Using the Logistic Functional Form for Modelling International Price Transmission in Net Trade Simulation Models

Various reasons including cif/fob spread, differing political price protection depending on the net trade situation, and domestic transportation cost contribute to situations in which domestic prices are different in an exporting compared to an importing situation. Net trade models that take these differences into account must somehow deal with the problem of products that are not exported at the export-based price, because it is too low, and are not imported at the import-based price, because it is too high. In such a case, the equilibrium price lies somewhere between the export- and the import-based price. This paper presents the application of the Logistic functional form for depicting price transmission from international to domestic prices in the net trade model ESIM. On the basis of the EU beef market it is shown that the Logit functional form is a flexible tool for the formulation of price transmission in net trade models. A smooth transition can be depicted from an import to an export based price. Also the effects of TRQs and quantity restricted export subsidies can be included. Preliminary results of the application of this approach to the EU beef market show that each, the abolishment of ES as well as the doubling of preferential market access for beef, may result in a price decline on the EU market of 7-9% and the EU would become a net importer of beef under both options. Combined, the price decline may amount 15% and net exports may amount 15% of EU domestic use.