Michael K. Wohlgenant

Prices and Quality Effects in Cross-Sectional Demand Analysis

A conceptual clarification of the sources and meaning of cross-sectional price variability is used to motivate a theoretical and econometric framework for the estimation of cross-sectional demand functions. Quality effects are distinguished from supply-related price variability to identify cross-sectional demand for disaggregated food commodities. An empirical application using data from the 1977–78 Nationwide Food Consumption Survey indicates that parameter differences resulting from a failure to adjust cross-sectional prices for quality effects are likely to be small for relatively homogenous, disaggregated food commodities.

Demand for Farm Output in a Complete System of Demand Functions

Demand interrelationships for farm outputs that are theoretically consistent with consumer demand and marketing group behavior provide important linkages between retail and farm prices. A conceptual model, based on reduced-form specifications for retail and farm prices, is formulated and applied empirically to a set of eight disaggregated food commodities. This approach circumvents the need for retail quantities, which are frequently unavailable for disaggregated food commodities. The results are consistent with theory and generally indicate significant substitution between farm and marketing inputs. Except for poultry, derived demand elasticities are at least 40% larger compared to those derived assuming fixed proportions.

Habit Formation and Demand for Sugar-Sweetened Beverages

Using scanner data, we estimated demand for nine nonalcoholic beverages under habit formation. We found strong evidence for habit formation. Although demand for sugar-sweetened beverages by low-income households is less elastic to own-price changes compared with high-income households, there is evidence that high-income households consider beverages to be more substitutable than low-income households do. A half-cent per ounce tax on store-purchased sugar-sweetened beverages will result in a moderate reduction in consumption of sugar-sweetened beverages for both income strata. Because of habit formation, long-run national tax revenue from a sugar-sweetened beverage tax is about 15 to 20% lower than short-run revenue. Copyright 2010, Oxford University Press.

Distribution of Gains from Research and Promotion in Multi-Stage Production Systems: The Case of the U.S. Beef and Pork Industries

A producer-financed program that leads to either an increase in retail demand from promotion or a decrease in marketing costs from research will generate returns to producers that are generally smaller than returns generated through an equivalent change in producer supply from research. The distribution of gains depends on the degree of substitutibility between farm and nonfarm inputs. Comparative statics of equal absolute changes in demand, supply, and marketing costs in the U.S. beef and pork industries show the significance of input substitutibility for distribution of gains, and sensitivity of the results to beef and pork demand interrelationships.

A Revised Test of the Law of One Price Using Rational Price Expectations

The law of one price (LOP) is an important ingredient in theories of international trade. Typical analyses of the LOP assume that parity should hold contemporaneously. This assumption overlooks temporal elements of trade. Recognizing this fact, we expect parity to hold for expected prices. Two empirical procedures are utilized to consider the LOP in international markets for U.S. agricultural commodities. The first utilizes econometric procedures to test an expectations augmented version of the LOP. A second approach uses nonparametric procedures to provide an alternative consideration of expectations. In each case, results provide support for a rational expectations view of the LOP.

Testing the law of one price when trade takes time

Abstract The paper deals with several issues that may bias empirical tests against the law of one price. To obtain relatively homogeneous goods, a set of 17 narrowly defined primary products are used. Since trade takes time, the model is specified in terms of expected prices ratger than contemporaneous prices. An empirical measure of rational price expectations is obtained by using the generalized method of moments. The expectations-augmented model provides stronger support for the law of one price than the conventional formulation using contemporaneous prices. Results are also sensitive to the measurement of transport costs and interest rates.

Estimating Interrelated Demands for Meats Using New Measures for Ground and Table Cut Beef

Two systems of demand equations for meats ate estimated using traditional and new measures of ground and table cut beef. The choice of disaggregation has a significant impact on estimated demand elasticities for hamburger and table cuts. A multivariate version of the PE-test is used as a nonnested test of the alternative specifications. The PE-test is an appropriate nonnested specification test when the models in question have different (but related) dependent variables. The PE-test rejects the nonfed beef model specification but does not reject the ground beef model, which uses the new measures of ground and table cut beef.

Competitive Storage, Rational Expectations, and Short-Run Food Price Determination

This paper demonstrates that lags between retail and wholesale food prices can be explained by inventory behavior of retailers. Theoretical considerations indicate that the markup model should be modified to include a Jorgenson-type user cost variable, which depends on expected future wholesale price. The rational expectations hypothesis is used to derive price expectations. The retail price specification, therefore, depends on the stochastic process generating expected wholesale price. The econometric methodology, employing both causality testing and nonlinear estimation, is illustrated by estimating monthly price relationships for beef. The results are consistent with the theory and indicate rejection of the markup model.

Regional Cotton Acreage Response

An econometric model of cotton acreage response was estimated for four distinct production regions in the United States. This work builds on previous work in the area of supply response under government farm programs and provides up-to-date regionalized estimates of own-price elasticity of cotton acreage supply. The own-price variable used in this study is a weighted combination of expected market price and government policy variables. Results indicate regional similarity in response to own price but differences with respect to the prices of alternative enterprises. Differences in regional response to paid diversion are also indicated.

Input Substitution and the Distribution of Surplus Gains from Lower U.S. Beef-Processing Costs

Analysis of a switch from boxed beef to tray-ready beef processing demonstrates that limited substitution between farm and nonfarm inputs has a significant impact on the distribution of surplus gains. A two-input, two-output (beef and by-products) industry model was specified. Technical change was modeled as a shift in marketing input supply. This approach yields equivalent results to a demand increase from biased technical change. Using an estimated elasticity of substitution of 0.1 and parameter values from previous studies, the results indicate cattle producers would receive either 57% or 72% of surplus gains depending upon whether input substitution occurs.