THE IMPACT OF FOOD SCARES ON PRICE TRANSMISSION IN INTER-RELATED MARKETS

This paper is concerned with the impact of the BSE crisis in the UK and focuses on the spread between retail and farm prices. From a theoretical perspective we show that if market power has an effect on the spread between retail and farm prices then this determines the specification of the co-integrating relationship. We also account for different aspects of the BSE crisis including the shift in the retail demand function as well as the shift in the farm supply function due to the mutually opposing effects of a worldwide export ban and the cull of infected and older beef cattle. The empirical results suggest that the impact of the BSE crisis on farm prices to be more than double that of retail prices, the main cause of the change in the retail-farm price spread being the shift in the consumer demand function. Our calculations suggest that the numbers removed via the cull offset the loss of exports, so that the net effect of the BSE crisis on prices is due to the depressed stated of demand. In addition, the results also suggest that we cannot reject the importance of market power in the UK food sector in influencing the retail-farm spread following the outbreak of BSE. This result corroborates the findings of the UK's competition authority, whose recent report found supermarkets undertaking certain practices that were judged to be against the public interest.