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Investigating price transmission in the Finnish dairy sector: an asymmetric NARDL approach

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Abstract

The nonlinear ARDL model is applied to monthly price data to analyse vertical price transmission among farm and retail markets for a variety of dairy products in Finland. The results support the presence of long-run asymmetry for non-fat and low-fat milk as well as for blue and Emmental cheese; of short-run asymmetry for Edam cheese; and of short- and long-run asymmetry for processed and cottage cheese as well as yoghurt. Furthermore, results indicate the presence of a positive degree of long-run price asymmetry for non-fat milk of about 46%; for low-fat milk of 64%; for blue cheese of 5.2%; for Emmental cheese of 12.4%; for processed cheese of 11.6%; for cottage cheese of 9.9%; and for yoghurt of 8.9%. The positive long-run price transmission asymmetry findings of the present paper can be attributed to the strong market power of the Finnish food retailers, while short-run asymmetric price transmission can be caused, in addition to market power, by factors such as adjustment and menu costs, search costs, inventory management strategies and policy intervention via the milk quotas.

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Notes

  1. The examination of the impact of farm fragmentation on climate and environment is outside the scope of the present study.

  2. Arla is the largest cooperative-based dairy company in Denmark and Sweden, and as the study by Jansik et al. (2014) shows, the company has to adjust its procurement prices to those prevailing in Germany, the Netherlands, and the UK since the company has thousands of farm members in those countries. On the other hand, Valio sets procurement prices according to the interest of Finnish farmers since it has members only in Finland.

  3. Note that in June 2014 the Finnish Market Court (FMC) dismissed Valio’s appeal against the FCA decision.

  4. The company launched its new milk brands (i.e. Arla Maitoa Suomesta which means “milk for Finland”, Alra Maitoa Hämeestä “milk from Häme” and Alra Maitoa Uudenmaalta “milk from Uusima”), emphasizing not only the Finnish origin of the milk but also the Finnish county from which the milk was produced.

  5. Reports in the media indicated that retail prices for milk and dairy products decreased by 40%, while farm gate milk prices dropped by 6c/l.

  6. The “direction” of the response is also termed “sign”.

  7. It is worth to state that the NARDL model represents an improvement over the threshold cointegration framework developed by Enders and Siklos (2001) because the NARDL model accounts for short- and long-run asymmetries simultaneously, while the Enders and Siklos (2001) approach relaxes the hypothesis of linear cointegration in favour of nonlinear cointegration and accounts only for the long-run asymmetry.

  8. According to Meyer and von Cramon-Taubadel (2004), asymmetric price transmission caused by the potential presence of adjustment costs will not lead to welfare effects that might provide justification for policy intervention. For this reason, companies accused of asymmetric price transmission due to the possession of market power often claim that adjustment costs are responsible for the presence of asymmetric price transmission.

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Authors and Affiliations

  1. Department of Business Administration of Food and Agricultural Enterprises, University of Patras, G. Seferi 2, 30100, Agrinio, Greece

    Anthony N. Rezitis

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  1. Anthony N. Rezitis
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Correspondence to Anthony N. Rezitis.

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The author likes to express his gratitude to the Editor of this Journal as well as to two anonymous referees for their constructive and valuable comments on an earlier draft of this paper. Needless to say, the usual disclaimer applies.

Appendix

Appendix

See Figs. 9, 10, 11, 12, 13, 14, 15 and 16.

Fig. 9
figure 9

Cumulative sum (CUSUM) test on NARDL non-fat milk model with SR symmetry imposed

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Fig. 10
figure 10

Cumulative sum (CUSUM) test on NARDL low-fat model with SR symmetry imposed

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Fig. 11
figure 11

Cumulative sum (CUSUM) test on NARDL blue cheese model with SR symmetry imposed

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Fig. 12
figure 12

Cumulative sum (CUSUM) test on NARDL Emmental cheese model with SR symmetry imposed

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Fig. 13
figure 13

Cumulative sum (CUSUM) test on NARDL Edam cheese model with LR symmetry imposed

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Fig. 14
figure 14

Cumulative sum (CUSUM) test on NARDL processed cheese model

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Fig. 15
figure 15

Cumulative sum (CUSUM) test on NARDL cottage cheese model

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Fig. 16
figure 16

Cumulative sum (CUSUM) test on NARDL yoghurt model

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Rezitis, A.N. Investigating price transmission in the Finnish dairy sector: an asymmetric NARDL approach. Empir Econ 57, 861–900 (2019). https://doi.org/10.1007/s00181-018-1482-z

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