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Food Scares, Market Power and Relative Price Adjustment in the UK

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88th Seminar of the European Association of Agricultural ... oligopoly with supply side shock. McCorriston et al (2001) returns to scale. Lloyd et al (2002) ... – PowerPoint PPT presentation

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Title: Food Scares, Market Power and Relative Price Adjustment in the UK


1
Food Scares, Market Power and Relative Price
Adjustment in the UK
88th Seminar of the European Association of
Agricultural Economics
  • Tim Lloyd, Steve McCorriston,
  • Wyn Morgan Tony Rayner

2
Outline of Presentation
1. Motivation and Aims 2. BSE in the UK 3.
Food Scares and Price Spreads 4. Empirical
Analysis 5. Results 6. Conclusions
3
1. Motivation and Aims
  • Increasing concern over food health scares
  • - Salmonella, BSE, e-coli, foot mouth
  • Differential effect on farmers and retailers
  • - Competition Commission (2000)
  • Few studies of market power effects

4
  • Aims
  • Link market power and price transmission with
    supply and demand shocks
  • - Power affects co-integrating relationship
  • - Testable hypothesis
  • Highlight the supply side effects of the scare
  • - Cull and export ban cancel out

5
2. BSE in the UK
  • Mid 1980s in cows
  • 1990 crossed species
  • 1996 CJD (139 deaths by 2003)
  • 2000 Parliamentary (Phillips) Report

Major scare but how did it affect spreads?
6
UK Beef Prices (Jan 1990 Dec 2000)
7
Retail Producer Price Spread of Beef (p/kg)
8
3. Food Scares and Price Spreads
Farmers more affected by BSE than
retailers Competition Commission explored market
power but how would we expect this a priori to
affect price spreads and what determines the
spread?
9
Gardner (1975) assumed perfect
competition McCorriston et al (1998) oligopoly
with supply side shock McCorriston et al (2001)
returns to scale Lloyd et al (2002)
oligopsony Plus source of shock,
shift/rotation of supply and demand
10
Use theory to determine econometric strategy
Horizontal (retail level) and vertical (spread)
relationships exist
Spread determined by demand shifter supply
shifter marketing costs
If market power exists, shifters will be
significant thus power not directly measured
11
4. Empirical Analysis
Employ a VAR framework and generalised impulse
response functions (Pesaran and Shin,
1998) Model beef prices at retail and farm
level Include demand and supply shifters, other
retail prices and marketing costs
12
Data Monthly prices (Jan 1990 - Dec 2000) Supply
shifter is net withdrawals sum of net exports
and cull (000t carcass weight
equivalent) Demand shifter press stories index
(log form)
13
Net Withdrawals from the UK Beef
Sector (1990-2000)
14
The Food Publicity Index (logs)
15
5. Results
Two co-integrating relationships Retail - price
of lamb () - price of pork () - demand shifter
(-) Transmission - supply shifter (-) - demand
shifter ()
16
  • Interpretation
  • Food scares cause retail prices to fall
  • Significant shifters mean we cant reject
    hypothesis of no market power
  • Food scares depress producer prices but
    withdrawals raise them (ceteris paribus)

How much do the shocks affect prices?
17
Impulse response analysis - long run responses to
a shock - use one standard error shock - look at
both demand and supply shocks
18
Simulated Dynamic Effect of a Meat Scares Index
Shock
19
Simulated Dynamic Effect of a Shock to Net
Withdrawals
20
The Impact of BSE on UK Beef Prices
21
6. Conclusions
  • If market power exists, shocks matter
  • Supply demand BSE shocks show power exists
  • BSE caused producer prices to fall twice as much
    as retail
  • Demand shift had greater impact than supply shift
  • Distributional effects of health scares where
    market power exists
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