Relational Adaptation in Spot Trading

Abstract Efficient adaptation to fluctuating market conditions is critical to economic agents’ survival and prosperity. Although theory highlights the value of relational contracts in facilitating adaptation, empirical evidence remains limited. Using wholesale transaction data, we show that a buyer initially sourcing on the spot market may repeatedly trade with a seller, offering a price premium in exchange for a relational contract that assures supply. The relational premium adjusts strategically to market-level supply shocks in a manner consistent with maximising the joint payoffs for the pair of traders. This efficient adaptation ensures the sustainability of relationships despite varying market demand and supply.