Differential price pass‐through in organic and conventional fresh fruit and vegetable markets

Abstract

Organic food production growth has remained relatively slow compared to organic retail sales growth in the United States. This paper questions whether the conduct of downstream agents plays any role in explaining the difference. Mainly, we shed light on structural differences between organic and conventional fresh fruit and vegetable markets by examining differential price pass‐through rates. We estimate a rolling‐window retail pricing model using retail and wholesale price data from five metropolitan statistical areas with terminal markets in the United States. We find that pass‐through rates are 10 to 15 percentage points lower in the organic market, and the differences are statistically significant. We also find that the gap between pass‐through rates narrows as the organic market share increases. Our results suggest the organic market is significantly less competitive than the conventional market. The implication is that farmers may have less incentive to convert to organic farming as they may not capture the full retail price premium consumers pay.