Commodity Price Pass-Through in Differentiated Retail Food Markets

Prices for nearly all basic commodity rose at unprecedented rates throughout early 2008, only to fall nearly as fast as financial markets and global economies began to collapse. Rising food prices in 2008 led to concerns that commodity price spikes would lead to more general food inflation, but by early 2009 interest focused more on the seeming inability of food prices to fall back down with commodity prices. This study provides an empirical investigation into the pass-through of commodity prices to retail prices for two different types of food products: potatoes and fluid milk. The results show that pass-through depends on the nature of the food in question, but is generally consistent with theoretical models of pricing by sellers of multiple, differentiated products. In particular, pass-through rates tend to be lower for processed (differentiated) products during periods of falling input prices than when input prices are rising. For less processed products, pass-through tends to be higher during regimes of both rising and falling input prices. Our results show that pass-through depends on the degree of pricing power possessed by all channel members and, more generally, suggest a nuanced approach to understanding retail food price inflation.