Commodity price inflation, retail pass-through and market power

Timothy J. Richards, William J. Allender, Stephen F. Hamilton

Research output: Contribution to journalArticle

15 Scopus citations

Abstract

When commodity prices rise, wholesalers and retailers of products derived from basic commodities respond by passing along at least a portion of the price increase to consumers. In this paper we examine whether firms respond differently to positive commodity price shocks than to negative commodity price shocks; that is, whether commodity price volatility alters market power. We exploit recent volatility in food commodity prices over the period 2007-2010 to investigate how commodity price shocks translate into market power in two different vertically-structured food product industries: potatoes and fluid milk. For potatoes, we find both wholesale and retail market power decreases (increases) during periods of rising (falling) commodity prices. Moreover, price-cost margins widen a substantially greater degree in response to negative shocks than margins narrow in response to positive shocks, indicating that commodity price volatility increases market power. For fluid milk, we find that market power likewise declines during periods of rising commodity prices; however, market power does not significantly change during periods of falling commodity prices, suggesting that commodity price volatility decreases market power.

Original languageEnglish (US)
Pages (from-to)50-57
Number of pages8
JournalInternational Journal of Industrial Organization
Volume30
Issue number1
DOIs
StatePublished - Jan 1 2012
Externally publishedYes

Keywords

  • Market power
  • Pass-through
  • Random parameter model

ASJC Scopus subject areas

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

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