What’s Asymmetric Price Transmission?

Dr. Daniel Lass of the Department of Resource Economics at the University of Massachusetts Amherst gathered monthly retail price data for the Boston and Hartford markets. He then estimated models using econometrics to try and predict retail price changes given changes in the farm price of milk and price indexes for processing/marketing inputs such as labor, packaging, energy and transportation. Models were estimated for two periods: the Pre-Compact period, January 1990 through June 1997, and the Compact period, July 1997 through September 2001.

Once he estimated the models and determined how each factor affects retail prices, he simulated impacts of equal increases and decreases of the farm price. It takes three months for farm price increases to work their way through the relationship with retail prices. If there is no asymmetric transmission of farm price increases and decreases, then retail prices will return to exactly the same level if other factors (marketing costs) are held constant.

The graph shows what Lass found for the two different periods. The retail price of milk was initially set at $2.50 per gallon. Farm price was then increased by $0.10 per gallon in month 1. By month 4, all the effects of the $0.10 increase have worked their way through to the retail price, which has risen to $2.62 per gallon, a 120 percent transmission of the farm price increase for the Compact period. In month 4, farm price is then reduced by $0.10. The retail price drops and by month 7 all effects have worked their way through to the retail price. But, retail prices only fall to $2.57 per gallon, a 50 percent transmission of the farm price decrease. The end result is that retail prices end up about $0.07 higher pre gallon after equal increases and decreases in the farm price. That’s what economists call asymmetric price transmission. For the earlier “Pre-Compact” period the end result was the same, but short-run transmission rates were much lower, about 90 percent for the farm price increase, and about 20 percent for the farm price decrease.