Prediction Markets:

A powerful tool for supply network management

Friedrich Hedtrich, Jens-Peter Loy and Rolf A.E. Müller (*)

Department of Agricultural Economics
CAU Kiel, Germany
(*) Senior authorship is not assigned

Paper prepared for presentation at the 110th EAAE Seminar ‘System Dynamics and
Innovation in Food Networks’ Innsbruck-Igls, Austria
February 18-22, 2008
 Copyright 2008 by [Friedrich Hedtrich, Jens-Peter Loy and Rolf A.E. Müller]. All rights
reserved. Readers may make verbatim copies of this document for non-commercial purposes
by any means, provided that this copyright notice appears on all such copies.

Prediction markets: A powerful tool for supply network management?

by
Friedrich Hedtrich, Jens-Peter Loy and Rolf A.E. Mueller(*)
Department of Agricultural Economics
CAU Kiel, Germany
(*) Senior authorship is not assigned

Abstract
Information management is a key element of supply network management (SNM)
(Lambert and Cooper 2000). This is obvious when supply network management fails to
prevent bullwhip effects in a supply network because imperfect demand forecasts are
communicated with a lag from retailers to wholesalers or from wholesalers to producers.
Information integration between network agents has therefore attracted considerable
attention by SNM researchers and practitioners. The quality of the demand forecasts that
are to be shared among the managers of the supply network, in contrast, has received little
to no attention.
In this paper we suggest to employ prediction markets (PM) as a tool for generating
forecasts for use in SNM. For a broad range of forecasting tasks PM have proved to
provide superior forecasts compared to conventional forecasting methods. Moreover, the
information environment of supply networks appear to be particularly well suited for the
successful integration of PM into SNM. In particular, our objectives for this paper are
• to introduce prediction markets to agribusiness researchers and professionals, and
• to discuss the potential that PM have to improve information management in supply
networks.
To this end, we first briefly summarize the needs of SNM for information of future
product demand. We then introduce PM as a forecasting tool and we highlight some
relevant examples of PM. Because success in forecasting may be due to good luck, we
also review theoretical models that help to explain why and under which conditions PM is
a successful forecasting tool (Page 2007). Jointly, the information environment of supply
networks, experiences with PM reported in the literature, and insights from theoretical
modeling provide the basis for a SWOT-analysis of PM as a SNM tool. The paper
concludes with some suggestions for research that would be needed to strengthen the case
for PM in SNM.

1 INTRODUCTION

Few students of supply chain management (SCM) are likely to be unfamiliar with the
"Beer Distribution Game", a business simulation game developed at MIT and popularized by
Sterman (1989). As all good games, the Beer Game is educational. It teaches three things: (i)
Firms are no islands in a sea of anonymous transactions; (ii) the success of a firm in a market
depends not only on its own decisions but also on the decisions of other firms with which the

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firm maintains business relations, and (iii) information that is available to one firm may be
useful also for other firms. Much supply chain research has focused on improving
performance by employing digital information technology in order to provide the agents in a
chain with the decision algorithms and the data that they need to better coordinate their
actions. Such concepts have resulted in a soup of acronyms which we need not sample. Here
it is sufficient to note that these concepts and approaches have two things in common: they
emphasize the substitution of human agents by digital computers and they tend to rely on the
better use of statistical data from within the chain.
Progress in the capacity of digital computer systems to process data and to guide business
activity has been beyond the wildest expectations of most pundits. But we are unaware that a
software program "Entrepreneur" has reached beta, despite sustained exponential growth in
information processing capabilities. In contrast to currently available computer systems, the
actions of alert, discerning entrepreneurs are guided not only by historical data and simple
models, but by their intelligent beliefs about future developments in the firm, the chain and
the external market (von Mises 1963; Kirzner 1973). Such entrepreneurs do not yet have
reason to fear to be sent into early retirement any time soon by some software start-up
operating out of a garage or an open-source venture spanning the web.
In this paper we are concerned with the question of how the foreknowledge held by the
entrepreneurs of a supply chain can be extracted from the entrepreneurs, aggregated, and
made available to all agents of a supply chain, and, further, whether the improved information
available to all agents is likely to result in an improved performance of the chain. More
concretely, we discuss and assess the use of prediction markets as a means for extracting and
aggregating foreknowledge held by entrepreneurs of a supply chain. This discussion is
organized as a SWOT-analysis and is the content of section 5 of this paper. Sections 2, 3 and
4 prepare the ground for the SWOT-analysis. In section 2 we introduce prediction markets -
what they are and for what they have been used. In Section 3 and 4 we sketch a framework of
supply chains which perceives supply chains as complex networks of entrepreneurs linked by
many information links and a much smaller number of flows of products. In this section we
also briefly review some of the research literature concerned with the impact of information
sharing on supply chain performance.

2 A BRIEF INTRODUCTION TO PREDICTION MARKETS

Decision making is always concerned with the future. The future is, however, always
uncertain but we hope that our decisions are the better the more we know about the future.
Imperfection is, however, the mother of all inventions. With regard to business forecasting
imperfection is a fertile mother indeed and there is no shortage of forecasting methods (see
for example Armstrong 2001). In this section we introduce prediction markets (PM) as one of
the younger, and we hope, more promising offspring. A recent survey of the prediction
market literature defines prediction markets "as markets that are designed and run for the
primary purpose of mining and aggregating information scattered among traders and
subsequently using this information in the form of market values in order to make predictions
about specific future events." (Tziralis and Tasiopoulos 2007, p. 75) Similarly, Wolfers and
Zitzewitz (2003, p. 1) characterize prediction markets as "... markets where participants trade
contracts whose payoffs are tied to a future events, thereby yielding prices that can be
interpreted as market aggregated forecasts."
Prediction markets come under many different names. Surowiecki (2004) calls them
"information markets" and Spann and Skiera (2003) prefer the term "virtual stock markets".
Other names that are used as synonyms are "ideas futures", "event futures", "decision

3
markets", "political stock markets" and "election stock markets" (Wolfers and Zitzewitz 2003;
Tziralis and Tasiopoulos 2007). Whatever they may be called, all prediction markets have in
common that they are organized markets where people trade contracts that link payoffs to the
occurrence of some future event, a continuous variable, or combinations of events and
continuous variables. For example, a prediction market contract may specify that some
candidate will win an election. If contract that pays its owner € 1 if that candidate wins the
election, the current price for this contract can be interpreted as the probability of the
candidate winning the election. In the case of a continuous variable, e.g. a price for a product
or the level of demand for it, the contract may pay a certain amount if the continuous variable
falls within a certain interval at a specific date or period. Again, the price paid for such a
contract would indicate the collective judgment of all market participants about the likelihood
that the continuous variable will attain the level specified in the contract.
Prediction markets are markets in legal rights and obligations which are pure information
and can be represented by any medium which is sufficiently resistant to fraud and
misrepresentation. As many other markets have shown, online markets are well suited as
platforms for trade in contracts and all prediction markets are organized as online market
places.
The history of prediction markets is short but lively. Tziralis and Tasiopoulos (2007) let
their account of the history of prediction markets begin in the year 1988 when the Iowa
Electronic Market was created to predict the result of the US presidential election in that year.
Shortly after this event Hanson (1990, 1992 a, b) published the first research papers on
prediction markets. Since then, the prediction market scene has evolved vigorously. A number
of prediction markets have been installed by independent market providers (for a list see
Sunstein 2006, Appendix 1), a couple of good survey papers have appeared (Wolfers and
Zitzewitz 2003; Tziralis and Tasiopoulos 2007), a volume of prediction-market-papers has
been published (Hahn and Tetlock 2006), various companies - Hewlett-Packard, Siemens, and
Google among others - have used prediction markets for forecasting, an academic journal
dedicated to prediction markets has been launched, and a heated political debate in the US
over the use of prediction markets to forecast events in the Middle East (Surowiecki 2004)
had cast prediction markets onto the public stage.
The excitement over prediction markets would be unwarranted if their performance was
wanting. Actually, it is not. In Sunstein's (2006, p. 14) acknowledges that prediction markets
"... have proved remarkably successful at forecasting future events. They do far better, in
some domains, than deliberating groups." Wolfers and Zitzewitz (2006) also rate the
performance of prediction markets highly. They praise their sensitivity to new information,
their robustness against manipulation, and, most importantly, their accurate forecasts. The
reason for the outstanding performance of prediction markets is seen in the simple notion that
two brains may know more than one - a notion that is familiar to all who have been involved
in collaborative problem solving at home, in business, and in politics. We also know,
however, that sometimes too many cooks spoil the broth, that the wisdom of the crowd may
turn into the folly of the majority, and that crowds simply may go mad. An important question
therefore is, under which circumstances can we expect a crowd to be wise and when may it
turn mad?
Surowiecki (2004) and Sunstein (2006) have given qualitative answers to this question.
Surowiecki (2004, p. 10) lists four conditions that characterize wise crowds: "diversity of
opinion (each person should have some private information, even if it's just an eccentric
interpretation of the known facts), independence (people's opinions are not determined by the
opinions of those around them), decentralization (people are able to specialize and draw on
local knowledge), and aggregation (some mechanism exists for turning private judgments into

4
collective decision." Sunstein (2006) emphasizes the importance of incentives which
prediction markets provide to people to disclose the information they hold. Because those
who anticipate the future correctly are the winners in prediction markets, people have an
incentive to think hard before they participate in a prediction market. Moreover, those who
know little about the likely future outcome of an event or the future course of some
development are likely to not to participate, leaving the prediction market unaffected by their
highly imperfect knowledge. Finally, Sunstein (2006, p. 106) argues that prediction markets
are inherently robust against individual errors which tend to be eliminated by the market.
The most thorough answer to the question when crowds are wise and when they may turn
mad has, to our knowledge, been provided by Page (2007) who explains the wisdom of
crowds with a theorem and a "law". Page's "Diversity Prediction Theorem" says, "Given a
crowd of predictive models,
Collective Error = Average Individual Error - Predictive Diversity.
In other words, the accuracy of a crowd's collective forecast can be decomposed into two
elements - the average accuracy of the individual forecasts of the members of the crowd and
the average squared deviation of the individual predictions form the collective prediction. The
important insight from the theorem is that individual forecasting ability and collective
diversity contribute equally to collective forecasting ability. The practical implication of the
theorem is that the collective forecasting ability of a crowd may be enhanced in two ways: by
increasing average forecasting ability, e.g. by adding to the crowd a better-than-average
forecaster, or by increasing prediction diversity, e.g. by adding a forecaster whose predictions
differ by more from the crowds collective forecast than the average of all the other forecasts
made by crowd members. Page (2007) summarizes this insight succinctly, "Being different is
as important as being good." (p. 208) and "the wisdom of a crowd is equal parts ability and
diversity " (p. 209).An implication of the theorem is Page's "Crowd Beats the Average Law"
which states that the collective prediction is always more accurate than the average individual
prediction:
Collective Prediction Error < Average Individual Error
which means that the crowd predict better than the people in it. The "Diversity Prediction
Theorem" and the "Crowd Beats the Average" law are valid for any method for aggregating
predictions or opinions. A distinguishing characteristic of prediction markets is, however, that
the predictions of the participating individuals are weighed by the amount of money that the
participants bet on their predictions, which, in turn, can be assumed to be correlated with the
size of the returns for predictions that turn out to be correct. Page (2007) argues, that
prediction markets are superior to polls, where all predictions are weighed equally, because of
the "Fools Rush Out" condition: "People with highly accurate predictive models answer poll
questions but do not wager money in information markets." (Page, 2007, p. 232). If this
condition holds, the average accuracy of the prediction may increase but the average diversity
may decrease and the net effect on total prediction accuracy of the crowd is indeterminate.
However, prediction markets tend to reward diversity highly when the diverse prediction also
is correct, and the biggest winners tend to be those whose predictions are diverse and correct.
Hence, if the incentives for market participants are right, there is reason to expect the
predictions that are aggregated by the market are characterized by both, a low average error
and a high predictive diversity.

5
3 IMPACT OF INFORMATION SHARING ON SUPPLY CHAIN PERFORMANCE

Better, more accurate, predictions are most often useful and can never be harmful to
individual decision makers. Better forecasts, e.g. of demand for a producers product, or of
supply of the producer's main inputs, can never have a negative value when the supply comes
from an individual producer. In a supply chain there are, however, several independent
decision makers and there may be a possibility that the benefits from better predictions for
some actors within the chain may be smaller than the costs to other actors of the chain. Before
we consider the SWOTs of prediction markets, we therefore should ask whether better
forecasts from prediction markets can be expected to have a positive impact on supply chain
performance.
Fortunately, there is a small research literature that has addressed the closely related
question concerning the impact of information sharing on supply chain performance. Huang,
Lao and Mak (2003) have provided a useful review of this literature which is highly relevant
for the ex ante assessment of prediction markets, which can be regarded as a highly
sophisticated mechanism for information sharing. We briefly summarize here the main
insights from that review that seem relevant for judging the impact on supply chain
performance of improved forecasts from prediction markets.
• With regard to the bullwhip effect in supply chains Huang et al. (2003, p. 1481) observe,
"Information sharing and coordination between the buyer and vendor in the supply chain
have been considered as useful strategies to remedy the so-called bullwhip effect and to
improve supply chain performance."
• Sellers to consumers always have an information advantage over their suppliers further up
the supply chain because they know market demand from their customers' orders.
Unsurprisingly, "Sharing order quantity information, especially the demand order of the
end customer, with upstream facilities in the supply chain is a common strategy to reduce
the bullwhip effect ... and total supply chain cost" (Huang et al. 2003, p. 1498).
• The literature does not provide a clear signal about the impact of demand forecasts on
supply chain performance. Huang et al. (2003, p. 1499) report, "The effect of forecasting
techniques on supply chain performance has been studied by many authors" and they add
that sharing of demand forecasts with an upstream supplier has also been studied, but they
provide no summary about the sign and size of the effect. They refer, however, to one
study which showed that, "under a vendor-managed inventory environment, sharing
inventory and demand information may not be beneficial when information transmission
is not reliable and the demand signal is imprecise" (Huang et al 2003, p. 1499).
• Information is of little use when there is no time left to act upon it. This aspect has,
however, received little attention in the research literature: "We observe that research on
the timeliness aspect of sharing information is in its infancy" (Huang et al. 2003, p. 1500).
The relevance of this literature for assessing ex ante the impact of prediction markets on
supply chains is difficult to gauge for several reasons. Most of the supply chain models
employed in this literature employed rather simple models of supply chains: more than half
(54%) of the models employed dyadic or serial supply chain models with a small number of
agents and only 8% employed more complex network models. When the number of agents in
a supply chain is small, it is not clear how such a small crowd can become smart with the help
of prediction markets. Moreover, closer inspection of some of the more important papers
reviewed by Huang et al. (2003) showed a tendency of this literature to employ rather simple
forecasting models, such as moving averages and exponential smoothing for generating the
forecasts whose impacts on supply chain performance is then evaluated.

6
4 INFORMATION AND KNOWLEDGE IN SUPPLY NETWORKS

The reason why most supply chain researchers employ models with simple supply chains,
such as dyadic or short serial chains, is the mathematical tractability of the models (Huang et
al. 2003). When the supply chain is more complicated, models cannot be solved analytically
but require simulation techniques, including multi-agent models (e.g. Lau, Huang and Mak
2004) which appear to be particularly suited for modeling systems with many interacting
agents.
If we chose to follow the approach of earlier research on the impact of forecasting on
supply chain performance, we would have to build a model of a supply chain with a
sufficiently large number of agents and connect that model with a model of a prediction
market. We believe that it will be a better strategy to experiment with prediction markets in
real supply networks. Although we do not require formal models, we nevertheless should
make explicit our informal model or framework which structures and guides out thinking
about the likely impact of prediction markets on supply chains. Our informal model comprises
three elements: (i) a model of the supply network that consists of agents, linkages among the
agents, (ii) a model of the agents which allows for diverse knowledge, including diverse
foreknowledge of the agents that belong to a supply network, and network-knowledge, which
exists at the level of the network, and (iv) a model of the prediction market which is
embedded in the supply network.

4.1 Networks and links

Supply chains are much of the time supply networks that consist of many agents and the links
among them (Mueller et al. 2007). What is of interest here are the types of links that we need
to consider in a supply network. We conceive our supply network to comprise two types of
links: (i) transaction links among agents; (ii) communication links between agents.
Transaction links represent the exchange relationships between agents: a transaction link
between two agents exists when a downstream agent takes delivery of goods and services
from an agent upstream in the network and transfers money to the upstream agent. Usually,
the money-link is ignored and we follow this practice.
Two agents are connected by a communication link if they exchange information - data or
messages - with each other. Communication links may be directed when the information
flows from one agent only to the other but not in the opposite direction, or it may be bi-
directional. Supply networks tend to contain more communication links than they contain
transaction links. This is because most transaction links are associated with communication
links unless the transaction is mute, and because agents in a network which do not entertain a
direct transaction relationship may nevertheless communicate with each other. An example
for such a relationship is the reporting of sales or inventory data to a central data base.

4.2 Agents and their knowledge

Agents are entities that perform actions. We may distinguish two types of agents.
Fundamental agents represent individuals - buyers, middlemen, etc. The fundamental agents
act to pursue their objectives. Derivative agents, in contrast, are agents that are composed of
fundamental agents, such as firms or other organizations, or they may be intelligent computer
systems that have been programmed by fundamental agents.
Many supply chain models employ on models of hyper-rational representative agents.
That type of agent is useless for our purposes. A prediction market populated by such agents

7
would hardly be lively because sellers of a specific contract would find few buyers, and vice
versa. Moreover, predictive diversity would be zero and total prediction accuracy would be
equal to the predictive accuracy of the representative agent. We need some other model of
agents. In particular, we need one that accommodates knowledge diversity. Models of agents
with the requisite attributes can be found in Austrian theories of entrepreneurship and
competition (e.g. von Mises 1963; von Hayek 1978; Kirzner 1973), in models from
evolutionary economics (e.g. Nelson and Winter, 1983; Hermann- Pillath 2002) and in
models of boundedly-rational agents which are equipped with "adaptive toolboxes" (Simon
1997, Gigerenzer and Selten 2002; Page 2007).
We think of our agents as being rational, in the sense that they employ their limited
physical and cognitive resources to achieve their aims. Our agents are equipped with (i) some
knowledge and skills, (ii) the capacity to combine scarce resources and limited skills into
products and services that can be sold; (iii) an ability to carry out exchange transactions with
other agents, (iv) an ability to communicate with other agents, (v) an limited ability to learn,
i.e. to revise the stock on knowledge in light of communication received or facts perceived,
and (v) a limited capacity to plan and to decide. In the context of prediction markets, we need
not be concerned with agents' productive and decision making capacities. Nor are their
communication abilities of much interest to us. The critical characteristics with which we
have to be concerned are their knowledge and their ability to perceive and to learn.
With regard to agents' knowledge we distinguish between explicit and tacit knowledge
and between referential and non-referential knowledge. Explicit knowledge is knowledge
which the agents can represent and communicate. Tacit knowledge, in contrast, cannot be
represented or communicated. For example, a retailer may know his inventory and show you
the number but be unable to convey to others his knowledge about the coming market
collapse. Referential knowledge is knowledge that can be attributed to particular agents. Non-
referential knowledge, in contrast, cannot be attributed to particular agents but resides in the
rules and institutions that emerge from the interactions of the agents
Agents learn when they attend to information and use this information to update their
knowledge. Agents in a supply network have three sources of new knowledge: (i) information
generated in the course of transactions, in particular the size of orders and the prices
negotiated, (ii) information that is communicated to them, and (iii) perceptions of their
environment. Agents obviously learn about their customers' demand by negotiating the terms
of transactions with them and they learn from other agents with whom they communicate.
Information from transactions and from communication with other agents is necessarily
selective: no agent in an extensive supply network supplies the whole market and time limits
the communication network that agents can maintain. Agents are also likely to differ with
regard to their perceptions of other agents' conduct and of the aggregate behavior of the
network. Human perception is conditioned by the knowledge of the perceiver. Furthermore,
perception of the environment is a limited capacity in humans and our agents are assumed to
perceive the conduct of only a limited number of agents in their network-neighborhood.
Limited perception capacities also constrain ability of our agents to grasp the aggregate
behavior of the network. For example, agents in a section of a supply network for pork may
believe that hog prices follow a cobweb cycle whereas those who are directly involved in hog
transactions may believe that prices follow a random walk.
Taken together, diversity of transactions, diversity of communication and diverse
perceptions provide sufficient reason to believe that hardly any agent knows exactly the same.
Moreover, there is reason to believe that the agents from some section of the network, as a
group, may have better knowledge about the conduct of the agents in that segment and of the
aggregate behavior of that segment. For example, slaughter house are likely to be better

8
informed about developments in the supply of slaughter hogs whereas retailers are likely to be
better informed about the demand for pork cuts and sausages of a particular type.

5 SWOT-ANALYSIS

Assuming a prediction market was to be introduced into supply network in order to provide
forecasts of product demand, input supply, or some measures of supply network performance,
such as lead times, inventories, or stock outs. If the supply network were of the kind described
in the previous section, what would be the strengths, weaknesses, opportunities and threats to
such a venture? Exploring answers to this question is the content of this section.

5.1 Strengths

5.1.1 Wisdom of crowds effect

In a prediction market the buyers of contracts compete for the rewards which are contingent
of some contingent event specified in the contract. Competition is a discovery mechanism
(Hayek 1978) and prediction market competition discovers the best prediction from the crowd
of individual predictions made by market participants. Under favorable conditions - low
average prediction error and high predictive diversity or able and diverse participants -
prediction markets have proved to be better forecasting methods than conventional
forecasting methods, including opinion polls (Wolfers and Zitzewitz 2003). Under conditions
that we have described in the proceeding section, the agents of a supply network could enter
their predictions which would be based on all types of knowledge that the agents have,
including their tacit knowledge that is difficult to express. Moreover, because prediction
markets force traders to "put their money where their predictions are", prediction markets are
unlikely to be driven by gamblers who know little about the market which they predict.

5.1.2 Low forecasting costs

Forecasts are intended to reduce decision makers' uncertainty. However, compared to the
large number of variables which are uncertain and which involve significant business risks,
the number of variables which are actually forecasts appears to be small. Economic reasoning
suggests that benefits from forecasting often do not warrant the effort, either because the
additional information gained from conventional forecasts is too small, or the costs of
producing the forecasts are too high, or a combination of both. Unfortunately, we have no
data on the cost of producing forecasts using prediction markets. However, we have strong
reasons to believe that the cost are low and falling because prediction markets can be
organized as fully computerized online markets on the web for which software is readily
available. For such markets, the installation costs tend to be high compared to the variable
cost of generating a forecast, which are close to zero.

5.1.3 Separation of entrepreneurial prediction from action

On a racetrack someone who is knowledgeable about horses can buy, train and run a
promising horse at races for the price money, or he can punt on horses. In most markets
entrepreneurs who believe to have superior abilities to perceive future market developments
have no other option to benefit from their ability than 'to run their horses for the price money',
i.e. by participating in the market either as producers or market intermediaries. Prediction
markets allow such entrepreneurs to collect the rewards from their superior ability from the

9
prediction market rather than the market for the goods and services traded in the supply
network.

5.1.4 Transparent and flexible

A strength of prediction markets is their flexibility and transparency. They are flexible
because they allow a wide range of contract specifications and trading mechanisms, including
auctions, double auctions, bookmaker markets like the ones known from horse races (Wolfers
and Zitzewitz 2006). Prediction markets are transparent because trading volumes and prices
can be made public on the web.

5.2 Weaknesses

There are three weaknesses of prediction markets we wish to discuss. First, as Page (2007, p.
199) has observed, prediction markets "cannot make a silk purse out of a crowd of sows'
ears". This means when supply network agents do not know much of anything about the
variable that the prediction market is meant to predict, the crowd of agents is not likely to
predict well. The chances that the agents of a supply network do not know much about their
business are, however, remote and we can ignore this weakness. Second, prediction markets
require crowds. This implies that they are ill suited for small supply chains with a small
number of agents. When the population is small and when prediction market participation is
voluntary, the crowd of traders that is populating in the prediction market is likely to be
smaller yet. The prediction market then is likely to be thin and lacking the requisite prediction
diversity. Market thinness is nearly always a problem at the initiation of a market, when
sellers may have difficulties to find buyers and vice versa. The incentives to participate in
such prediction markets are reduced and the danger that the market may not take off is high
(Sunstein 2006).
The most serious weakness of prediction markets is perhaps their failure to attract the
attention of business managers and Surowiecki (2004, p. 21-22) complains, "... the most
mystifying thing about decision markets is how little interest corporate America has shown in
them. Corporate strategy is all about collecting information from many different sources,
evaluating the probabilities of potential outcomes, and making decisions in the face of an
uncertain future. These are task for which decision markets are tailor made. Yet companies
have remained, for the most part, indifferent to this source of potentially excellent information
and have been surprisingly unwilling to improve their decision making by tapping into the
collective wisdom of their employees." As far as we know, Surowiecki could have exhorted
corporate Europe too for its neglect of prediction markets.

5.3 Opportunities

The space of opportunities for employing prediction markets in supply networks is large.
Prediction markets can be organized as closed markets for predictions within a company or
set of agents or open over all agents and stages of a supply chain. Constraints of these
opportunities for prediction markets are given (i) the size, in terms of number of agents of a
supply network, (ii) urgency of the prediction problem, and (iii) dominant agents.
Besides their main task of providing forecast, prediction markets give opportunities for
improved information flows between agents within and between the various levels in the
supply chain. Also predictions markets might improve the informational status of each agent
by providing informations on the markets to be predicted and agents might be stimulated to
spend more time and effort to come up with reasonable forecasts.

10
 Supply networks that are dominated by a single or few firms are likely to benefit less
from public or open prediction markets because the dominant firms may be able to obtain the
forecasts without the help of a prediction market, or it may constrain the dominated agents to
act upon the improved forecast. Also some forecasts might be handled confidential.
Therefore, dominant firms might rely on internal prediction markets which have also proven
to result good forecasts. In that case the firm then has to decide if and to whom the obtained
predictions are forwarded to improve the management of the supply chain.

5.4 Threats

The rise and viability of prediction markets is imperiled by several threats. First, an anti-
market ethic is still deeply ingrained in some quarters of society. The power of this ethic was
clearly visible when initiatives for a policy prediction market collapsed under the weight of
public outrage (Surowiecki 2004). Prediction markets for some emotionally neutral goods,
such as computer items or steel plates, etc., would hardly attract much public attention.
Prediction markets for food items may, however, be a different matter altogether and some
anti-market activists may be able to attract public attention and acclaim by questioning the
morality of taking bets on the future price of 'essential' food items. Even if the ethics were no
obstacle for prediction markets, they still would have to conform with national laws and
regulations. Prediction markets have attributes similar to betting markets and to futures
exchanges. Both types of markets are heavily regulated in some countries. At this stage it is
not clear to us which laws and regulations would apply to prediction markets where contracts
are traded for real money.
Prediction markets, like all markets, are threatened by market bubbles and by attempts to
manipulate the market. A market bubble is the market equivalent of a crowd going mad. In a
prediction market that means that most market participants would have to make the same bad
forecasts so that the predictions lack accuracy and diversity. This is unlikely to happen unless
market participants deliberate jointly about their forecasts and thereby decrease diversity
more than they increase prediction accuracy (Page 2007). Market manipulations are always a
possibility where access to markets is easy and where markets are relatively thin. Experiences
with prediction markets have provided no evidence that they are easily manipulated and
manipulation may be more of an imagined scare than a real threat.

6 WHERE DO WE GO FROM HERE?

The topics of the prediction markets are out of the agricultural area. Since the McSharry
Reform in 1992/93 the price risk is increasing for the agricultural sector. There is a trend
away from known intervention price towards the world market price. This new fluctuation
was enormous in the last year and unexpected by most of the European farmers and
converting industry. The outcome of the actual WTO-round will support this trend towards
market prices. In the course of the political changes the price risks are formidable raised.
On this account we want to use the new forecasting method prediction markets. The
prediction markets shall become a constant offer with a benefit for the agricultural area. First
an opening portal will be installed on the website of the chair. The portal will present
interesting informations to the participants. The informations are for the whole supply chain
presented, not only for special parts. On this portal will also be the prediction markets. The
prediction markets can be organized as open and closed markets. Closed markets are
interesting for companies that want to predict something within its company. We start with
open markets, because there is a need of a critical mass of participants to get good predictions.
To attract a sufficiently size of participants, the markets are presented in newspapers. We start

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with prediction markets for the German milk quota price afterwards we want to expand it to
harvest yields, prices for grain and different agricultural products. There is a need for good
predictions because for many products predictions are absent apart from commodity futures
exchange. We hope to get good predictions and may help to reduce the effects of the
increasing price risk.

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