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Price transmission market power and industry technology: a note

  • Habtu T. Weldegebriel
  • Xiuqing Wang
  • Anthony J. Rayner

Purpose – The purpose of this paper is to develop a theoretical model of price transmission from the farm to the retail sector, allowing not only for an interaction between oligopoly power, oligopsony power and non-constant returns to scale in industry technology, but also allowing for the market power conduct parameters to vary in response to an industry-wide exogenous shock. Also, the degree of price transmission under imperfect competition relative to that under perfect competition is evaluated. Design/methodology/approach – Conjectural variations are used to parameterize both seller and buyer market power conduct of the industry and then the equilibrium displacement approach is applied to solve a system of six structural equations which describe the demand for and supply of industry retail output and farm and marketing inputs. Findings – First, it is found that given empirical values of retail output demand elasticity, of farm and marketing inputs supply elasticities, of market power conducts, and of the returns to scale measure, the degree of price transmission under imperfect competition is greater than that under perfect competition. Second, it is found that the relative degree of price transmission under imperfect competition could be greater or smaller under the assumption of a varying market power conduct than one under the alternative assumption of a constant market power conduct, depending on whether market conduct is falling or rising, respectively. Originality/value – The paper makes two original contributions to the literature. First, it allows for an interaction between oligopoly power, oligopsony power and industry technology. Second, it allows both oligopoly and oligopsony power parameters to vary in response to industry-wide exogenous shocks.

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Article provided by Emerald Group Publishing in its journal China Agricultural Economic Review.

Volume (Year): 4 (2012)
Issue (Month): 3 (October)
Pages: 281-299

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Handle: RePEc:eme:caerpp:v:4:y:2012:i:3:p:281-299
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  1. Dobson, Paul W & Waterson, Michael, 1997. "Countervailing Power and Consumer Prices," Economic Journal, Royal Economic Society, vol. 107(441), pages 418-30, March.
  2. Jochen Meyer & Stephan Cramon-Taubadel, 2004. "Asymmetric Price Transmission: A Survey," Journal of Agricultural Economics, Wiley Blackwell, vol. 55(3), pages 581-611.
  3. Edward J Green & Robert H Porter, 1997. "Noncooperative Collusion Under Imperfect Price Information," Levine's Working Paper Archive 1147, David K. Levine.
  4. Gallet, Craig A. & Schroeter, John R., 1995. "The Effects of the Business Cycle on Oligopoly Coordination: Evidence from the U.S. Rayon Industry," Staff General Research Papers 5250, Iowa State University, Department of Economics.
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  7. Kinnucan, Henry W., 2002. "Optimal Generic Advertising In An Imperfectly Competitive Food Industry With Variable Proportions," 2002 Annual meeting, July 28-31, Long Beach, CA 19775, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  8. Brander, James A. & Zhang, Anming, 1993. "Dynamic oligopoly behaviour in the airline industry," International Journal of Industrial Organization, Elsevier, vol. 11(3), pages 407-435, September.
  9. Lloyd, Tim & McCorriston, S. & Morgan, C.W. & Rayner, A.J., 2001. "The impact of food scares on price adjustment in the UK beef market," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 25(2-3), September.
  10. Lloyd, Tim & McCorriston, S. & Morgan, C. W. & Rayner, A. J., 2001. "The impact of food scares on price adjustment in the UK beef market," Agricultural Economics, Blackwell, vol. 25(2-3), pages 347-357, September.
  11. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  12. Habtu Tadesse Weldegebriel, 2004. "Imperfect Price Transmission: Is Market Power Really to Blame?," Journal of Agricultural Economics, Wiley Blackwell, vol. 55(1), pages 101-114.
  13. Kinnucan, Henry W., 2003. "Optimal generic advertising in an imperfectly competitive food industry with variable proportions," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 29(2), October.
  14. Paul Dobson & Roger Clarke & Stephen Davies & Michael Waterson, 2001. "Buyer Power and its Impact on Competition in the Food Retail Distribution Sector of the European Union," Journal of Industry, Competition and Trade, Springer, vol. 1(3), pages 247-281, September.
  15. A. M. Azzam & E. Pagoulatos, 1990. "Testing Oligopolistic And Oligopsonistic Behaviour: An Application To The Us Meat-Packing Industry," Journal of Agricultural Economics, Wiley Blackwell, vol. 41(3), pages 362-370.
  16. Sanjib Bhuyan & Rigoberto A. Lopez, 1997. "Oligopoly Power in the Food and Tobacco Industries," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1035-1043.
  17. Paul W. Dobson & Michael Waterson & Stephen W. Davies, 2003. "The Patterns and Implications of Increasing Concentration in European Food Retailing," Journal of Agricultural Economics, Wiley Blackwell, vol. 54(1), pages 111-125.
  18. S McCorriston & CW Morgan & AJ Rayner, 2001. "Price transmission: the interaction between market power and returns to scale," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 28(2), pages 143-159, June.
  19. S. McCorriston & C. W. Morgan & A. J. Rayner, 1998. "Processing Technology, Market Power and Price Transmission," Journal of Agricultural Economics, Wiley Blackwell, vol. 49(2), pages 185-201.
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