Cointegration relationships and hedonic pricing of differentiated commodities: an application to price dynamics in the US dairy sector

Abstract

This study investigates the implications of hedonic pricing for price dynamics of differentiated commodities. A conceptual model of hedonic pricing is developed under a Leontief technology, showing how commodity prices reflect the underlying value of their components. Implications for the existence of cointegration relationships among commodity prices are derived. An application to the pricing and dynamics of selected US dairy commodities is presented. It provides evidence on the role of component valuation in the dynamics of dairy commodity prices in the short run as well as in the long run. Distinguishing between market regime and government regime (when the government price support is active), the analysis finds significant differences in dairy price dynamics between the two regimes.

Threshold Effects and Asymmetric Price Adjustments in U.S. Dairy Markets

“…In contrast, there is little empirical evidence in support of asymmetric adjustment for cheese prices. The results from this study for butter and milk are similar to those in previous studies that used different data and empirical methodologies (Kinnucan and Forker 1987; Chavas and Kim 2005). Overall, the empirical results indicate that some previous studies that assumed symmetric behavior a priori and ignored threshold effects may be misleading.…”

“…In contrast, since the analysis by Kinnucan and Forker (1987), only a few studies have focused on price dynamics issues affecting the U.S. dairy sector (Vande Kamp and Kaiser 1999;Westhoff and Brown 1999;Chavas and Mehta 2004;Chavas and Kim 2005;Capps and Sherwell 2007). Using monthly farm and retail price data from 1971 to 1981, Kinnucan and Forker (1987) applied the Wolffram (1971) and Houck (1979) asymmetry model to four U.S. major dairy products (butter, cheese, fluid milk, and ice cream) and found evidence in support of asymmetric price transmission.…”

Characteristics and hedonic pricing of differentiated beef demands

“…An additional way to address quality issues in a seemingly homogeneous product is to examine the value of characteristics embodied in such a good (e.g., Atrostic, 1982; Bajic, 1993; Coatney, Mehkhaus, and Schmitz, 1996; Rudstrom, 2004; Bajari and Benkard, 2005; Chavas and Kim, 2005). In this framework, a good or commodity at time t , x t , consists of a set of K characteristics, z t ={ z 1 , z 2 , … , z K }, that are not directly priced in the market place, but which contribute to the total value of the good.…”