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Abstract

Economists have proposed a number of plausible explanations for observed price transmission asymmetries in commodity markets. The reasons may be broadly classified as theories of cooperative oligopoly, search costs in locally imperfect markets, or asymmetric costs of inventory adjustment. Unfortunately, the econometric methods commonly used in such studies do not allow us to distinguish pricing behavior under the competing theories. In this paper, we argue that the alternatives may be distinguished by firm responses to high and low frequency (rapid or slow) price cycles. We use Engle's band spectrum regression to examine the symmetry of price transmission for price cycles of different frequencies. The spectral analysis results indicate that changes in wholesale pork prices are asymmetrically transmitted to retail prices in relatively low frequency cycles, which is not consistent with the search cost theory. Conversely, wholesale pork prices asymmetrically respond to changes in farm prices at all frequencies, which is not consistent with the search cost or inventory management theories.

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