TITLE:
Market Middlemen and Determinants of the Price Spread under Competition
AUTHORS:
Michael K. Wohlgenant
KEYWORDS:
Middlemen, Diminishing Marginal Returns, Competition
JOURNAL NAME:
Theoretical Economics Letters,
Vol.4 No.9,
December
9,
2014
ABSTRACT: Neoclassical economics is shown to yield
predictions consistent with empirical industrial organization models regarding
market middlemen behavior. Diminishing marginal returns to use of variable
factor inputs produces three important predictions: a) the price spread between
the output price and raw material price is positively correlated with output
price, b) the raw material quantity is positively correlated with the price
spread, and c) the price spread is positively correlated with other variable
factor prices. An application to US farm-to-retail price spread time series
data shows the consistency of the predictions.