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Abstract
The typical model of retail pricing for produce products assumes retailers set price equal to the
farm price plus a certain markup. However, observations from scanner data indicate a large
degree of price dispersion in the grocery retailing market. In addition to markup pricing
behavior, we document three alternative leading pricing patterns: fixed (constant) pricing,
periodic sale, and high-low pricing. Retail price variations under these alternative pricing
regimes in general have little correlation with the farm price.
How do retailers’ alternative pricing behaviors affect farmers’ welfare? Using markup pricing
as the baseline case, we parameterize the model to reflect a prototypical fresh produce market
and carry out a series of simulations under different pricing regimes. Our study shows that if
harvest cost is sufficiently low, retail prices adjusting only partially, or not at all, to supply
shocks tends to diminish farm income and exacerbate farm price volatility relative to the
baseline case. However, we also find that if harvest cost is sufficiently large and the harvest-cost
constraint places a lower bound on the farm price, increased farm price volatility induced by
retailers’ alternative pricing strategies may result in higher farm income, compared to markup
pricing. Our study is the first to evaluate the welfare implications for producers of the diversified
pricing strategies that retailers utilize in practice and the resulting attenuation of the
relationship between prices at retail and at the farm gate.