Price Dynamics in a Vertical Sector: The Case of Butter
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We develop a reduced-form model of price transmission in a vertical
sector, allowing for refined asymmetric, contemporaneous and lagged, own and
cross price effects. The model is used to analyze wholesale-retail price dynamics
in the US butter market. The analysis provides strong evidence of asymmetric
price transmissions. It documents the complex nature of nonlinear price dynamics
in a vertical sector and its implications for the distribution of future prices. It finds
evidence that the asymmetric response to shocks is stronger in the short run for
retail prices, and in the longer run for wholesale prices.