A Note on the Specification of Wage Rates in Cost-Push Models of Food Price Determination

Since publication of Popkin's work on price determination by state of processing, cost-push models of “inflation” have provided the theoretical structure underlying much of the empirical analysis of food price behavior. The general premise of such models is that the price (usually a component of the Consumer Price Index) of a commodity can be expressed as the summation of that commodity's price in a less processed form, plus the cost of all resources expended in the physical transformation of the commodity to its current form. Then, if the costs of raw farm produce or other factors of production used by food processing firms increase, cost-push models predict that retail food prices will increase at some future date. It is argued that price increases at the retail level occur because market power of processing and retail firms permits them to “pass through” increased costs of production by increasing the prices of their output. Or, “because of their oligopolistic structure, these [food manufacturing] firms are able to select the prices at which they sell” (Lamm, p. 119). Similarly, Heien (p. 11) states that “an operationally more realistic theory is one where store managers apply a markup over costs for each product in order to arrive at a price.”