Abstract
I
n 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.