Price transmission and estimations of price elasticity of secondary demand functions: application on commodity market for food grains

Abstract

The paper is focused on the quantitative analysis of the price transmission and on its use for the estimations of the direct price elasticity of the vertical-derived demand functions. The price transmissions were examined between the commodity markets for the food grain and the consumer markets for the bakery products and flour. The data (1995–2002) were taken over from the Czech Statistical Office (CSO), the Price Statistics (PS) and the Statistics of Family Budgets (SFB). The intensity of the inter-market price transmission was assessed by means of the coefficients of the price transmission elasticity (EPT). For enumerating of EPT, the regression linear models were developed. The explicit as well as the implicit time-definition in the models was tested. The explicit dynamic construction was carried out on the basis of the stationary process with the parabolic trend. After the determination of trend functions, the seasonal component in used time-series was thoroughly investigated by means of the harmonic analysis (G-tests of the individual extremes of the developed periodograms). The implicit dynamization of the linear models was solved on the basis of the first differences of appropriate commodity prices, respectively price levels on the consumer market. For the quantification of the price transmission elasticities, directly dynamized models there were only used only because the model unambiguously achieved better values of characteristics of the statistic verification (correlation index, F-test, T-test). These models also satisfied the economic assumptions in the sense of the vertical price transmissions between the observed market levels and the preservation of the law of diminishing demand. Based on the linear models of the price transmission with parabolic-trend stationarization, it was found out that within the observed period (1995–2002) EPT between commodity market with the food wheat and consumer market with the bakery products and flour reached the average level of +0.1602%. Within the same period, the value of EPT between commodity market with the rye and consumer market with the bakery products and flour reached the average level of +0.1067%. These coefficients were subsequently used together with coefficients of the own price elasticity of consumer demand for the bakery products and flour (ε) to the estimations of the own price elasticity of the commodity demand for food wheat and rye (e). In accordance with the construction of these estimations: e = ε × EPT, it was found out that the average level of the own price elasticity of the demand for food wheat (respectively rye) is about –0.0659% (respectively –0.0441%). Both observed secondary demand functions are therefore strongly inelastic with respect to the reaction on the direct price changes. The commodity demand for the rye seems to be more inelastic.