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Price Dynamics in a Vertical Sector: The Case of Butter

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Author Info
Jean-Paul Chavas
Aashish Mehta

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Abstract

We develop a reduced-form model of price transmission in a vertical sector, allowing for refined asymmetric, contemporaneous and lagged, own and cross-price effects under time-varying volatility. The model is used to investigate the wholesale-retail price dynamics in the U.S. butter market. The analysis documents the nature of nonlinear price dynamics in a vertical sector. It finds strong evidence of asymmetric retail price responses, both in the short term and the longer term, but only weak evidence of asymmetric wholesale price responses. Asymmetric retail responses play a major role in generating a skewed distribution of butter prices. The empirical results indicate the presence of imperfect competition at the retail level. Copyright 2004 American Agricultural Economics Association.

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Article provided by American Agricultural Economics Association in its journal American Journal of Agricultural Economics.

Volume (Year): 86 (2004)
Issue (Month): 4 (November)
Pages: 1078-1093
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Handle: RePEc:bla:ajagec:v:86:y:2004:i:4:p:1078-1093

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  1. Koop, Gary & Potter, Simon M, 1999. "Dynamic Asymmetries in U.S. Unemployment," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(3), pages 298-312, July.
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  2. Potter, Simon M., 2000. "Nonlinear impulse response functions," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1425-1446, September. [Downloadable!] (restricted)
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  3. Sam Peltzman, 2000. "Prices Rise Faster than They Fall," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 466-502, June. [Downloadable!] (restricted)
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  4. Toda, Hiro Y & Phillips, Peter C B, 1993. "Vector Autoregressions and Causality," Econometrica, Econometric Society, vol. 61(6), pages 1367-93, November. [Downloadable!] (restricted)
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  5. Zellner, Arnold & Palm, Franz, 1974. "Time series analysis and simultaneous equation econometric models," Journal of Econometrics, Elsevier, vol. 2(1), pages 17-54, May. [Downloadable!] (restricted)
  6. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, vol. 72(3), pages 334-48, June. [Downloadable!] (restricted)
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  7. Borenstein, Severin & Cameron, A Colin & Gilbert, Richard, 1997. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 305-39, February.
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  1. Pan, Suwen & Mohanty, Sam & Fadiga, Mohamadou, 2003. "Price Relationships In The U.S. Fiber Markets: Its Implications For Cotton Industry," 2003 Annual meeting, July 27-30, Montreal, Canada 22138, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  2. Xia, Tian & Li, Xianghong, 2009. "Asymmetric Price Transmission and Demand Characteristics," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49400, Agricultural and Applied Economics Association. [Downloadable!]
  3. Serra, Teresa & Gil, Jose M. & Goodwin, Barry K., 2006. "Local Polynomial Fitting and Spatial Price Relationships: Price Transmission in the EU Markets for Pigmeat," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25388, International Association of Agricultural Economists. [Downloadable!]
  4. Ben Shepherd, 2005. "Market Power in International Commodity Processing Chains: Preliminary Results from the Coffee Market," International Trade 0511013, EconWPA. [Downloadable!]
  5. Goetz, Linde & von Cramon-Taubadel, Stephan, 2008. "Considering threshold effects in the long-run equilibrium in a vector error correction model: An application to the German apple market," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 44247, European Association of Agricultural Economists. [Downloadable!]
  6. Gervais, Jean-Philippe, 2007. "Disentangling non-linearities in the long- and short-run price relationships: An application to the U.S. hog/Pork supply chain," MPRA Paper 7743, University Library of Munich, Germany, revised 15 Jan 2008. [Downloadable!]
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