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Most policy analysis in agricultural economics typically ignores the existence of the food processing, distribution and retail sectors. If these sectors were perfectly competitive, their exclusion would not significantly affect the welfare changes following policy reform. However, since these sectors are typically imperfectly competitive, excluding them does matter. In a theoretical model of a vertically-related food market, this paper shows that welfare changes of policy reform are lower than the 'perfectly competitive' case since there is imperfect pass-through of price changes occurring at the farm-gate. The model shows that the pass-through effects depend on the nature of strategic interaction in the food market, and the degree of product differentiation of the final food products. The theoretical model is applied to the recently proposed changes to the European Community (EC) banana regime, a sector characterized by the existence of a few large firms.


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