Introduction

Dramatic price swings in global energy and food markets have caused much concern around the world about price policies. These price swings have resuscitated interest among policymakers on the issue of price transmission, and the implications for producer and consumer welfare. The debate was strongest for developing countries as some argued that consumers in developing countries were hurt by increasing food prices while producers were not benefiting from higher prices for their products, increasing hunger and poverty. However, also in richer countries the policy discussion on price transmission was reinvigorated.

The extensive literature on the transmission of price shocks discerns different types of price transmission. Transmission of price shocks at the consumer level (e.g., triggered by a demand shock) to producers in domestic markets – and vice versa – is referred to as vertical price transmission. Transmission of price shocks in the world market to domestic markets – and vice versa – is referred to as spatial price transmission. Imperfections in spatial price transmission have been attributed to factors including government intervention in markets (such as import tariffs and price stabilization measures), transport and marketing costs, the degree of processing, market structure, and consumer preferences (e.g., if imported products are imperfect substitutes for domestic products) (e.g., Rapsomanikis, 2011).

Imperfect vertical price transmission, on the other hand, has most often been interpreted as providing evidence of market failure, such as the exercise of market power by processing companies and/or retailers, enabling them to capture value chain rents and reduce social welfare (Meyer and von Cramon-Taubadel, 2004; Wohlgenant, 2001). The existing literature focuses mostly on the effects for consumer welfare, and generally assumes a positive correlation between the degree of downstream vertical price transmission and consumer welfare – as a lower degree of price transmission would attest to a greater share of the rents being captured by powerful intermediaries in the chain.

However, this is not a consensus argument. There is also a set of studies contesting the direct link between the degree of price transmission and market power, arguing that one should account for the incidence of vertical coordination in value chains, the existence of increasing returns to scale, risk mitigating behavior by intermediaries, and the degree of processing (McCorriston et al., 2001; Wang et al., 2006; Weldegebriel, 2004; Wohlgenant, 2001).