Market Power and Price Transmission Mechanism in the Supply Chain

This thesis is divided into two areas of investigation. Firstly, acknowledging the use of New Empirical Industrial Organisation Techniques (NEIO) on prior market power literature, this study extends the literature by examining the market power of retailers towards the consumers and of retailers towards their providers across the UK Milk/Dairy products, Road fuels, and Electricity sectors. Due to high market concentrations of the retailers in all three supply chains and scarcity of relevant literature; the UK provides a novel setting for the estimation of each chain’s degree of market power The Fully Modified Ordinary Least squares (FMOLS) estimator and the Dynamic Ordinary Least squares (DOLS) estimator methods are used for the first time in the market power literature, considering endogeneity. Secondly, this thesis examines the cost pass through mechanism for the three supply chains. While distributed lag models are used by prior literature to estimate cost pass through, this thesis is the first to use this method to examine the cost pass through of an input cost change to the wholesale price and the cost pass through of a change in the wholesale cost to the retailer price for the UK supply chain. The data sample used, is time series with quarterly observations for the milk sector, starting from the first quarter of 1996 up to the last quarter of 2019, with a total of 96 observations and 228 monthly observations for the road fuels sector starting from the first month of 2000. For electricity, 243 observations are considered for the period January 2000 to end of March 2020. For the electricity cost pass through mechanism, 178 observations are used starting from the third month of 2003 until December 2017.

Sufficient evidence supports the oligopsonistic and oligopolistic market power of the retailers towards the providers and the retailers towards the consumers, respectively. This applies to all supply chains. In the case of electricity, not enough evidence is provided for market power of the retailers towards the consumers. In the case of milk, ample evidence demonstrates the oligopsonistic and oligopolistic market power of the processors. Similar evidence is provided for an incomplete cost pass through of an input cost change to the wholesale price and a wholesale cost change to the retail price across all three supply chains. In the case of road fuels, this study also yields compelling evidence for asymmetric price transmission.