Progress 10/01/02 to 09/30/08
Outputs
OUTPUTS: Presentation of paper on relative role of imperfect competition and market forces determining distribution of gains from promotion and research presented at NE-63 conference on market structure and promotion. Invited paper on determinants of US market basket price spreads presented at conference on global competitiveness in agriculture and the food industry (EU and US perspectives, Bologna, Italy, June, 2006. Paper on determinants of US market basket measures in the aggregate and by major food group disseminated as working paper to academic community. PARTICIPANTS: Principal investigator only participant. TARGET AUDIENCES: Intended audiences are other researchers and USDA economists. PROJECT MODIFICATIONS: Not relevant to this project.
Impacts
Distribution of gains to producers from generic promotion and research were found to be insensitive to the degree of market power. The implication of this finding is that market power plays a very minor role in transmission of retail changes back to the farm level. Estimation results using market basket measures of price spreads for food in the aggregate and the nine major food groups (meats, poultry, eggs, dairy, fruits, vegetables, processed fruits & vegetables, fats & oils, cereal & bakery products) indicated that per capita income was by far the most important factor affecting change in the price spread. In virtually all cases, the price spread was found to be positively and statistically significantly related to per capita disposable income. Empirical results with aggregate data also confirmed that change in market power contributes little to changes in the farm-retail price spread. Theoretical analysis showed that, in the short run with decreasing returns to scale, the price spread can be expected to be positively related to retail price--even in the absence of market power. Additional empirical results confirm that a market equilibrium model based on price-taking behavior with variable proportions in food processing & marketing provides better explanatory power than a model allowing for imperfect competition but restricting substitution to fixed proportions. The implication of this finding is that the standard model for modeling price spreads is misspecified.
Publications
- Wohlgenant, M.K., and Piggott, N.E. (2003). Distribution of Gains From Market Research and Promotion in the Presence of Market Power, Agribusiness: An International Journal, 19(3): 301-314.
- Wohlgenant, M.K. 2008. Changes in U.S. Price Spreads for Food: Role of Competitiveness and Demand for Marketing Services, Chapter in R. Fanfani, E. Ball, L. Guiterrez, and E. Ricci Macarini (ed.), Competitiveness in Agriculture and Food Industry: US and EU Perspectives. BUP, Bologna, Italy.
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Progress 01/01/07 to 12/31/07
Outputs
New comparative static results for structural relationships for retail food price and the farm-retail price spread for food were derived. The model consists of an equation describing how retail price changes as consumer income, farm output, and marketing input price changes. The second equation describes how the price spread changes as retail price, farm output, and marketing input prices change. Theoretical results indicate that, in the short run, retail price should be positively related to income and negatively related to farm quantity; the price spread should be positively related to both retail price and the farm quantity. In both cases, the impact of marketing inputs is indeterminate because of offsetting substitution and output effects. Theory also indicates that one can distinguish fixed proportions/markup pricing from variable proportions/competitive pricing by testing whether marketing input prices have an impact on retail price. Statistical analysis was
conducted on the relationship between the farm-retail price spread for food from 1970-2004 for the USDA Market Basket measure of the price spread for food produced on U.S. farms. The model was estimated with the new cointegration methodology of Phillips and Loretan. The statistical results are found to be consistent with the theory of competitive price-taking behavior. Hypothesis testing indicated that farm quantity can be taken as predetermined and that fixed proportions/markup pricing does not describe industry pricing behavior. The statistical results underscore the importance of input substitution, diminishing marginal product of raw materials, and increasing marginal cost of supplying retail food products in the short run.
Impacts
The fact that changes in the price spreads can be explained by more fundamental supply/demand factors for food, and that tests reject fixed proportions with market power, suggests that market power is not the main driving force behind rises in price spreads. The relative importance of increased consumer demand for food, through rising real incomes, suggests that consumers are continuing to demand goods with higher value added. Farmers could benefit from offering products that are more consistent with what consumers want.
Publications
- No publications reported this period
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Progress 10/01/05 to 09/30/06
Outputs
Statistical analysis was conducted on the relationship between the farm-retail price spread for food from 1954-2002 for three different measures of the price spread for food produced on U.S. farms: (a) USDA Market Basket, (b) USDA Marketing Bill, and (c) Farm Value Share of the Retail Dollar. Each price spread measure, expressed in real or deflated terms, was related to retail demand shift variables (per capita real dispoable personal income, real price of non-food), the real index of marketing costs, and per capita farm quantity marketed. Co-integration methodology was used to control for the effects of unit roots, transient dynamics, and endogeneity. The statistical results were in agreement with theory and showed that each price spread measure has been demand driven over time. Income and non-food prices together accounted for over 94% of the increase in the unit marketing bill measure from 1985-2002. Growth in real per capita disposable personal income averaged 10%
per annum over the period 1985-2002 and was the dominant factor contributing to the rise in the price spread.
Impacts
The fact that changes in the price spreads can be explained by more fundamental supply/demand factors for food suggests that market power is not the main driving force behind rises in price spreads. The relative importance of increased consumer demand for food, through rising real incomes, suggests that consumers are continuing to demand goods with higher value added. Farmers could benefit from offering products that are more consistent with what consumers want.
Publications
- No publications reported this period
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Progress 10/01/04 to 09/30/05
Outputs
Additional statistical analysis conducted on all food and nine food groups to check for robustness in results to alternative approaches to correct for unit roots. A simple modeling approach developed by Phillips was found to perform the best. The approach essentially calls for adding first differences on explanatory variables to account for effects of unit roots on estimation. Results also checked for robustness to strict exogeneity assumption by including lead variables in the regressions as well. There is no indication that the assumption of treating farm supply as though it is strictly exogenous creates a problem. In the case of poultry and eggs, it was necessary also to include trend variables to capture changes in structure of these industries over time. This did not change any of the previous conclusions about the relative importance of income and marketing costs. In fact, the results appear to be strengthened. Only fats and oils defy explanation with the
economic modeling approach taken. Finally, further theoretical analysis indicates that the market basket statistics used to measure farm-to-retail prices spreads may be viewed as measures of unit value-added.
Impacts
The fact that changes in the price spreads can be explained by more fundamental supply/demand factors for food suggests that market power is not the main driving force behind rises in price spreads. The relative importance of increased consumer demand for food, through rising real incomes, suggests that consumers are continuing to demand goods with higher value added. Farmers could benefit from offering products that are more consistent with what consumers want. Consumers have shown they demand farm products for the attributes they produce such as freshness, leanness, palatability, convenience, etc.
Publications
- No publications reported this period
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Progress 10/01/03 to 09/30/04
Outputs
Data set on farm-retail price spreads for food (market basket data on all food plus nine major food groups)was updated through 2002. Co-integration analysis indicated unit roots in all but two time series variables. Co-integration methodology of Phillips used to estimate relationship between price spreads, per capita disposable income, per capita farm output, and the food marketing cost index. The results overall indicate good explanation of the variables and conformity to theory of marketing margins developed by Wohlgenant. Continuing rises in the price spreads for food over time are due mainly to rising marketing costs and rising real income. The results are consistent with the classical theory that rising demand for marketing services increases the price spread because of a rising marginal cost of providing marketing services.
Impacts
The fact that changes in the price spreads can be explained by more fundamental supply/demand factors for food suggests that market power is not a major concern. The relative importance of increased consumer demand for food, through rising real incomes, suggests that consumers are continuing to demand goods with higher value added.
Publications
- No publications reported this period
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Progress 10/01/02 to 09/30/03
Outputs
Data for 1970-2001 were collected on food expenditures, total marketing bill expenditures, expenditures for components of the marketing bill (labor, packaging, transport, energy, and other), expenditures on farm products used in producing food, and price indexes for the components of the marketing bill and the total marketing bill. The consumer price index for all food and the index of prices of agricultural products were used to derive quantities of food consumed and quantities of farm products used in producing food. These data were then used to estimate a system of supply and demand functions for aggregate food using the translog restricted profit function, augmented to account for market power. The results are consistent with theory and give results that seem reasonable. These results were then combined with an estimated demand model for all food to analyze factors contributing to the change in the farm-to-retail price spread for food from 1985-2000. The
reduced-form of the structural model does a reasonably good job of predicting the increase in the price spread over this period with most of the change accounted for by shifts in retail demand for food and shifts in the supply of farm products used in food production. Marketing input prices and market power contributed relatively small amounts to the increase in price spread over this period.
Impacts
The fact that changes in consumer demand for food and supply of farm products used to produce food account for a substantial portion of the increase in the farm-to-retail price spread for food means that the food marketing sector is behaving in a relatively efficient manner and that market power overall is not a major concern.
Publications
- No publications reported this period
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