Integrating Marginal Cost into Pricing-to-market
Models for U.S. Agricultural Products

Sayed H. Saghaian
Assistant Research Professor, Department of Agricultural Economics,
University of Kentucky

Michael R. Reed
Professor, Department of Agricultural Economics,
University of Kentucky

This paper was presented at the annual meeting of the Canadian Agricultural Economics Society (Montreal, July 2003) in a session entitled “Pricing to Market: Issues in Agricultural Trade”. Papers presented at CAES meetings are not subjected to the journal’s standard refereeing process.

The Issue

This article investigates the markup pricing behaviour of U.S. exporters of agricultural products. Agricultural products studied are feed, flour, frozen potatoes, frozen orange juice, five categories of beef, five categories of pork, and two categories of chicken. The popular pricing-to-market (PTM) approach of Krugman (1987) is used to examine market power and imperfect competition for the markets under study. The PTM model can directly investigate whether there is any evidence of market power in international trade. The sensitivity of U.S. export prices to exchange rate fluctuations may indicate price discrimination and imperfect competition in the international markets. The PTM approach is popular because of its relatively simple specification and empirical testing.

Implications and Conclusions

We use a modified version of Knetter’s fixed-effects panel model, which allows for lagged adjustments in export prices similar to Kasa’s (1992) model. Domestic wholesale prices are included in the model as a measure of marginal costs instead of the typical dummy variable scheme. The empirical results indicate there is evidence of markup pricing for U.S. agricultural products in some of the international market destinations in our sample. Markups over marginal cost were found for Ireland, the Netherlands, Portugal, and Spain for feed; Japan for orange juice; Hong Kong for frozen potatoes; Canada, Japan, and Mexico for some of the beef and pork types; and Canada, Hong Kong, Mexico, and Singapore for some chicken types.

The views expressed in this article are those of the author(s) and not those of Current Agriculture, Food & Resource Issues nor the Canadian Agricultural Economics Society.

© Copyright 2004 Current Agriculture, Food & Resource Issues

Suggested citation: Saghaian, Sayed H., and Michael R. Reed. 2004. Integrating marginal cost into pricing-to-market: Models for U.S. agricultural products. Current Agriculture, Food & Resource Issues 5: 187-203. Retrieved [date] from the World Wide Web: http://www.CAFRI.org

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