Farmgate versus retail prices and supermarkets’ pricing decisions: an integrated approach
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Food and agricultural commodity prices exhibit several empirical regularities, including asymmetric price transmission, higher farmgate price volatility, and relatively low correlation between farmgate and retail prices. Supermarket pricing behaviors include promotions, loss-leaders, and unadvertised sales. Existing explanations tend to focus on either the behavior of farmgate and retail prices or on supermarkets’ pricing decisions. We develop a model that integrates them. It has three core assumptions: consumers are basket shoppers, each consumer has a preferred store, and consumers cannot observe the full set of prices freely before entering the store. The phenomena listed above are all outcomes of the model.