Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Lkassbi et al. (2008) Transmission of Price Trends from Consumers to Producers Why this is an interesting paper? 1 – Quite short 2 – Has to do with Canada and market concentration 3 - Light on the description of a rather complex mathematical concepts 4 - Illustrates some of the practical complexities of this type of analysis Objective of the Paper Examine the relationship between farm and retail food prices for several agricultural products. (supply management) Market power being exercised by the marketing chain, specifically retailers. Terminology to define in simple terms: Purchasing Power Parity Alternative to using the exchange rate to measure the buying power of income Based on a basket of goods, and the $US cost in two countries Price flexibility how price responds to a quantity change supply or demand side of a market Non-stationary versus stationary series mean and variance do not change over time Integration and Co-integration of time series (1) Integration – 1 series Differencing the series (once or more) produces a stationary series (1 L) X t X t X t 1 X where L the difference operator (2) Co-integration – 2 series some combination of two series produces a stationary series E.G. subtracting one series from the other => they share some common element Economic Model and Method (1) Derive equations that connect retail prices to farm prices Assuming a competitive market equilibrium (2) Use data to determine: Are results consistent with a competitive market ? (3) If NOT => evidence that there might be an abuse of market power Step 1: Derive Equations Pr Arf F Arw W Arz Z and Pf A ff F A fw W A fz Z where Pr retail price Pf farm price F farm sup ply W farm inputs Z demand shifters All variables are expressed in logarithms coefficients (A) are the price flexibilities Step 2: Testing for Market Power Competitive market => MVP of input equal to price of input Farm AND Retail If MVP > P(input) => evidence of market power Assuming competitive markets, the two equations can combined Pr B f Pf Bw W Bz Z (Equation 2) coefficients (B) are a function of the price flexibilities NOT competitive, the equation is a bit different Pr B f Pf Bw W Bz Z Bc C (Equation 3) Includes other variables (C) that influence retail price: stocks of the farm products and farm input prices. Practical (Statistical) Considerations If the variables in (3) are “stationary”, then a standard F-test can be used Ho: BC = 0 If the variables are “integrated” then: Test if (2) OR (3) are co-integrated. If (2) is co-integrated without the variable C, then BC = 0 => evidence for a competitive market. The Symmetry Test The Concept: When the retail price increases, the retail level demand for a farm product should change in much the same way as when there is a change in the farm price. There is symmetry. Arf S f Afz (4) Where S f is the cos t share of the farm product to produce the retail product => Price flexibilities at the retail and farm level should be related Change in a shift variable (e.g. bad weather) should be reflected in how the change in the farm price affects the retail price. Constant Returns to Scale Producing the retail (food) product when using the farm product as an input E.g. Are there constant returns to using corn to produce corn flakes? Increasing returns => potential market power The Test: Price flexibility at the retail and farm level should be the same, given an exogenous shift (shock) at the farm level (bumper crop -- Z) Arz A fz (5) Data Used in the Analysis - Canada (4) supply managed commodities: eggs, milk, chicken and turkey Monthly data on farm and retail prices (CANSIM, Statistics Canada) Quantity data are, based on per capita commercial disappearance data 1997 – 2005 for 98 observations Results: Data were not stationary (constant mean & variance) Had to test for co-integration and Constant Returns Co-integration relationships found for retail and farm prices for all products Eggs: a single co-integration in eggs consistent with no market power. Other three commodities have multiple co-integration relationships, consistent with market power. CRTS was rejected in all cases. This result, by itself implies market power for all four commodities. Conclusion (1) Conclude that their results are suggestive of market power for these four commodities (2) Temper their conclusions by recognizing that the data they used might not be the best (3) Other more sophisticated statistical methods could have been used