Using threshold co-integration to estimate asymmetric price transmission in the Turkish milk market

doi:10.30682/nm2101i

Abstract

We investigate the price dynamics between retail milk price and raw milk price in the Turkish fluid milk market. The study uses monthly fluid milk prices for 14 years between January 2003 and December 2016. We analyze the price adjustment in the fluid milk market through an asymmetric error correction model with threshold co-integration. We find that the transmission between the two prices has been asymmetric in both the long term and short term period. Differences between the farm milk prices and retail milk prices may exist due to marketing costs across the supply chain and pricing policies associated with the market structure. Results of the long-run analysis indicate a significant market power in the fluid milk market. Therefore, in this asymmetric case, the deviations are likely to be the reason for the market power of the processors/retailers and the reason for the oligopolistic market structure in the sector.

Highlights

Price transmission and market integration have been very important topics in the fields of industrial organization and other areas of applied microeconomics, especially for the study of price relationship in agricultural commodity markets, that can shed light on the stability of prices
The results show that the nature of asymmetry is captured by the M-Threshold Autoregressive (TAR) model and the path of adjustment to the long run equilibrium relation is relatively faster when the price differential is decreasing compared to the case when the price differential is increasing
This paper examines the extent to which increases and/or decreases in farm gate prices during the past years have been transmitted to retail level prices for an important food commodity, fluid milk, in Turkey as a developing country

Summary

Introduction

Price transmission and market integration have been very important topics in the fields of industrial organization and other areas of applied microeconomics, especially for the study of price relationship in agricultural commodity markets, that can shed light on the stability of prices. Çınar (2017) applies a Vector Error Correction Model (VECM) to monthly price data from January 2003 to December 2016 for farm milk prices and retail cheese and yoghurt prices and finds that there is an asymmetric price transmission between producer and retailer market Both above mentioned studies support the presence of asymmetric pricing behavior in Turkey. There are empirical studies in literature on asymmetric price transmission referring to anti-competitive market structures (Kinnucan and Forker, 1987; Miller and Hayenga, 2001) These studies investigate imperfect competition in processing and retailing that allows middlemen to use the market power. We aim to investigate the same issue for Turkey and test raw milk and retail fluid milk price transmissions by employing TAR and M-TAR specifications to contribute to the literature and to provide insights that should signal to policy makers for improving the dairy market structure.

Institutional background in the Turkish fluid milk market

Empirical strategy

Data and empirical results

Findings

Conclusion

Discussion