Price transmission: the interaction between market power and returns to scale

Recent literature emphasises the role of market structure in determining th e degree of price transmission along the marketing chain, the presumption b eing that if downstream markets are imperfectly competitive price transmiss ion will be less than complete. However, empirical studies of market power often ignore the role of the underlying cost conditions. This paper shows t hat if an industry is characterised by non-constant marginal costs, there c an be a significant impact on price transmission. Specifically, it is shown that the nature of the returns to scale that characterise the food industr y cost function may either increase or decrease the degree of price transmi ssion. Under certain conditions, price transmission may be greater in indus tries with increasing returns to scale than in markets characterised by per fect competition and constant returns to scale.