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Price transmission in cross boundary supply chains

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Abstract

The extent to which demand and supply shocks are transmitted in the supply chain is an important topic. As many supply chains cross international borders exchange rate pass through is an important element in this context. In this paper a multivariate system that allow us to test different hypothesis with respect to the supply chain is specified. Our empirical analysis includes tests of whether there is a link between the different stages in the supply chain, whether the exchange rate pass through is complete and whether price signals are fully transmitted. Different exogeneity assumptions are testable hypothesis, and one can avoid the simultaneity problem associated with the common single equation specifications. Moreover, one can also test whether the exchange rate is determined outside the system, as well as testing for price leadership. An application is provided for the supply chain for cod between Norway and Portugal.

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Notes

  1. When analyzing only one link in the chain, as is common in analysis of e.g. import demand, data availability also often creates problems. See e.g. Winters (1984) for a powerful critique of the commonly used Armington approach to estimation of import demand equations.

  2. Richardson (1978) basically modifies the relationship that is used when testing for market integration domestically by also taking account of the exchange rate. See Doane and Spulber (1994) for a good review of approaches used when testing for market integration.

  3. This is true both when the data is treated as stationary as e.g. in Kinnucan and Forker (1987) and when the data is treated as nonstationary but cointegrated as in Gjølberg and Johnsen (1999).

  4. Spain, Italy and France also import substantial quantities of wet salted cod.

  5. However, there are also exceptions including Kinnucan and Forker (1987) where the prices of different marketing costs such as wages are included as variables on the right hand side.

  6. Please note that if we rather normalize on the export price, the sign on the exchange rate parameter will be reversed.

  7. If β = γ, one can write βp + γe as β(p + e) = β ln(P*E).

  8. A discussion of the simultaneity issue in the similar case where the focus is on prices for the same good in different markets can be found in Richardson (1978) and Goodwin et al. (1990).

  9. The system will be simultaneous if both prices respond to demand and supply shocks. The higher level price will be exogenous if it does not respond to supply shocks, while the lower level price will be exogenous if it does not respond to demand shocks.

  10. One can also model several stages in the supply chain in the same system (Goodwin and Holt 1999). However, we avoid this since the interpretation when also an exchange rate variable is included is much harder.

  11. The main difference between the two product forms is that for dried cod, the raw fish is dried directly, while for dried salted cod, the fish is first salted and then, possibly after some time, dried.

  12. In some markets like Spain, salted cod has taken over the market from dried product forms, in some markets like Italy both types of products are consumed, while in other markets like Portugal, dried product forms are preferred.

  13. This share is substantially higher in Norway then for the other main cod suppliers (Iceland, Canada and Russia).

  14. The foundation of dried salted cod consumption in Portugal dates back to the end of the 15th century, when the Portuguese discoveries were at the peak. The cod was caught in the banks of Terra Nova (Grand and Georges Banks), where the fish was salted on board, and then dried when it was landed in Portugal.

  15. The lag length in the ADF tests is chosen high enough to make the residuals white noise. The reported test statistics are with six lags.

  16. That price signals are fully transmitted between two levels in the chain implies that the price transmission elasticity is one, as is indicated by our test.

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Acknowledgements

The authors wish to acknowledge the financial support of the European Commission (FAIR contract no. CT99-01346) and the Norwegian Research Council. The views expressed herein are those of the authors and not to be attributed to the European Commission or the Norwegian Research Council.

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Authors and Affiliations

  1. University of Stavanger, Stavanger, 4036, Norway

    Frank Asche

  2. Centre for Fisheries Economics, Institute for Research in Economics and Business Administration, Bergen, Norway

    Frank Asche

  3. Instituto Superior de Ciências do Trabalho e da Empresa (ISCTE/ADETTI), Av. Forças Armadas, Lisboa, 1649-026, Portugal

    Rui Menezes & Joaõ Ferreira Dias

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  1. Frank Asche
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  2. Rui Menezes
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  3. Joaõ Ferreira Dias
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Correspondence to Frank Asche.

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Asche, F., Menezes, R. & Dias, J.F. Price transmission in cross boundary supply chains. Empirica 34, 477–489 (2007). https://doi.org/10.1007/s10663-007-9045-0

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