What Is 'buffer stock market'?

Answer 1

Buffer Stock is a stock held to reduce the negative effects (stock-out costs) of an unusually large usage of stock.

Buffer stock schemes seek to stabilize the market price of products by buying up supplies of the product when stocks are plentiful and selling stocks of the product onto the market when supplies are low.

In theory buffer stock schemes should be profit making, since they buy up stocks of the product when the price is low and sell them onto the market when the price is high. However, they do not often work well in practice. Clearly, perishable items cannot be stored for long periods of time and can therefore be immediately ruled out of buffer stock schemes. Setting up a buffer stock scheme also requires a significant amount of start up capital, since money is needed to buy up the product when prices are low. There are also high administrative and storage costs to be considered.

The success of a buffer stock scheme however ultimately depends on its ability to correctly estimate the average price of the product over a period of time. This estimate is the scheme's target price and obviously determines the maximum and minimum price boundaries. But if the target price is significantly above the correct average price then the organisation will find itself buying more produce than it is selling and it will eventually run out of money. The price of the product will then crash as the excess stocks built up by the organisation are dumped onto the market. Conversely if the target price is too low then the organisation will often find the price rising above the boundary, it will end up selling more than it is buying and will eventually run out of stocks.