Asymmetric Price Transmission: A Survey
Jochen Meyer
Stephan von Cramon-Taubadel
Paper prepared for presentation at the X
th
EAAE Congress
‘Exploring Diversity in the European Agri-Food System’,
Zaragoza (Spain), 28-31 August 2002
Copyright 2002 by Jochen Meyer and Stephan von Cramon-Taubadel. All rights
reserved. Readers may make verbatim copies of this document for non-commercial
purposes by any means, provided that this copyright notice appears on all such copies.
Page 1
Asymmetric Price Transmission: A Survey
1. Introduction
Price theory is one of the foundations of neo-classical economics. Within this
paradigm, flexible prices are responsible for efficient resource allocation and price
transmission integrates markets vertically and horizontally. Economists who study market
efficiency therefore investigate price transmission processes. Of special interest are those
processes that are referred to as asymmetric. In an extensive study, Peltzman (2000) finds
asymmetric price transmission to be more the rule than the exception. This leads him to draw
the strong conclusion that the standard economic theory of markets is wrong, because
asymmetric price adjustment is not its general implication (Peltzman 2000, pp. 493). On the
other hand, authors such as Gauthier & Zapata (2001) and v. Cramon-Taubadel & Meyer
(2000) recomment caution due to methodological problems associated with empirical tests for
asymmetry. They point out that standard tests (such as that applied by Peltzman) can lead to
excessive rejection of the null hypothesis of symmetry under common conditions.
Clearly, the issue of asymmetric price transmission is of great importance. First
because, as Peltzman point out, it may point to large gaps in economic theory. Second,
because asymmetry can have important implications for policy. Since it is commonly assumed
that asymmetric price transmission is caused by market power, empirical evidence of
asymmetry is often claimed to justify intervention. Given these possible ramifications, it is
obviously imperative that economists think very carefully about the theories they use to
explain and the tests they use to measure asymmetric price transmission.
In this paper we survey the literature on asymmetric price transmission. This literature
contains a substantial share of publications by agricultural economists. After classifying the
different types of asymmetric price transmission in section 2, we describe the explanations for
asymmetric price transmission that have been proposed in section 3. In section 4 we focus on
the econometric techniques used to quantify asymmetry. Section 5 concludes with a
discussion of outstanding methodological problems and suggestions for future research. Our
main conclusion is that the existing literature is far from being unified or conclusive, and that
a great deal of work remains to be done. A wide variety of often conflicting theories of and
empirical tests for asymmetry co-exist in the literature. Furthermore, existing tests are not
discerning in the sense that they as a rule to do not make it possible to choose between
Page 2
competing explanations for asymmetry on the basis of empirical results. Therefore, after more
than three decades of work, a considerable need for further research remains, and it would
appear premature to draw far reaching conclusions for theory and policy on the basis of work
to date.
2. Types of asymmetry
Two basic types of asymmetry are depicted in diagram 1 in the context of price
transmission, where a price (p
out
) is assumed to depend on another price (p
in
) that either
increases or decreases at a specific point in time.
1
In diagram 1a, the magnitude of the
response by p
out
to a change in p
in
depends on the direction of this change. In diagram 1b, the
speed of the response by p
out
depends on the direction of the change in p
in
. Clearly,
combinations of these two fundamental
asymmetries are conceiveable. In diagram 2,
an increase in
in
p takes two periods (t
1
and t
2
)
to be fully transmitted to
out
p. The
corresponding transmission of a decrease in
in
p is asymmetric with respect to both speed
and magnitude because it requires three periods (t
1
, t
2
and t
3
) and is not full.
Price transmission, and thus asymmetry, can be vertical or spatial (horizontal). As an
example of vertical asymmetry, farmers and consumers often complain that increases in farm
1
Asymmetry is closely related to the issue of price rigidity or ‘stickiness’ (Means, 1935). Blinder et al. (1998)
offer an extensive overview of different explanations for rigidity. Note as well, that asymmetry is not only of
interest with regard to price transmission. Traill et al. (1978) and Young (1980) study asymmetric supply
responses and Farrel (1952) studies asymmetric demand functions while vande Kamp & Kaiser (1999) and
Granger & Teräsvirta (1993) consider asymmetric advertising-demand response functions and business cycles
respectively.
p
out
p
in
p
t
t
1+n
t
1
Dia. 1b: asymmetric price transmission (speed)
p
out
p
in
p
t
Dia. 1a: asymmetric price transmission (magnitude)
p
out
p
in
p
t
t
1+n
t
1
Dia. 1b: asymmetric price transmission (speed)
p
out
p
in
p
t
Dia. 1a: asymmetric price transmission (magnitude)
p
out
p
in
p
t
Dia. 2: asym. price transmission (combination)
t
3
t
1
t
2
p
out
p
in
p
t
Dia. 2: asym. price transmission (combination)
t
3
t
1
t
2
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prices are more fully and rapidly transmitted to the wholesale and retail levels than similar
decreases in farm prices. An example of spatial asymmetry would be a rise in the US wheat
price causing a more pronounced reaction in Canadian wheat prices than a corresponding
reduction of the same magnitude.
Following a convention employed by Peltzman, asymmetry can be either positive or negative.
If
out
p reacts more fully or rapidly to an increase in
in
p than to a decrease, the asymmetry is
termed ‘positive’ (diagram 3a). Correspondingly, ‘negative’ asymmetry denotes a situation in
which
out
p reacts more fully or rapidly to a decrease in
in
p than to an increase (diagram 3b).
This convention can be misleading if interpreted in a normative fashion; if
in
p and
out
p
represent farm and retail prices for a commodity, respectively, ‘negative’ asymmetry is ‘good’
for the consumer, while ‘positive’ asymmetry is ‘bad’.
3. What causes asymmetric price transmission?
Two main causes of asymmetric price transmission dominate the literature: the
presence of non-competitive markets and existence of adjustment costs. Other causes such as
political intervention, asymmetric information and inventory management are also reported.
3.1 Market power
The vast majority of publications on the topic of asymmetric price transmission
includes considerations of non-competitive market structures. Especially in agriculture,
farmers at the beginning and consumers at the end of a marketing chain often believe that less
than perfect competition in the processing and retailing sectors allows middlemen to make use
of market power.
2
This market power is often expected to lead to positive asymmetry. Hence,
2
See, for example, Kinnucan & Forker (1987); Miller & Hayenga (2001).
p
out
p
in
p
t
p
out
p
in
p
t
Dia. 3a: positive asym. price transmission Dia. 3b: negative asym. price transmission
p
out
p
in
p
t
p
out
p
in
p
t
Dia. 3a: positive asym. price transmission Dia. 3b: negative asym. price transmission
Page 4
it is expected that increases in input prices which reduce marketing margins will be
transmitted faster and more completely than decreases as a result of market power.
3
In most
cases, however, this conjecture is presented without rigourous theoretical underpinning.
Indeed, some authors such as Ward (1982) suggest that market power can lead to negative
asymmetry if oligopolists are reluctant to risk losing market share by increasing prices. In a
similar vein Bailey & Brorsen (1989) consider firms facing a kinked demand curve with the
perceived kink either convex or concave to the origin. If a firm believes that no competitor
will match a price increase but all will match a price cut, positive asymmetry will result.
Otherwise if the firm conjectures that all firms will match an increase but none will match a
price cut, negative asymmetry will result. Hence it is not clear
a priori whether market power
will lead to positive or negative asymmetry (Bailey & Brorsen 1989, pp. 247).
Several studies of market power and asymmetry that focus on specific markets deserve
mention. Borenstein et al. (1997) assume that downward stickyness of retail prices in an
oligopolistic environment will lead to positive asymmetry. Similar to a trigger price model
they assume that in the presence of imperfect information about the prices charged by other
firms, the old output price, after a change in the input price, offers a natural focal point. While
cost increases will lead to an immediate increase in output prices, because retail margins are
squeezed, cost decreases won’t lead to immediate output price decreases because firms will
maintain prices above the competitive level as long as their sales remain above a threshold
level (Borenstein et al. 1997 pp. 324f). Related to this, Balke et al. (1998) and Brown & Yücel
(2000) also consider oligopolistic firms that engaged in an unspoken collusion to maintain
higher profits. Because of the importance of reputation under such conditions, asymmetric
price adjustment can arise. For example, in the presence of input price increases all firms will
quickly adjust output prices upwards to signal their competitors that collusion will be
maintained. However, if input prices fall, firms will wait to lower output prices to avoid
signaling an undermining of the unspoken agreement. In a paper on imperfect information in a
competitive duopoly, Damania & Yang (1998) stress potential punishment as a cause of
asymmetry. In their model demand is assumed to fluctuate randomly between high and low
states. Punishment occurs if a firm believes that the competitor is undermining a collusive
price. Given the possibility of punishment, firms facing low demand eschew a price reduction,
while prices can be increased without fear of punishment in the high demand situation.
3
See also Boyd & Brorsen (1988); Karrenbrock (1991); Appel (1992); Griffith & Piggott (1994); Mohanty,
Peterson & Kruse (1995)
