Steve McCorristonUniversity of Exeter

DG Agri/JRC Workshop on ‘Market Transparency’Brussels, 30th-31st May, 2018

What does the economic theory tells us aboutmarket price transparency and transmission?

Context for the presentation: the ‘demand’ and‘supply’ of market transparency

Theoretical issues: 4 themes

Related empirical evidence

Concluding observations

“We need to ensure that small farmers and ranchers have afull and fair opportunity to compete in an increasinglyconcentrated agricultural economy. This new mandatoryreporting program will help producers by making the marketmore transparent, giving them better information about whatis happening in the marketplace”

Glickman, US Secretary State for Agriculture, 2000

“Well functioning markets require an adequate flow ofinformation between consumers, buyers and sellers at allstages of the supply chain. [There are]… a number ofconcerns about the level of transparency along the foodsupply chain. While information on farm gate prices isfreely available, there is much less information on pricesapplied at downstream stages of the groceries supplychain-in particular in the manufacturing, processing andfood service sectors. This contributes to the weak positionof farmers and other small suppliers in the chain andhampers their ability to take well-informed production andmarketing decisions”

Defra, February 2018.

OECD

ConsumersRetailingFood Processing Agriculture

Price Transmission(Extent, nature, reasons,

differences)

Where Do Price Transparency Issues Arise?

Price Formation: How are prices linked between stages?

How do retailers compete?

Vertical restraints, vertical coordination (PLs)

How do processors compete?

Pricing, contracts ofdifferent forms, UTPs

ConsumersRetailingFood Processing Agriculture

Price Transmission(Extent, nature, reasons,

differences)

Where Do Price Transparency Issues Arise?

Price Dispersion

Price Formation: How are prices linked between stages?

How do retailers compete?

Vertical restraints, vertical coordination (PLs)

How do processors compete?

Pricing, contracts ofdifferent forms, UTPs

‘Low’ prices, price dispersionand terms of contracts

Transparency: independent, third party provision ofprice information

Food Price Monitoring (e.g. EU)

Food Price Observatories (e.g. France and Spain)

Price Comparison web-sites (e.g. Italy)

Mandatory Price reporting (e.g. US meat andlivestock sector, Israel Food Act)

Prices of cereals and cereal-based products, EU-27

“The European Food Prices Monitoring Tool is aEuropean Commission initiative to increasetransparency in the food supply chain. This willencourage competition throughout the agro-foodsupply chain and improve its resilience to pricevolatility”

Analyse pricing structures (covering 26 products atfarmer, wholesale and retail levels) and the mainfactors determining prices

Weekly monitoring of price formation and produceweekly reports

More in-depth studies of supply chains includingfactors that determine prices and explainimbalances in bargaining power throughout thesupply chain

Foster dialogue and collaboration amongstakeholders at all stages of the food chain withformal meetings and seminars and conferences

Source: MARM

In principle, price comparison websites can lowersearch costs; some studies on single products(books, airline tickets etc) did show that pricecomparisons websites did lower prices

For food markets, price comparison websites areincreasingly available

www.mysupermarket.com In UK, for example,compares baskets of food items across 15supermarket chains

US Livestock Mandatory Reporting Act, 1999: meatpackers to report detailed price and quantityinformation on transactions in the meat sector

Aim to provide “timely, accurate, and reliablemarket information, facilitating more informedmarketing decisions; and promoting competition inthe industry”

Improving transparency has been advocated bymany competition authorities

And mandatory price reporting has been applied ina range of markets across many countries coveringsectors such as health, fuel, cement (otherexamples)

Return to some of this later

Role of information has a long track record ineconomics and is a main theme of recenttheoretical developments in macro through to IO

There are many dimensions to this but keyquestion is whether provision of public informationis socially desirable from a welfare perspective

Headline: the provision of public information doesnot necessarily increase welfare

Also report on some recent empirical research

What is the information structure?

Transparency, competition and coordination

Transparency and upstream linkages

Transparency and the extent and speed of price changes

Highlight these issues with reference to 4 themes

Theme1: Macro-perspectives

See, for example, Shin and Morris (AER, 2002).Bothprivate agents and ‘public’ sources could haveaccess to information

Private information is/may be imperfect andacquiring information may be costly for privateagents

Simple way of characterising the role of socialinformation is that the variance of expected pricesis reduced with the supply of information; publicinformation improves the precision of the signal

But there is a trade-off in moving between publicand private information

Public information is only socially valuable ifprivate agents have imprecise information

If private agents already have relatively preciseinformation, public information is harmful insofaras the private agents will over-react to the publicsignal.

This is a feature of information in macroeconomicsand has been used to explain a variety of issuessuch as herd behaviour, bubbles, credit crises etc

In essence, social information may lead to ‘toomuch’ coordination leading to potentiallyundesirable outcomes

Theme 2: Transparency, Competition andCoordination

Firms have private information which can varyacross firms

Competition is limited and information plays a rolein determining the equilibrium

A characterisation of this is that when consumersface costly search, price dispersion can arise

The provision of public information in this contexthas two offsetting effects

Public information can lower search costs: bylowering search costs, markets become morecompetitive (Stiglitz, 1989)

Public information can lead to coordination acrossfirms; markets become less competitive

The mechanisms suggest no clear cut answer thatmeans transparency is desirable.

Which dominates?

Consider the mechanisms (drawing on Mollgaardand Overgaard, 2000)

Two central issues to consider: there is a staticeffect and a dynamic effect

In the static dimension, transparency is a ‘good’thing

In the dynamic context, the effect of transparencyis less obvious.

Static Effect

Demand function facing each firm:

𝑞𝑖=1 − 𝑝𝑖+𝑡𝑟

1−𝑡𝑟(𝑝𝑖 − 𝑝𝑗)

𝑡𝑟 is a measure of transparency

Profits for the ith firm are:

𝜋𝑖 =1−𝑡𝑟

(2−𝑡𝑟)2

An increase in transparency (𝑡𝑟->1), brings prices‘closer together’ and reduces profits

i.e. markets are more competitive

Dynamic Effect: there are several components here

…firms can collude-this is not dependent on thelevel of transparency

…firms can deviate from the collusive outcome andearn ‘deviation’ profits

…firms may be caught deviating and transparencycan shorten the time of benefiting from cheating;

…and be punished; the punishment profits is alsodependent on the level of transparency

Luca (2017) provides a useful summary of thesetrade offs (with some differences from the above)

Some consumers are informed and some ill-informed

There is a spatial aspect to competition: the loweris the cost of travel, competition is more intense

When there is the provision of public information,more consumers are better informed but itincreases the incentives of firms to coordinate

The trade offs are summarised in this expression

Ø is the proportion of informed consumerst is the cost of travelz is the time before being detected from deviation

The trade offs are highlighted below

Theme 3: Transparency and Countervailing Power

Some firms are informed and others are notinformed

Hviid and Mollgaard (2006) investigate this issue inthe context of countervailing power

In the context of some firms being informed andothers not, this influences bargaining over contractprices: contract terms differ between these twofirms

With more public information, there is an incentivefor (ill-informed) firms to take a tougher stance innegotiations

Transparency may not necessarily improve welfare

Theme 4: Transparency and firm decisions underuncertainty

Azzam (2003) explores the issue of publicinformation in the context of mandatory disclosureof livestock contracts in the US

Transparency relates to reducing the variance oflivestock prices with mandatory reportingcompared with the voluntary case

As background, firms are also concerned withuncertainty; when the number of firms is limited,uncertainty can affect the strategic decisions ofcompeting firms (they produce less)

The set-up is a vertical marketing chain with meatpackers (split into a dominant and fringe group)and feeders

For a packer in the dominant group, profits aregiven by:

𝜋𝑙=(𝑝 − 𝑤)𝑞𝑙-𝐶𝑙-𝐾𝑙(𝐼𝑙)-𝑓𝑙 The packer maximises the expected utility of

profits:

𝑉𝑙=𝐸[𝑈(𝜋𝑙)]=U[𝜋𝑙 −1

2𝜌𝑙 (𝑞𝑙σ

2)]

What is important here is that the variance matters,the attitude to risk aversion and the cost ofproviding the mandatory information

The effect of transparency reduces to:

-the marginal cost of reporting information

-the effect of information pooling across packers

-the effect on output decisions

The latter two effects are assumed to dominate

Intuitively, since risk aversion features in thedecisions of packers, increasing transparencyreduces the variance and therefore increases thederived demand for output from the upstream(feeder) suppliers

The impact of providing more transparency isambiguous

The issue of transparency is not just ‘more isbetter’

This ambiguity comes through in a variety ofcontexts

Is there evidence to provide some insights one wayor another?

Recent work on mandatory disclosure of prices

Luca (2017): gasoline price in Chile

Did mandatory disclosure increase coordination orcompetition?

He shows that margins for gas stations increasedsince they could now monitor what other gasstations were charging

The increase in margins increased more wheresearch costs were still high for consumers

Rossi and Chintaganuta (2017): gasoline prices in Italy

They show that after mandatory disclosure (due to motorway signs), prices decreased (by around 1% per litre)

But price dispersion still persisted

Retail fuel prices in Germany; overseen by theGerman competition authority, gas stations have toreport fuel and diesel prices in ‘real’ time.

Purpose: consumers gain information and react toprice changes more easily; data could also detectabuse of power

Dewenter et al.(2016) find that gasoline pricesincreased by between 1.2-3 cents per litre and by 2cents per litre for diesel

Albaek et al. (1997): cement prices in Denmark

Danish competition commission mandated thattransaction prices for cement should be published

Prices increased by between by 15-20% that couldnot be accounted for by other factors

Disclosure therefore weakened competitionbetween the few firms in the Danish cement market

Cai et al. (2011): focus on mandatory disclosure inUS livestock meat sector

Allowing for both oligopoly and oligopsony power,they show that rents from oligopsony increasedfollowing mandatory disclosure

Do not explicitly control for other factors butevidence is consistent with the anti-competitiveeffects of transparency outlined above

Ater and Rigbi (2017): price disclosure in the Israelisupermarket industry

Following the Food Act in 2014, supermarkets haveto publish and update prices online and updatecontinuously

Price comparison websites could also publishprices across supermarkets

The advantage of this study over others onmandatory disclosure is that it covers all productssold in supermarkets not single sector prices (e.g.gasoline)

Main insight: Prices and price dispersion bothfell following price disclosure

Gordonichenko and Talavera (2016):

Investigates price dynamics of durable goods thatare available online

Standard observation from the macro literature isthat prices can be sticky, there is price dispersionand price transmission slow and incomplete

Hypothesis is that the availability of prices on pricecomparison websites should impact on these pricedynamics

Their evidence shows this to be the case

Specifically:

Prices change more frequently/duration of price spells is shorter

Size of price changes is smaller

Price transmission is higher

Speed of adjustment is faster

Both theory and emerging evidence suggests thisissue is not clear-cut

It is a challenge to standard assumptions about thebenefits that transparency would bring…there arepotential downsides associated with greatertransparency

Even if there are gains, they should/could bequantified?

There is an important research agenda hereparticularly now that data from different sources isincreasingly available

More speculatively:

Processing sector is more of a black box

Question about the aggregation is important: if transparency is to beprovided, what is the best way (the higher the aggregation, the lessinformative: more disaggregation makes coordination easier)?

What is the relevant market? (If data is at a national level, is thatinformative for regional markets?)

What is the frequency of the data necessary to inform medium to longerterm decisions?

How is the information used?

Does price transparency necessarily reflect underlying developments inthe downstream food sector (technology, mergers etc)?