Do Inventories Have an Impact on Price Transmission? Evidence From the Canadian Chicken Industry

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ABSTRACT

This paper investigates the influence of inventories in explaining the magnitude of price transmission. Using data from the Canadian chicken industry, a flexible non-linear inference framework detects significant non-linearities in the relationship between farm and wholesale prices. An empirical model is proposed to estimate a price transmission elasticity and a target inventory equation in the spirit of linear-quadratic inventory models in the macroeconomics literature. A generalized method of moments estimator measures the impact of inventories on price transmission and accounts for the potential correlation between sales and wholesale prices. The price transmission elasticity is lower (higher) when inventories are above (below) the target level.

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