the regional programming models is unknown but certainly differs from the one in the market model which necessitates an iterative update. In order to speed up convergence, the supply side uses a weighted average of prices of the last iterations.
Convergence is achieved faster if supply has the same price responsiveness in the market model as in the regional programming models. To achieve this at least approximately, a set of price elasticities is generated from the regional programming models and is used to calibrate the parameters of the market model. This also applies to young animals which are “netputs” that are only traded between European regions with regional supply models.
Price linkage in the sugar sector
Whereas the linkage of prices from the market model to the supply model is usually a proportional one, the price linkage in the sugar sector is specific for ethanol beets. Sugar and ethanol beets are considered two products with independent proportional linkage applied to each of them. Their prices may move independently therefore and European beet producers respond to both prices.