Thursday, May 28, 2009

Retail and Wholesale Market Power in Organic Foods

Posted by D. Daniel Sokol

Timothy J. Richards (ASU - School of Management and Agribusiness), Ram Acharya (New Mexico - Agricultural Economics), and Ignacio Molina (ASU - National Food and Agricultural Policy Project) undertake a study into Retail and Wholesale Market Power in Organic Foods.

ABSTRACT: The demand for organic fresh fruits and vegetable continues to grow at a rate far higher than the rest of the produce industry. The cost of meeting organic certification standards, however, has meant that supply has been slow to adjust. With limited supply, we hypothesize that organic suppliers enjoy more market power in bargaining over their share of the retail-production cost margin for fresh apples. We test this hypothesis using a random parameters, generalized extreme value demand model (mixed logit) combined with a structural model of retail and wholesale pricing that allows conduct to vary by product attributes (organic or non-organic) and time. We find that organic growers do indeed earn a larger share of the total margin than non-organic growers, but this vertical market power is eroding over time as market supply adjusts.

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If growers think that they have too much power they will be shooting themselves in the foot. The biggest impediment to the organic industry is exhorbantant prices. While demand is continuing to rise, it is capped be economic realities. Don't be greedy and the industry success is assured.

Posted by: Gas Analyzer | Jul 8, 2009 7:49:48 PM

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