Price transmission market power and industry technology: a note

Abstract

PurposeThe purpose of this paper is to develop a theoretical model of price transmission from the farm to the retail sector, allowing not only for an interaction between oligopoly power, oligopsony power and non‐constant returns to scale in industry technology, but also allowing for the market power conduct parameters to vary in response to an industry‐wide exogenous shock. Also, the degree of price transmission under imperfect competition relative to that under perfect competition is evaluated.Design/methodology/approachConjectural variations are used to parameterize both seller and buyer market power conduct of the industry and then the equilibrium displacement approach is applied to solve a system of six structural equations which describe the demand for and supply of industry retail output and farm and marketing inputs.FindingsFirst, it is found that given empirical values of retail output demand elasticity, of farm and marketing inputs supply elasticities, of market power conducts, and of the returns to scale measure, the degree of price transmission under imperfect competition is greater than that under perfect competition. Second, it is found that the relative degree of price transmission under imperfect competition could be greater or smaller under the assumption of a varying market power conduct than one under the alternative assumption of a constant market power conduct, depending on whether market conduct is falling or rising, respectively.Originality/valueThe paper makes two original contributions to the literature. First, it allows for an interaction between oligopoly power, oligopsony power and industry technology. Second, it allows both oligopoly and oligopsony power parameters to vary in response to industry‐wide exogenous shocks.