PRICE TRANSMISSION: THE INTERACTIONBETWEEN FIRM BEHAVIOUR AND RETURNS TOSCALE

Much of the recent literature on price transmission focuses on whether price changesoccurring at one stage of the food sector are fully transmitted in changes to retail prices. Therole of market structure in determining the degree of price transmission is often emphasised,the presumption being that if downstream markets are imperfectly competitive pricetransmission will be less than complete. However, an important feature of market structure,often by-passed in empirical studies of market power is the nature of the underlying costconditions. In this paper, it is shown that if the industry is characterised by non-constantmarginal costs, there can be a significant impact on price transmission in the agro-foodsector. Specifically, it is shown that the nature of the returns to scale that characterises thefood industry cost function will either increase or decrease the degree of price transmission...