Food price variation and passthrough among retail firms in rural and urban Tanzania

Seasonal price variation is a typical feature of markets in low- and middle-income countries. Retail firms that regularly stock food staples face substantial price variation when purchasing new inventory. How much of this input price variation passes through to output prices for rural customers? I use a panel of wholesale and retail prices from 270 urban and rural retail firms in Tanzania to evaluate the transmission of input price shocks to the prices of staple foods. Rural firms smooth both negative and positive input price shocks more than urban firms. Urban firms passthrough nearly 95% of input price increases, while rural firms passthrough only 55% of input price increases. Price adjustments are asymmetric; Rural firms passthrough a higher share of cost savings and a lower share of cost increases. By exploring possible mechanisms, I find evidence that a smaller community size among rural firms is associated with lower passthrough of negative price shocks. At the same time, distance to markets and competitive pressure matter as well: rural firms with more competitors and further from urban markets have higher passthrough rates, consistent with a competitive market framework with transaction costs. Firms passthrough a smaller share of price increases during the harvest season when agricultural households have more substitutes available.