The price is right
Scientists of the Department of Agricultural Economics have collaborated in an EU-funded project to find out why the price of certain foods is rising. Their result: Margins have become narrower and wholesalers are just merely passing on their own costs.
“Our task was to find out why prices for food are falling or rising”, explained Loy. “This is of particular interest for all societies.” People are constantly reading about protests by farmers against low prices for milk, criminal price-fixing agreements among competitors or other scandals. “In the framework of TRANSFOP, we focused on two scientific projects”, said the professor. “First, we wanted to gain new insights into price transmission.” Loy and his team wanted to find out if changes in retail prices have an influence on the price consumers have to pay.
“The second project aimed to analyse how the pricing policy influences consumer behaviour”, explained Loy. He wanted to know which factors constituted brand loyalty and how this could be changed.For the first analysis, Loy and his team chose products that should not be subject to change. “Whole milk and butter are basically homogeneous. They have the same ingredients, independent of the shop they are sold at”, Loy explained his choice of products. Nevertheless, he found that there were differences in pricing between stores, brands and across a time range.
The basic hypothesis was: Price transitions are asymmetric – processors and retailers of milk or butter pass on any increase in costs to the consumers; any decrease would eventually be passed on, but not as fast.
Loy and his team picked 200 to 300 retailers in Germany and gathered random samples for all milk and butter brands weekly. The next step was to check the prices for producing these products on the same dates. Third, the hypothesis was checked. “We did find an asymmetric cost pass-through”, declared Loy. If the wholesaler raised the price, it was soon after passed on to the market; if the cost decreased, it was also adjusted – but not as quickly. “We were then curious if there was a difference in cost pass-through with certain brands”, said Loy. “Do brands have a higher influence on the price than no-name products?”
The result was negative: “Price transmission has nothing to do with market power”, reported Loy. “Milk and butter by major brands are subject to the same pricing mechanism as no-name products. But the price adjustments are not passed on as fast as with the retailer brands.” This leads to project number two. The scientists at Kiel University wanted to find out how special offers correlate with customer loyalty. For this analysis they chose cereals instead of milk and butter. The thesis was that a brand with a strong customer base would not offer a lot of discounts. “We found that Kellogg’s is the strongest brand in this segment; Nestlé is number two. Further, our analysis showed that Nestlé offers more and higher discounts than Kellogg’s. In short, the weaker brand uses price promotion more intensively.” It was also found that each brand uses their most prominent sub-brand most for price promotions. The latter result still needs a formal theoretical explana-tion, which Loy and his team want to address in their future research.
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