Market Middlemen and Determinants of the Price Spread under Competition

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.