Asymmetric Price Transmission in the Israeli Citrus Export Sector in the Aftermath of Liberalization

The Israeli citrus export sector was liberalized in 1991 with the aim to increase citrus growers'income and to improve overall efficiency of the international citrus marketing channel. However,the former government export monopoly's activities were mainly taken over by four largecompanies accounting for over 90% of total Israeli citrus market exports. In addition, citrusexporters maintained the monopoly's consignment system, substantially limiting transparency onhow the grower price is determined. This lead the government to intervene in the newly liberalizedmarket by implementing a minimum price agreement in the 1994/95 season to protect citrusgrowers against exporters' abuse of market power.In this paper we analyze whether market power was exerted by exporting companies over citrusgrowers in the form of asymmetric price transmission. Our study is unique in that it investigatesvertical price transmission across international borders, i.e. in the context of Israeli grapefruitexports to France. We explicitly account for possible changes in exporters' pricing behaviour in thepost-liberalization period.We apply an error correction model (ECM) to disaggregated firm-level Israeli grower price andFrench import price data. An ECM is estimated individually for each of the major exportingcompanies within a seemingly unrelated regression (SUR) framework. We find asymmetric pricetransmission in the first years after liberalisation, but symmetry in the second half of the 1990s. Ourresults indicate that growers' losses due to asymmetry amounted to as much as 2.5% of their totalrevenues. Our results suggest that liberalization improved the efficiency of the Israeli citrusinternational marketing channel, but that this took time and was probably accelerated bygovernment intervention.