Prices, consumption, and production are all profoundly affected by the presence of competitive storage, both at one moment in time and over time. The “equilibrium rules” for competitive storage and planned production reveal how the various endogenous variables are related at one moment in time, whereas the long-run probability distributions of the endogenous variables characteristic of the stochastic steady state reveal much about the implications of these rules over time. The first two sections of this chapter consider these two subjects in detail for the “base case” set of parameters introduced above in Section 2.4. Implicit in the discussion of long-run distributions are the characteristics of the sequential equilibria emphasized in that section. Also investigated in this chapter, in the final three sections, is the sensitivity of these aspects of storage behavior to the shapes of the underlying supply and demand curves, storage cost function, and the probability distribution of the weather. In a sense, the numerical sensitivity analysis amounts to examining the reduced-form equations as functions of the parameters representing these underlying functions, in lieu of any analytical representation.

Characteristics of storage rules

In Figure 4.1 are plotted the relationships between equilibrium storage or planned production and current availability, seen previously as Figures 2.3 and 2.4. Here they are shown on one diagram to emphasize their connections. The specific parameters were a linear demand curve with elasticity ηd = -0.2, a supply elasticity ηS = 0.5, marginal physical storage costs k = $2, a per-period interest rate r = 5 percent, and a standard deviation of normally distributed yields equal to 10 percent of planned production.