Dynamics of Price Adjustment in Qualitatively Differentiated Markets in the U.S.: The Case of Organic and Conventional Apples

Production and consumption of conventional and organic apples in the U.S. have changed dramatically over the past two decades. Despite a drop in the conventional apple production, production of organic apples shows a double-digit growth. Demand for organic apples also continues to outpace growth in overall organic fruit sales. In this research, we investigate whether these changes have an impact on price adjustment dynamics between these two qualitatively differentiated products. We use a Markov-Switching Assymetric Vector Error Ccorrection model (MS-AVECM) and weekly U.S. national retail prices for the 2010-2015 period for three varieties of apples: Gala, Fuji, and Red Delicious. The MS-AVECM results indicate three Markov-Switching regimes can be defined for the three varieties during the study period. The results show there are different short-run price adjustment daynamics in each of these regimes and asymmetric price transmission behavior between organic and conventional apples. Result indicates that apple varity plays important role in the price relationship between organic and conventional apple. These findings have implications for farmers, wholesalers, retailers, policy makers, as well as consumers