Overview of price transmission and reasons for different adjustment patterns across EU member states

Abstract

The analysis of price transmission along the food marketing chain has drawn special attention in the economics literature, as it is considered to be important to understand the overall operation of the market (Goodwin and Holt, 1999). Under a perfectly competitive market structure, economic theory shows that a price change in one market will originate similar price changes in related markets. Several empirical studies, however, have found that price dynamics differ from this theoretical competitive behaviour (von Cramon-Taubadel, 1998; Serra and Goodwin, 2003; Ben Kaabia and Gil, 2007; Serra etal., 2011; Hassouneh etal., 2012). Though a large number of studies on vertical price transmission have been conducted to characterize how prices are transmitted along the food marketing chain, little light has been shed on the factors driving different price transmission mechanisms. The objective of this chapter is to analyse price transmission processes along a wide range of different food marketing chains within the European Union (EU) and attempt to explain the differences and/or similarities that exist between them. In characterizing price behaviour, researchers agree upon the interest in assessing the presence of asymmetries in price transmission. In the context of vertical price transmission, asymmetry usually refers to different price responses to positive and negative shocks. From a policy perspective this is an important issue, as the burden of adjustment on producers and consumers may depend on whether prices are rising or falling. A number of theoretical