Price transmission is an interesting subject in economics, because it’s a very specific (probably small) analytical domain, but it offers relevant opportunities to discuss about the founding principles of economics and, on the others side, the real outcome of the market functioning (the sacred market efficiency), including the social dimension. “Great!” said the reader, “but what does it matter with animal health economics?!”. “Keep calm!” said the author “and follow me.”
Price transmission concerns the way a variation in the price of a good is transmitted from one market to another. Transmission has at least two dimensions, for example it works:
- vertically along the food supply chain (e.g. between farmers and the processing industry, - between the processing industry and food retailers, and between food retailers and final consumers downstream).This is the so-called Vertical Price Transmission (VPT);
- and horizontally across different market places for the same commodity (spatial price transmission, e.g. how a rise of the milk price in the American market affects the milk price in the European market), or even across different commodities (cross-commodity price transmission, e.g. how a price increase in the beef-meat market affects prices in the pork-meat market or how a price increase in the oil market affects the milk market). These are examples of Horizontal Price Transmission (HPT).
Exchanging goods often implies both the horizontal and the vertical dimension, but the concept of HPT focuses on the relationships among different economic systems and the trade rules (a typical case: how European trade rules affect price transmission between USA and the EU?), while The concept of VPT focuses on the efficiency of the supply chain (typical case: how much the higher price of a Scotch beef cut in the Edinburgh meat gross market is transmitted to producers?).
During decades economists have approached the problem of price transmission following a very simple reasoning: in a perfect market system (an abstract economic system where free competition and few others –unrealistic- conditions grant that market prices reflect an optimal allocation of resources and could not be lower) any price variation for a given product must be perfectly transmitted to all the related products. If this doesn’t happens (e.g. a price increase at consumer level is not transmitted to the producers) it means that markets are not perfect: other actors along the supply chain (the distributors, the processors, the traders, etc. ) take over the price increase downstream while they still pay the same price to the producers upstream. VPT and HPT analysis may thus reveal the existence of imperfect markets (monopoly or oligopoly situations). This reasoning applies the classical Structure-Conduct-Performance paradigm, which in few words says that, given the structure of a sector (the number of companies), the companies adopt their competitive behaviour (the way they play their market power to impose the buying/selling price) and determine their profit. Many empirical and theoretical analysis have been conducted to criticize the SCP paradigm (one for all: the reversal effect is possible as far as a company can actually apply a strategy to acquire market power, thus determining endogenously the structure of the sector, to gain more profit) finally showing that market are far away to be perfect and imperfection is the rule.
Market imperfections often take the shape of Asymmetric Price Transmission (APT), e.g. when a price rise in a downstream market is not completely transmitted upstream, but a price rise in an upstream sector is completely transmitted downstream. APT comes with relevant distributional situations. We can imagine a surplus in corn production which makes the price paid to farmers fall. In a perfect market system this price reduction should be reflected in the feed and in the meat prices. However, if processors or retailers may take advantage from situations of monopoly, they pay less for corn but they sale meat at the same price and gain more profit, to the detriment of consumer welfare.
Now the capital question: what is the role of price transmission in animal health economics? Animal health outbreaks often hit production at some level in the supply chain, and may affect international trade; consumer behaviour changes, market demand falls for the hit commodity and probably rises for substitutes; politicians must take safety measures during the emergency and safety policy may change in the long run. Any of this action may affect production cost and/or prices and at some level in the supply chain. If consumers are scared by BSE, market demand for beef falls while demand and prices of poultry rise: how much this will affect beef meat producers (-) and poultry producers (+) depends on the way prices are transmitted. Animal health measures may have distributional effects as well: they may impose costs to some firms in the supply chain that will be more or less transferred to the others according to the price transmission patterns. In few words, when the economic effects of an animal health event are analysed at system or sector level the way price transmission takes places becomes relevant and determine the distributional effects among economic parties.
“Is it clear?” said the author.
Few readings to learn more
Peltzman, S (2000) Price Rise Faster than they fall, Journ. of Political Economy, Vol. 108/3: 466-502 (when economists discovered that market imperfection is the rule, not the exception).
Kimmel, S. (2009) Why Prices Rise Faster than they Fall, Discussion paper EAG 09-4. Economic Analysis Group/Antitrust Division, US Department of Justice (alternative explanation of imperfect price transmission to complete SCP paradigm)
Meyer, J., v. Crammon-Taubadel, S. (2004), Asymmetric Price Transmission: A Survey, Journ. of Agricultural Economics, Vol. 55/3: 581-611, November 2004 (an interesting good review of the different aspects concerning the subject, which also focuses on statistical methods. The bibliography includes several cases of PT studies concerning animal productions).
Listorti, G. and Esposti, R. ‘Horizontal Price Transmission in Agricultural Markets Fundamental Concepts and Open Empirical Issues’, Bio-based and Applied Economics Vol. 1/1: 81-96, 2012
Author: Maurizio Aragrande, Universita degli Studi di Bologna, Italy