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An Application of the Two-Regime Threshold Vector Error Correction Model to Analyze Asymmetric Price Transmission of Milk in Zanjan Province of Iran

Moharram Ainollahi, Mohammad Ghahremanzadeh.

In this paper asymmetric price transmission mechanism and nonlinear adjustment between producer and retail prices of
milk were examined in Zanjan Province of Iran. For this purpose, a Two-Regime Threshold Vector Error Correction
Model (TVECM) and a Sup-LM Test developed by Hansen and Seo (2002) were employed for checking presence of a
threshold effect. Application of unit root tests indicated that both wholesale and retail prices are I (1), and Johansen test
verified cointegration of the series in the long-run. Results of the Sup-LM test confirmed threshold adjustment of product
price towards the long-run equilibrium. Furthermore, results obtained from TVECM revealed that the coefficient of ECT is
significant only in the first regime of retailing equation implying that retailers significantly respond to the decreasing deviations from the long-run equilibrium. While adjustment coefficient is not significant for wholesale equation in both regimes to imply
that there is not significant inclination to react to deviations from the long-run equilibrium among the wholesalers despite
the retailers.

Key words: Hansen and Seo Approach, Threshold Vector Error Correction Model, Asymmetric Price Transmission, Vertical Integration, Zanjan

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