Abstract

The goal of this paper is to test whether changes in the marketing margin between the farm and the retail prices can result in an asymmetric relationship between the on farm and the retail prices in the rice market of Iran. By separating the transaction cost variation into two regimes, this paper utilizes a two-type TVECM with the error correction. The empirical results show that when the marketing margin is lower than the threshold value, the market system operates freely and there is feedback between the farm and retail prices. However, when the marketing margin is higher than the threshold value, the government intervenes in the market and the causality between the farm and retail prices no longer exists. The conclusions are as follows: Changes in the marketing margin can cause the asymmetric price transmission between the farm and retail prices in Iran’s rice markets; therefore, ignoring the effect of the marketing margin could lead to errors in the models. When the marketing margin is higher than the threshold value, the government intervenes in the market and the causality between the two prices is broken.

Key words: Marketing margin, price transmission, price asymmetry, threshold model.