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Product Heterogeneity and the Relationship between Retail and Farm Prices

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  • Wohlgenant, Michael K

Abstract

This paper examines the relationship between the price of an aggregate of agricultural outputs and raw material price in two situations: (i) when product heterogeneity within the product group arises from aggregation over heterogeneous commodities of different competitive industries, and (ii) when product heterogeneity arises from product differentiation among similar products in a monopolistically competitive industry. We show that a positive relationship between the aggregate price spread and the agricultural raw material price could result from input substitution between the raw material input and other inputs in response to changes in the relative raw material price. Indeed, within a composite product group there is likely to be significant input substitution, in response to changes in relative input prices, because of the increased opportunities for efficiency gains from altering the composition of the heterogenous commodities within the composite product. Therefore, when analysing aggregate price spread behaviour of agricultural commodities using data on composite product, one should be cautious in attributing observed markup pricing behaviour to market power resulting from imperfect competition. Copyright 1999 by Oxford University Press.

Suggested Citation

  • Wohlgenant, Michael K, 1999. "Product Heterogeneity and the Relationship between Retail and Farm Prices," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 26(2), pages 219-227, June.
    • Handle: RePEc:oup:erevae:v:26:y:1999:i:2:p:219-27
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    Cited by:

    1. World Bank, 2009. "Land Reform, Rural Development, and Poverty in the Philippines : Revisiting the Agenda," World Bank Publications - Reports 18545, The World Bank Group.
    2. Reed, Albert J. & Elitzak, Howard & Wohlgenant, Michael K., 2002. "Retail-Farm Price Margins And Consumer Product Diversity," Technical Bulletins 33573, United States Department of Agriculture, Economic Research Service.
    3. Rahman, Mohammad Chhiddikur, 2018. "Welfare Impact of Asymmetric Price Transmission on Bangladesh Rice Consumers," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 251114, July.
    4. Isaac Abunyuwah & Henry De-Graft Acquah, 2013. "Modelling non-linear Spatial Market Integration and Equilibrium Processes in Hidden Markov Framework," Journal of Economics and Behavioral Studies, AMH International, vol. 5(8), pages 535-545.
    5. Franz Sinabell, 2005. "Marktspannen und Erzeugeranteil an den Ausgaben für Nahrungsmittel," WIFO Studies, WIFO, number 25398, February.
    6. Michael K. Wohlgenant & Nicholas E. Piggott, 2003. "Distribution of gains from research and promotion in the presence of market power," Agribusiness, John Wiley & Sons, Ltd., vol. 19(3), pages 301-314.
    7. Dipankar Das, 2019. "Multilayer of Suppliers Fixed Costs and Spatial Competition in the Upstream Market as a Source of Retailers Buying Power," Studies in Microeconomics, , vol. 7(2), pages 210-226, December.
    8. Rahman, Mohammad Chhiddikur, 2020. "Welfare Impact of Asymmetric Price Transmission on Bangladesh Rice Consumers," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 242248, July.
    9. Ozcan Ozturk, 2018. "Effects of Price Transmission and Exchange Rate Elasticities of Three Developing Countries on the World Cotton Trade," Applied Economics and Finance, Redfame publishing, vol. 5(1), pages 91-101, January.
    10. Abunyuwah, Isaac, 2013. "Implications of conceptual and data complexities on time-series econometric applications in market integration analysis," Studies in Agricultural Economics, Research Institute for Agricultural Economics, vol. 115(1), pages 1-7, February.
    11. Christensen, Lee A., 2002. "Soil, Nutrient, And Water Management Systems Used In U.S. Corn Production," Agricultural Information Bulletins 33618, United States Department of Agriculture, Economic Research Service.
    12. Cranfield, John A.L., 2002. "Optimal Advertising With Traded Raw And Final Goods: The Case Of Variable Proportions Technology," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 27(1), pages 1-18, July.

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