Heterogeneity in Brand Effects on Farm-Retail Price Transmission: Evidence from Private Labels and Branded Products in Fluid Milk Market

Abstract

The asymmetric farm-retail transmission has been well documented in the general fluid milk market. However, little attention has been given to the possible heterogeneous cost pass-through process of private labels. Given the leading role of private labels in the fluid milk market, it is of special interest to focus on its possible different effect on farm-retail price transmission. In this paper, we examine the heterogeneous effects of private label and branded products on price transmission in the fluid milk market. We incorporate and extend the Error Correction Model (ECM) approach to specify and estimate the farm-retail pass-through using panel data. To capture the heterogeneous effects of brand types on price transmission, we include interaction terms of brand type dummies with increasing and decreasing phases of farm price and then test the asymmetry in farm-retail pass-through for different brand types. Our results indicate that private label and branded milk all show asymmetry in price transmission. However, brand types affect the magnitudes of the asymmetry and private label milk presents the lowest asymmetry in price transmission, compared with national and regional branded milk. One possible explanation is that retail chains have a greater ability to affect prices of their own private label products through integrated distribution channels and thus impose a strong lessening power of the asymmetry in farm-retail price transmission.