Retail pricing behavior for agricultural products with implications for farmer welfare

Rising concentration and consolidation of sales among large supermarket chains in the United States in the past decades has accelerated both policy concern and debate among economists. Prior work on food retailers has emphasized their market power over consumers and to a lesser extent their market power over farmers, but essentially no work has made the link between their pricing methods and farmer welfare. This 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.;The typical model of retail pricing for agricultural products assumes retailers set price equal to the farm price plus a certain markup. However, observations from the grocery retailing market indicate a large degree of price dispersion and demonstrate that retailers adopt diversified pricing strategies. By studying the pricing behaviors for six major agricultural commodities sold at fifteen retail chains across the United States, this study provides extensive evidence of price dispersion in the grocery retail market. In particular, I document three alternative pricing patterns in the grocery retailing market in addition to markup pricing: fixed (constant) pricing, periodic sale, and high-low pricing. Retail prices under these alternative-pricing strategies adjust only partially to supply shocks, and do not closely reflect the price variations at the farm gate.;A vertical structure model is constructed to reflect the relationship between retailers and producers in a prototypical fresh produce market. Using retailers' markup pricing strategy as the baseline case, I parameterize the model and carry out a series of simulations under different pricing regimes to evaluate the welfare implications for producers of the diversified pricing strategies that retailers utilize in practice.;The simulation results show that alternative pricing strategies and the resulting retail price dispersion tends to reduce farm income and exacerbate farm price volatility relative to markup pricing. However, harvest cost places a lower bound constraint on the farm price, since no product will be harvested at price below the marginal harvest cost. If harvest cost is sufficiently large, which is likely to be true especially for perishable products, then increased farm price volatility induced by retailers' alternative pricing strategies may result in higher farm income, compared to markup pricing case.;Furthermore, by taking farmers' risk attitude into account, this study shows that retailers' alternative pricing strategies increase farmers' income risk, which tends to reduce the expected utility of risk-averse farmers. The overall welfare effects to producers resulting from diversified retailer pricing strategies depend on several key factors: the level of farm supply shocks, farm demand elasticity, unit harvest cost, and farmers' risk attitude.