Price transmission in the South African food market

Abstract

This study investigated asymmetric price transmission between producer and retail markets in South Africa. The authors applied the traditional (Engle-Granger) and the standardised (Enders & Siklos) Dickey-Fuller procedures to test for cointegration and asymmetry in price transmission. Four competing models, namely the Engle-Granger (EG), Threshold Autoregressive (TAR), Momentum Threshold Autoregressive (M-TAR), and Momentum Consistent Threshold Autoregressive (MC-TAR) models, were fitted. Following the application of a standard model selection criterion, the MC-TAR was chosen as the best. The following results were obtained: price transmission between producer and retail prices is asymmetric; the direction of causation runs from producer to retail prices; retailers correct about 2 per cent of the negative and 4 per cent of positive disequilibria every month; and it takes fewer months for negative shocks than positive shocks to be eliminated. In general, the results suggest that retailers respond more quickly to shocks that stretch their market margin than to those that squeeze it. This is typical of positive asymmetric price transmission. We attribute this to the anticompetitive behaviour that characterises the food market chain.