Price caps do not stop price transmission – they change where it happens
Imre Fertő, Szilárd Podruzsik
Government interventions in food markets are usually judged by what happens to prices at the checkout. But focusing only on consumer prices can obscure how regulation changes the distribution of adjustment across the supply chain. Drawing on new evidence from the Hungarian pork market, we show that during the country’s food price cap, price transmission remained relatively strong between producers and retailers, while it was sharply compressed between retailers’ procurement costs and consumer prices.
When food prices rise rapidly, governments face intense pressure to act. Price caps are among the most visible responses because they promise an immediate and easily observable outcome: lower prices on supermarket shelves.
But a lower shelf price does not mean that the underlying cost pressures have disappeared. It may simply mean that they are being absorbed somewhere else in the supply chain.
This distinction matters for how we evaluate retail price regulation. If we only compare producer and consumer prices, weak price transmission may appear to indicate that the entire supply chain has become disconnected. In reality, the disruption may be concentrated at one particular stage.
In our recent study of the Hungarian pork-leg market, we use weekly data from 2021 to 2026 to identify where price transmission weakened during a period of unusually intensive retail intervention. Rather than estimating a single relationship between producer and consumer prices, we distinguish two directly connected links: producer prices to retail procurement prices, and retail procurement prices to final consumer prices.
This simple distinction produces a very different account of what happened during Hungary’s recent food-price interventions.
Price transmission remained strong upstream
Price transmission describes how changes at one stage of a supply chain feed into prices at the next. If a 10% increase in producer prices eventually produces a 10% increase in procurement prices, long-run pass-through is complete. A smaller response indicates that some of the original price shock is being absorbed or delayed.
For Hungarian pork leg, we find a relatively strong relationship between producer and retail procurement prices. The estimated long-run elasticity is 0.785. In broad terms, a 10% change in producer prices is associated with a long-run change of around 7.9% in retail procurement prices.
The relationship between procurement prices and consumer prices is very different. Here, the long-run elasticity is only 0.275. A 10% movement in procurement costs is therefore associated with an average change of less than 3% in the net consumer price.
The contrast is large and robust. Alternative model specifications produce almost identical estimates for the upstream relationship, while the downstream elasticity remains much lower. Robust statistical inference leads to the same ranking.
The implication is straightforward: incomplete price transmission in the Hungarian pork-leg market was not evenly distributed across the supply chain. Most of the attenuation occurred after the retail procurement stage, where final consumer prices are set.
This matters because a conventional producer-to-consumer model would conceal this distinction. A weak relationship between farm and shelf prices can result from very different processes, with very different policy implications.
The price cap compressed consumer-facing pass-through
Hungary provides an unusually useful case for studying this issue because several retail interventions were introduced over a relatively short period. Pork leg was included in the food price cap introduced in 2022, and subsequent years also saw mandatory promotions, online price monitoring and, later, a retail margin cap. Because these policies overlapped, our estimates should be interpreted as comparisons between observed regulatory regimes rather than clean causal effects of individual measures.
Even with this qualification, the price-cap period stands out.
In periods without major intervention, the estimated long-run elasticity from producer to procurement prices was 0.854, while the procurement-to-consumer elasticity was 0.258.
During the period in which the food price cap operated without the later interventions, upstream transmission remained substantial at 0.766. Downstream transmission, however, fell to just 0.094. The decline relative to the no-intervention period is statistically significant.
In other words, the price cap did not appear to break the link between producer prices and retailers’ procurement costs. Instead, it coincided with a sharp weakening of the relationship between those procurement costs and the price consumers paid.
This is precisely the distinction that is lost when policy evaluation focuses solely on the shelf price.
Suppressing a price does not suppress a cost
This result illustrates a broader point about price regulation. When policy prevents a downstream price from adjusting freely, the underlying economic pressures must still be accommodated somewhere.
Retailers may absorb part of an increase in procurement costs. They may adjust margins across different products, change promotional strategies, alter quantities or product mixes, or offset losses elsewhere. A binding price constraint can therefore change the location and form of adjustment without eliminating the original cost shock.
Our aggregate price data cannot tell us which of these mechanisms dominated. In particular, the difference between procurement and consumer prices should not be interpreted as a direct measure of retailer profits. Consumer prices also reflect operating costs, promotions, losses, pricing strategies and changing margins. Identifying these mechanisms would require retailer-level data on quantities, contracts, promotions and costs.
This limitation is important. Evidence that downstream pass-through weakened is not, by itself, evidence of market power, profiteering or any single retailer response.
What it does tell us is where adjustment occurred.
Later interventions are harder to interpret
The Hungarian case also demonstrates why policy evaluation becomes difficult when interventions accumulate.
During the later period combining online price monitoring and a margin cap, the estimated downstream elasticity rises sharply, to 0.836. At first sight, this might suggest that the margin cap restored price transmission.
That would be too strong an interpretation.
The later regime coincided with a different inflationary environment, repricing following earlier interventions and other contemporaneous changes. The policy variables are also highly correlated because measures were introduced sequentially and sometimes overlapped. The result therefore describes stronger observed co-movement under that regulatory environment, rather than identifying the causal effect of the margin cap itself.
This is a wider lesson for research on real-world policy interventions. Governments rarely introduce one policy in isolation, wait for researchers to identify its effect, and only then move on to the next. Policies are layered on top of one another in response to changing economic and political conditions. Empirical analysis consequently has to distinguish carefully between causal effects and patterns observed under different policy regimes.
The story is not simply ‘rockets and feathers’
A common explanation for incomplete food-price transmission is asymmetric pricing: prices rise quickly when costs increase but fall only slowly when costs decline – the familiar “rockets and feathers” pattern.
We find little robust evidence that this mechanism explains the Hungarian results.
Nonlinear models do not show stable long-run differences between the response to positive and negative upstream price changes. One specification indicates some short-run asymmetry downstream, but this disappears when a longer lag structure is used. Threshold models similarly provide stronger evidence of a stable long-run relationship upstream than downstream.
The more important asymmetry in this case is therefore not necessarily between price increases and decreases. It is between different stages of the supply chain.
Policy evaluation should ask where adjustment takes place
The main policy implication is that consumer-price interventions should not be assessed solely by observing whether shelf prices rise or fall.
A successful price cap can, by definition, stabilise a regulated consumer price. But this does not tell us what has happened to the rest of the supply chain. Evaluating the policy requires asking where the cost pressures have gone, who has absorbed them, and whether the resulting adjustment is sustainable.
Intermediate prices are therefore crucial evidence.
In our case, procurement data show that the producer-facing part of the pork supply chain continued to transmit price signals relatively strongly even when consumer-facing transmission was heavily constrained. A producer-to-consumer comparison alone would have made the entire chain appear less integrated than it actually was.
More broadly, this suggests a useful principle for evaluating market interventions: do not ask only whether a policy changed prices; ask which relationship between prices it changed.
Price regulation does not switch off markets. It changes where markets adjust.
This post draws on Imre Fertő and Szilárd Podruzsik’s paper, “Price Caps, Retail Margins and Pork Price Transmission in Hungary”, published in Agribusiness. http://doi.org/10.1002/agr.70153