2011, Volume 19, Paper 3
ISSN: 1883-5675

A pig in a poke? Accounting for uncertainty about elasticity values in an EDM of the Australian pig industry

Stuart Mounter
Garry Griffith

Abstract

Recently Griffith et al. (2010) updated an existing equilibrium displacement model (EDM) of the Australian pig industry which was then used by Slattery et al. (2010) to estimate the potential industry impacts from an increase in demand for low cholesterol pork (see Bellhouse et al. 2010). In that model the specified market parameters were chosen on the basis of economic theory, previous studies and some assumptions made by the authors. While it was concluded those values adequately represented the price responsiveness of market participants within the industry, uncertainty still exists about their true values. This may have implications for the results generated from the model. In this paper stochastic sensitivity analysis is undertaken to account for that uncertainty. Overall, the EDM results
are found to be relatively robust. However, the methodology used allows for the calculation of probabilities to determine the chances of a result contrary to that obtained using the original point estimates. These calculations suggest the rankings of alternative industry investments may change for particular combinations of parameter values, away from the rankings implied by the point estimates, and that an investment shown to have a positive return of $0.67 million using the point investments may in fact vary from a loss of $0.1 million to a gain of $1.14 million with 95 per cent probability under the stochastic sensitivity analysis.

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