Pass-through and consumer search: An empirical analysis

Timothy Richards, Miguel I. Gómez, Jun Lee

Research output: Contribution to journalArticle

20 Scopus citations

Abstract

Retail-price pass-through is one of the most important issues facing manufacturers of consumer packaged goods. Although retailers tend to pass higher wholesale prices through to consumers quickly and completely, they often do not pass on trade promotions. Currently, asymmetric pass-through is commonly thought to result from retailers' exercise of market power. Alternatively, it may be because of consumer search behavior and retailers' competitive response. We test this theory using a panel threshold asymmetric error-correction model applied to wholesale and retail scanner data for ready-to-eat cereal for a number of retailers in the Los Angeles metropolitan market. We find that consumer search behavior contributes significantly to imperfect pass-through. By allowing pass-through to depend on market power and consumer search costs, we find results that are contrary to the conventional wisdom. Namely, market power causes retail prices to fall quickly and rise slowly, whereas consumer search behavior causes retail prices to rise quickly and fall slowly - precisely the "rockets and feathers" phenomenon.

Original languageEnglish (US)
Pages (from-to)1049-1069
Number of pages21
JournalAmerican Journal of Agricultural Economics
Volume96
Issue number4
DOIs
StatePublished - Jul 2014

ASJC Scopus subject areas

  • Agricultural and Biological Sciences (miscellaneous)
  • Economics and Econometrics

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