Price transmission and market power in a transition context: evidence from the Polish fluid milk sector

Abstract

Profound changes have been taking place in the Polish dairy sector since the beginning of transition. Two distinct features have attracted particular attention, namely growing consolidation of the downstream industries and serious farm fragmentation. Consequently, in the debate numerous concerns have been expressed that the sector's restructuring has been proceeding, so to speak, at farmers' expense. Most frequently farmers' relatively weak bargaining position, compared with that of processors and retailers, has been blamed for this state of affairs. Up to now, however, no convincing evidence has been provided that these arguments really hold. This article aims at verifying the above view by examining the mechanism of price transmission. To put the problem in a theoretically consistent, structural equation setting, an approach using exogenous demand and supply shifters is followed. The analysis is couched in a vector error correction model framework. The results suggest that price transmission between farm and retail levels is affected by both short-run and long-run asymmetries. Moreover, behaviour of prices in the fluid milk sector in Poland is consistent with the use of market power by the downstream sector.