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Price Dynamics in a Vertical Sector: The Case of Butter

Jean-Paul Chavas () and Aashish Mehta

American Journal of Agricultural Economics, 2004, vol. 86, issue 4, pages 1078-1093

Abstract: We develop a reduced-form model of price transmission in a vertical sector, allowing for refined asymmetric, contemporaneous and lagged, own and cross-price effects under time-varying volatility. The model is used to investigate the wholesale-retail price dynamics in the U.S. butter market. The analysis documents the nature of nonlinear price dynamics in a vertical sector. It finds strong evidence of asymmetric retail price responses, both in the short term and the longer term, but only weak evidence of asymmetric wholesale price responses. Asymmetric retail responses play a major role in generating a skewed distribution of butter prices. The empirical results indicate the presence of imperfect competition at the retail level. Copyright 2004, Oxford University Press.

Date: 2004
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Handle: RePEc:oup:ajagec:v:86:y:2004:i:4:p:1078-1093