Competitive Storage, Rational Expectations, and Short‐Run Food Price Determination

This paper demonstrates that lags between retail and wholesale food prices can be explained by inventory behavior of retailers. Theoretical considerations indicate that the markup model should be modified to include a Jorgenson‐type user cost variable, which depends on expected future wholesale price. The rational expectations hypothesis is used to derive price expectations. The retail price specification, therefore, depends on the stochastic process generating expected wholesale price. The econometric methodology, employing both causality testing and nonlinear estimation, is illustrated by estimating monthly price relationships for beef. The results are consistent with the theory and indicate rejection of the markup model.