Asymmetric Price Transmission and Consumer Costs in the Taiwanese Rice Market

Kuo-Wei Chou () and Po-Chun Lin ()
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Kuo-Wei Chou: Corresponding author. Department of Applied Economics, Fo Guang University, Yilan, Taiwan.
Po-Chun Lin: Chung-Hua Institution for Economic Research, Taipei, Taiwan.

Journal for Economic Forecasting, 2019, issue 4, 67-86

Abstract: Rice is a staple food in Taiwan, fluctuation in the retail price of milled rice has considerable influence on the costs of consumer. Unlike the numerous previous studies, this study analyses asymmetry in farm-retail price transmission in the Taiwanese rice market, using the asymmetric error correction model with threshold cointegration. We found that retail price of milled rice adjustments to negative price deviations from long-run equilibrium are faster than adjustments to the positive ones with a null threshold. We also showed that over the short run, the adjustments of retail price of milled rice react more strongly to positive shocks in paddy rice price. The asymmetric price transmission in the Taiwanese rice market also implies that the benefit of a fall in the paddy rice price is not transmitted to the consumers. In other words, the shocks in paddy rice price inflate consumer costs, and entities involved in the production-to-sales process are earning supernormal profit. This uneven spreading of surplus between the consumers and noncompetitive sellers displays a market failure. Instead of monitoring prices and interfering in the market, the policy makers should be adopting right intervention.Such as facilitate transparent pricing data or subsidize milling equipment for farmers, would be more effective in improving the competitiveness and efficiency of the rice market, potentially discouraging price asymmetry.

Keywords: Paddy Rice Prices; Retail Prices of Milled Rice; Market Power; Asymmetric ECM; Taiwan (search for similar items in EconPapers)
JEL-codes: D43 L11 Q10 (search for similar items in EconPapers)
Date: 2019
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