Food Scares, Market Power and Relative Price Adjustment in the UK

Abstract

This paper is concerned with the impact of food scares, principally the BSE crisis, in the UK and focuses on price adjustment at different stages in a vertically-related market. From a theoretical perspective we show that if market power has an effect on the margin between retail and farm prices then this determines the specification of the co-integrating relationship. We also account for different aspects of the BSE crisis including the shift in the retail demand function as well as the shift in the farm supply function due to the mutually opposing effects of a worldwide export ban and the cull of infected and older beef cattle. The results suggest that we cannot reject the importance of market power in the UK food sector in influencing the retail-farm margin following the outbreak of BSE. The results also suggest that the impact of the BSE crisis on farm prices to be more than double that of retail prices thus corroborating public interest concerns of a differential impact of the food scares on retailers and producers.