EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 9.12.2008 
SEC(2008) 2972 
 
  
COMMISSION STAFF WORKING DOCUMENT 
The functioning of the food supply chain and its effects on food prices  
 
Accompanying document to the 
 
COMMUNICATION FROM THE CO MMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMI TTEE OF THE REGIONS 
 
FOOD PRICES IN EUROPE 
 
Including a roadmap to improve the f unctioning of the food supply chain 
 
EN 2   EN TABLE OF CONTENTS 
1. Introduction and background ....................................................................................... 3 
2. Complexity of the food supply chain........................................................................... 4 3. Economic importance and efficiency of  sectors along the food supply chain............. 6 
3.1. Share in EU value added, employment and consumption expenditure........................ 6 3.2. Economic performance: productivity and innovation.................................................. 8 4. Determinants of consumer food price developments in the EU ................................ 10 4.1. Recent developments in food prices .......................................................................... 10 4.2. The pass-through and price stickine ss along the food supply chain .......................... 13 
4.3. The role of the food retail market structure ............................................................... 19 5. Regulatory issues ....................................................................................................... 19 5.1. The effect of the regulatory framework and price levels ........................................... 19 5.2. Entry regulations ........................................................................................................ 2 0 
5.3. Shop opening hour restrictions .................................................................................. 21 5.4. Regulations restricting the ab ility to compete on prices ............................................ 21 
5.5. Enforcement of consumer protection rules ................................................................ 23 6. The role of competition along the food supply chain ................................................ 23 6.1. Market structures along the food supply chain .......................................................... 23 
6.2. The link between competition, pr ice levels and inflation .......................................... 27 
6.3. Horizontal practices ................................................................................................... 28 6.4. Vertical issues ........................................................................................................... . 29 
7. Conclusion.................................................................................................................. 32 
 
 
EN 3   EN  
COMMISSION STAFF WORKING DOCUMENT 
The functioning of the food supply ch ain and its effects on food prices 
1. INTRODUCTION AND BACKGROUND  
In the second half of 2007 price increases of many agricultural commodities accelerated 
rapidly and by early 2008 reached exceptional le vels. These increases have been mainly 
driven by a temporary imbalance between de mand and supply – against the background of 
structurally rapidly increasing demand for f ood products across the globe. The agricultural 
commodity price surge generated a rapid increase in consumer food prices, which peaked in 
July 2008. Within the EU the largest producer and consumer  food price increases were 
reported in the new Member States. In the lig ht of these developments, the Commission 
decided in its May 2008 Communication "Tackli ng the challenge of rising food prices - 
Directions for EU action"1 to investigate the functioning of  the food supply chain with the 
following objectives: 1) to better understand how the degree of competition in the food 
industry and the downstream retail markets may have affected price developments; 2) to 
identify some best regulatory practices and formulate recommendations; and based on this 3) 
to identify possible actions at the Community level. This analysis has benefited from 
consultations and discussions with Member States including competition and regulatory 
authorities, as well as dialogues with stakeholders in the markets along the food supply chain. 
The food supply chain is complex. It is com posed of a wide diversity of products and 
companies which operate in different markets a nd sell varied food products to various types 
of purchasers. The regulatory framework affects the food supply chain at all levels from the 
agricultural sector down to reta il. The degree of market powe r held by the firms along this 
chain varies by product category and is influenced by the relevant markets in which these 
firms operate. It has an impact on the contr actual relationships between the main players 
along the chain and can influence the degree of transmission of the increase in agricultural 
commodity prices into consumer prices.  
Given the complexity of the food supply chain,  general conclusions regarding its functioning 
should only be drawn with caution. This docum ent attempts to contribute to a better 
understanding of the functioning of  the food supply chain in orde r to allow a more informed 
debate on policy proposals. It al so identifies a number of issues  that would merit further in-
depth analysis. The policy recommendations derive d from this analysis are presented in the 
Communication "Food prices in Eu rope: Including a roadmap to improve the functioning of 
the food supply chain". 
The present staff working paper starts with a description of the f ood supply chain and its 
constituent sectors, thus  setting the framework within whic h interactions between firms take 
place. In section 3, the paper provides an  overview of the economic importance and 
performance of the sectors belongi ng to the food supply chain. S ection 4 makes an analysis of 
the food price transmission mechanism, looking in particular at th e pass-through of price 
developments along the food supply chain. The re gulatory framework and its possible impact 
                                                 
1 COM(2008) 321/3, "Tackling the challenge of rising food prices - Directions for EU action". 
 
EN 4   EN on prices is analysed in section 5. Secti on 6 gives an overview of the conditions of 
competition along the food supply chain. Section 7 concludes. 
2. COMPLEXITY OF THE FOOD SUPPLY CHAIN  
The food supply chain connects thre e main sectors (see Figure 1): the agricultural sector, the 
food processing industry and the distribution sectors (wholesale and retail). Basic agricultural 
commodities undergo, to varying degrees, substantial series of intermediate alterations before 
they are sold as final food products to consumer s. Therefore, a description of the food supply 
chain helps to better understand  how prices are formed along this chain, how input costs are 
passed on, where interactions be tween firms take place and wh ere different regulations may 
have an impact. However, sin ce specific food supply chains exist for every single food item 
purchased by consumers, the following desc ription is a necessary simplification.  
Figure 1: Schematic representati on of the food supply chain  
Agricultural Sector
Food processing industry
Retail sector
(incl. Retail chains, individual stores, 
petrol stations)
Non-food sectors:
(e.g. biofuels)Factor markets
(e.g. fertilisers)
Consumer
Public policy / Regulation / Macroeconomic conditions
Food service
(canteens etc.)Craft production
(e.g. bakeries, 
butchery)
ConsumerCraft production
(e.g. bakeries, 
butcheries)Wholesale Wholesale Wholesale
Wholesale WholesaleWholesale
Source: own presentation  
 
  
 
EN 5   EN The first sector considered in the food supply chain is the agri cultural sector. Its activities 
include crop production and the raising of liv estock. As agricultural commodities comprise 
very different products, the sector's distributio n channels are equally diverse. Firms in the 
agricultural sector primarily sell  their output to the food processi ng industry and to itself (e.g. 
animal feed), but can also direc tly sell to retailers, final cons umers or alternative markets (e.g. 
biofuels). The food processing industry is ve ry heterogeneous and comprises a number of 
varied activities. These include for example refining (sugar), milling (cereals), cleaning, 
cutting or drying (fruit and vege tables) and slaughtering and di sassembling (livestock). The 
different inputs are processed in successive st ages and to different degrees, packaged and 
dispatched to customers (e.g. distributors, f ood service). Another important activity of food 
manufacturers is to carry out market and produc t research leading to the development of new 
products, and to engage in marke ting. The distribution sector (and retail in particular) is the 
principal outlet for food products and, being the final link in th e supply chain, it interacts 
directly with final consumers. While the sector's main activity is the sale of products, in doing 
so, retailers may also carry out services for food manufact urers, such as promotional 
activities. 
 
The moves forward along the supply chain – between, but also with in sectors – imply a 
transfer of intermediate goods between firms.  These transfers can occur directly between 
firms involved in production or sale to consum ers or, as is often th e case, via specific 
wholesalers. Transfers can be analysed from bo th a contractual and a technical perspective. 
The contractual aspects essentially refer to buye r-seller interactions a nd are influenced by the 
relative market power of the firms along the chai n (see section 4 and 6). On the technical side, 
the transfer involves a series of activities wh ich generate additional costs, such as those 
incurred for transport, storage and logistics. Therefore, besides the raw material – which in 
general accounts for a small share of total costs only 2 – the cost structure of food production 
comprises a number of other cost factors, mo st notably transport en ergy and labour, which are 
reflected in the final consumer prices. In addi tion, the functioning of the food supply chain is 
also affected by a number of external fact ors such as regulation, public policy and the 
macroeconomic environment, which impact cost  structures and price developments across 
Member States.  
 
The cost structure not only varies by product de pending on the number of intermediate steps 
and the degree of processing but is also likely to vary across countries, even for comparable 
goods (see also section 4.2). Therefore, the effect  of an increase in th e raw material price may 
have different repercussions ac ross countries: while "other cost s" raise the final consumer 
prices, they can either mitigate raw material pric e increases or exacerbate them, if the price of 
other cost elements also rises.  
 
While each product has its own cost-structure, firs t indications of how th ese structures vary by 
product category and sector can be inferred from input-output tables. A simple analysis shows 
that the share of intermediate  products (excluding wages) is  substantially higher for food 
processing industry than for the distribution (wholesale and retail) sectors. For the food 
processing industry, the cost share of intermedia te products is about 70%, even though this 
varies across countries and type  of product. For the distributi on sectors this share is around 
                                                 
2 Generally speaking agricultural commodity shares of 20%-30% on average in the costs of consumer 
food products seem to be good approximations. 
 
EN 6   EN 40%. Energy and transport on average repres ent around 10% of the costs of the food 
processing industry, but fluctuat e considerably acro ss food categories, and are higher for 
wholesale trade. The costs of rent account for a large part of the costs incurred by the retail 
sector. The input-output tables also highlight the importance of marketing and advertising 
costs, notably in sectors producing confectionery , cereals or beverages.  Finally, compensation 
of employees accounts for a larg er share in distribution (arou nd 30%), than in food processing 
(around 20%).  
 
The remainder of this document takes developmen ts in the agricultural sector as given, and 
focuses on the food processing indust ry and the distribution sector. 
3. ECONOMIC IMPORTANCE AND EFFICIENCY OF SECTORS ALONG THE FOOD SUPPLY 
CHAIN  
 
This section shows that the sectors belonging to  the food supply chain, in particular the food 
processing industry and the distribution ar e economically important and have many 
interactions with other sectors of the econom y, either as purchasers or as suppliers of 
intermediate inputs. Therefore,  a malfunctioning of the food su pply chain can have significant 
repercussions on the whole EU eco nomy. This analysis also show s that there is a room for 
improving the efficiency of this chain, which is particularly relevant in the present economic 
conditions. Reforms improving the functioning of the food supply chain could contribute to 
preserve the purchasing power of households, particularly of low income households which 
spend a relatively larger proporti on of their expenditures on food products. It is also essential 
in a period of deceleration of price increases to ensure that  the downwards price movement 
are transmitted to consumers wit hout delay (see also section 4).  
 
3.1. Share in EU value added, employme nt and consumption expenditure 
 
The sectors making up the food supply chain – agriculture, food processing and the food 
distribution sectors – can be cons idered as economically importan t as they jointly account for 
approximately 6% of EU value added and 12 % of EU employment. The food and beverages 
industry makes up 1.7% of EU value added, while the wholesale and retail sectors (including 
non-food products) account for 3.8% and 4.5% respectively (see table 1). The size of these 
two sectors is typically larger in new Member  States. For example, while the value added 
share of the food and beverage industry and of  the wholesale and retail trade equalled 1.7% 
and 8.3%, respectively in 2005, they represen ted 2.6% and 13.2% respectively in the new 
Member States. The value added share of the f ood and beverage industry is particularly high 
in Ireland (4.1%) and Lithuania (3.6 %), that of the wholesale trade sector in the Baltic States 
(12.4% in Latvia, 7.9%, in Estonia and 7.6% in  Lithuania) and in the Slovak Republic (7.7%) 
and that of the retail trade in Poland (7.8%), Lithuania (7.4%) and Greece (7.3%). 
 
The European food and beverage industry employs around 4.5 million persons, accounting for 
2.3 % of total EU employment in 2005. The Eu ropean distribution sectors (including non-
food items) employ over 26 million persons or 13% of total EU employment, with the 
wholesale trade sector accounting for 4.4% and the retail sector representing 8.5% of total 
employment. More than a third of them (3% of  all employees) are active in food retail. The 
 
EN 7   EN share of employment in the food and beverage i ndustry and of in wholes ale trade is higher in 
the new Member States than in the EU15. 
 
Table 1: Sector shares in total valued  added and total employment (in %), 2005 
Agriculture Food and 
bevera gesWholesale 
trade*Retail 
trade*Agriculture Food and 
bevera gesWholesale 
trade*Retail 
trade*Total Food 
Retail
Austria 1,1% 1,8% 6,5% 4,4% 11,1% 1,9% 5,0% 7,6% 2,6%
Belgium 0,9% 2,2% 7,1% 4,2% 1,9% 2,2% 5,2% 7,3% 2,9%
Bulgaria n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Cyprus 3,5% 2,7% 5,3% 5,6% 7,1% 3,7% 6,6% 8,5% 2,4%
Czech Republic 2,3% 2,7% 6,9% 4,4% 3,1% 2,8% 4,8% 7,6% 2,9%
Denmark 1,2% 2,1% 6,7% 3,6% 2,7% 2,5% 6,2% 7,4% 2,8%
Estonia 2,1% 2,6% 7,9% 5,2% 3,3% 3,6% 5,6% 5,9% 3,2%
Finland 1,1% 1,7% 5,3% 3,5% 4,1% 1,6% 4,2% 6,5% 2,2%
France 2,0% 1,9% 4,6% 4,3% 3,3% 2,2% 4,1% 7,4% 2,8%
Germany 0,8% 1,7% 4,4% 4,1% 2,1% 2,4% 4,1% 8,7% 2,2%
Greece 4,8% 2,3% 3,7% 7,3% 11,8% 2,9% 2,6% 10,5% 4,1%
Hungary 4,2% 2,5% 4,8% 4,8% 4,4% 3,5% 2,4% 10,5% 3,6%
Ireland 2,5% 4,1% 4,4% 4,4% 5,4% 2,8% 3,5% 7,8% 4,1%
Italy 2,1% 1,8% 5,5% 4,4% 3,8% 1,9% 4,7% 7,5% 2,6%
Latvia 2,4% 2,7% 12,4% 5,4% 4,9% 3,3% 5,1% 9,6% 4,2%
Lithuania 5,1% 3,6% 7,6% 7,4% 10,0% 3,4% 6,5% 6,8% 3,8%
Luxembourg 0,4% 0,9% 4,7% 3,2% 1,3% 1,4% 4,9% 6,2% 1,6%
Malta 2,1% 2,4% 6,2% 4,7% 2,3% 2,6% 6,2% 7,2% 0,0%
Netherlands 2,1% 2,1% 7,8% 3,3% 3,2% 1,6% 5,8% 9,0% 3,2%
Poland 4,2% 2,8% 7,4% 7,8% 18,6% 3,5% 5,2% 8,3% 3,9%
Portugal 2,1% 2,3% 5,6% 4,6% 11,2% 2,2% 6,1% 8,3% 2,8%
Romania n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Slovak Republic 3,1% 2,2% 7,7% 6,5% 3,2% 2,3% 7,4% 9,1% 1,2%
Slovenia 2,3% 1,9% 5,4% 4,7% 9,9% 2,3% 4,8% 5,8% 2,8%
Spain 2,9% 2,0% 4,4% 4,7% 4,7% 2,4% 3,5% 8,9% 3,4%
Sweden 0,5% 1,5% 5,9% 3,7% 1,6% 1,4% 5,0% 5,6% 2,3%
United Kindgom 0,9% 1,9% 4,4% 5,7% 1,3% 1,5% 4,2% 10,5% 4,4%
Euro Area n.a. 1,9% 5,1% 4,3% 4,1% 2,2% 4,4% 8,2% 2,7%
EU27 1,2% 1,7% 3,8% 4,5% 4,6% 2,3% 4,4% 8,5% 3,2%
NMS 3,1% 2,6% 6,9% 6,3% 11,1% 3,3% 5,0% 8,4% 3,4%Sector share in total value added Sector share in total employment
 
Source: ESTAT (food retail) and EUKLEMS  
Note: (*) Wholesale and retail excl udes motor vehicles and motorcycles  
 
The economic importance of the food supply chain can also be gauged by the share of its final 
products – food and beverages – in household e xpenditure. On average 16% of EU household 
spending is devoted to food and be verages. This share typically falls as per capita GDP rises 
and vice versa. Consequently, th e share of food expenditure is typically higher in the new 
Member States, where in many cases it exceeds 20%.  
 
EN 8   EN  
Figure 2: Composition of food cons umption basket by Member State, 2008 
0 5 10 15 20 25 30 35 40ROLTBGLVPLEEESHUCZPTCYSKMTITBESIGRFRDKFISEIENLATDELUUK
% of total household expenditure
Bread and cereals Meat Milk, cheese and eggs Other food Non-alcoholic beverages
S
ource: Eurostat (based on HICP weights)  
 
The food processing industry and the wholesale and reta il trade can also help to improve the 
capacity of the EU to adjust. Indeed, these sect ors have important linka ges with other sectors 
of the economy. This means that the market perf ormances of these sectors (in terms of price, 
quality, variety etc.) have immediate repercussion s on the rest of the economy, as well as final 
consumers. In other words, market inefficien cies in these sectors will propagate throughout 
the economy and ultimately hamper performa nce in upstream and downstream sectors. 
Moreover, the wholesale and retail trades can be  categorised as important users of information 
and communication technologies and therefore, th ey can contribute to the diffusion of new 
technologies, which is another dimensi on of the adjustment of an economy.  
3.2. Economic performance: productivity and innovation 
 
An analysis of labour productivity  growth in the three sectors of the food supply chain (food 
processing industry, wholesale and retail) reveals that the averag e annual growth rate over the 
period 1995-2005 was lower in the EU than in th e US in all these three sectors. The EU-US 
gap is significant in the case of the food-proces sing (2.1 percentage points) and retail sectors 
(3.5 percentage points), but rela tively narrow in wholesale trad ing (0.3 percentage points). 
Such differences could indicate that there may be room for further improvement in the 
efficiency along the food supply chain. 
 
In the food and beverages industry, the labour productivity growth ove r the period 1995-2005 
has been particularly slow (or even negativ e) in Cyprus, Denmark, Italy, Luxemburg, Malta 
and Spain. Among the old Member States, high pr oductivity growth in th is sector has been 
observed in Austria, Finland and Ireland and among the new Member States in Latvia, 
 
EN 9   EN Lithuania Poland and the Slovak Re public. In the wholesale and reta il trade, the dispersion in 
the labour productivity performance among the Memb er States is larger than for the food and 
beverage industry. The countries having recorded the lowest la bour productivity growth rates 
overt that period are Spain (wholesale), Cyprus (retail) and Malta (wholesale and retail). The 
highest rates in both distribution sectors have  been observed in the Czech Republic, Estonia 
and Lithuania. 
 
Figure 3: Labour productivity growth in  the EU food and beverages industries, 
wholesale and retail trade, 1995-2005 
 Food and beverages
-4% -2% 0% 2% 4% 6% 8% 10% 12%
AT
BE 
CY 
CZ 
DK 
EE
FI 
FR 
DE
GR 
HU 
IE 
IT 
LV
LT
LU 
MT
NL
PL
PT
SK
SL 
ES
SE 
UK
EU25
USAWholesale trade 
-4% -2% 0% 2% 4% 6% 8% 10%
AT
BE 
CY 
CZ 
DK 
EE
FI 
FR 
DE
GR 
HU 
IE 
IT 
LV
LT
LU 
MT
NL
PL
PT
SK
SL 
ES
SE 
UK
EU25
USARetail trade
-4% -2% 0% 2% 4% 6% 8% 10% 12%
AT
BE 
CY 
CZ 
DK 
EE
FI 
FR 
DE
GR 
HU 
IE 
IT 
LV
LT
LU 
MT
NL
PL
PT
SK
SL 
ES
SE 
UK
EU25
USA
 
Source: Calculations based on EUKLEMS  
 
The productivity gap with the US in the retail sector3 has been explained by a lower use of 
information and communication technologies (ICT) in the EU. It is plausible that different 
degrees of ICT adoption partially explain cr oss-country productivity gaps in the EU. The 
remaining segmentation of the European Single Market which is illustrated by the diverging 
price levels and price developments across coun tries (see section 4) may also contributed to 
the lower productivity performance of th e EU. But other cause s of the productivity 
differentials observed across coun tries include differences in th e intensity of competition, in 
the regulatory framework and in la bour market policies, as indicat ed in a recent analysis made 
on the possible causes of malfunctioning on EU product markets4. Labour productivity growth 
in the three sectors considered here has generally been higher in  the new Member States. This 
most likely reflects catching-up effects and lower initial productivity levels. 
 
Innovation can lead to efficiency gains, both through the introduction of new and better 
production methods, and through the introduction of  new and better products, which raises the 
long term productivity growth rate. In addition to the effect on the firms producing them, 
                                                 
3 It should be noted that these indicators apply to th e retail and wholesale sector s as a whole, and may not 
fully reflect developments in the distribution of food. 
4 See European Economy, Economic Paper n° 271 at  
http://ec.europa.eu/economy_finance/publications/publication_summary13085_en.htm  
 
EN 10   EN novel products can ensure that consumers have a wide choice of food products, satisfying 
their health and value expectations. Innovation ta kes place at all levels of the food supply 
chain. Examples from the food industry include  development and subsequent launch of new 
products. In the retail sector  innovation activitie s could for example focus on distribution 
channels, store design, new services making it easier and quicker for consumers to do their 
shopping (e.g. ordering via intern et and collecting the product s at the outlet), etc.  
 
Innovation can be examined from an input side  (i.e. investment in R&D, both private and 
public5, and research personnel) and an output side (i.e. innovation per se). Data from the 
Community innovation survey suggest that firms in the food and beverage industries are more 
likely to pursue R&D activities than firms in ot her sectors of the EU economy. Firms in the 
distribution sectors are generally less likely to be involved in R&D activities and also spend 
less on them, which can largely be explained by the nature of thei r core activities.  
 
In terms of innovation outcome, the proportion  of firms succeeding in product innovation – 
i.e. the development of new or improvement of existing products and se rvices – is higher in 
the food and beverage industry compared to ot her sectors. Inherent to their function, the 
distributive sectors are effectiv ely engaged to a far lesser extent in product innovation than 
other sectors. However, the retail sector s eems relatively successful in terms of process 
innovation – i.e. the way in which pr oducts and services are produced. 
4. DETERMINANTS OF CONSUMER FOOD PRICE DEVELOPMENTS IN THE EU 
 
This section presents and discusses the results of  an empirical analysis of the determinants of 
consumer food price developments in the EU . It investigates the price transmission 
mechanism along the food supply chain (from ag ricultural commodity prices and producer 
food prices to consumer food prices). 
4.1. Recent developments in food prices  
 
In the second half of 2007, price increases of many agricultural commodities accelerated 
rapidly and reached exceptional levels by the end of the year. The agricultural commodity 
price surge generated a rapid in crease in producer and consumer  food prices within the EU 
(see figure 4). Even more striking was the wide  dispersion in terms of the magnitude of 
consumer food price increases between EU Member  States. Within the EU the strongest food 
price increases, at both producer and consumer  level, were recorded in the new Member 
States. In Bulgaria, Latvia and Lithuania pri ce levels increased by more than 15% between 
July 2007 and August 2008. Among the old Member States, consumer prices rose by more 
than 6% over this period in Aust ria, Denmark, Ireland and the UK. 
 
Moreover, in nearly all Member States proces sed food prices increased more rapidly than 
unprocessed food prices.6 The differences observed in pri ce developments between processed 
                                                 
5 At the Community level, the Commission has already invested about €135 million in food research 
projects through its different research framework programmes. 
6 The 'processed food' category is a weighted averag e of the following product categories: 'Bread and 
cereals', 'Milk, cheese and eggs', 'Oils and fats', 'Sugar, jam, chocolate and confectionery', 'Food 
products not elsewhere classified', 'Coffee, tea an d cocoa', 'Mineral waters, soft drinks, fruit and 
 
EN 11   EN and unprocessed food appear mostly due to co mposition effects. The category "Processed 
food" includes food products that are produced on  the basis of commodities most affected by 
the international price increases , notably cereals and dairy products. The input costs for the 
category "unprocessed food" – including meat – have increased much less. Moreover, the 
sharp increases in fuel prices may have ha d a greater effect on processed food prices. 
 
Figure 4: Consumer, producer and raw materi al food price increases in the EU over 
the period 2002:1-2008:8 (y-o-y growth rates) 
-20-1001020304050
2002 2003 2004 2005 2006 2007 2008%Food producer prices
Consumer food prices
Raw material food prices
 
Source: Own calculations based on ESTAT and DG AGRI  
 
 The share of food in the househol d expenditure differs significantly across EU countries (see 
figure 2 in section 3.1) and is strongly correlated with GDP per capita. As the weight of food 
in household consumption baskets is typically higher in new Member States, the contribution 
of food inflation to overall inflation was also higher in these Member States.  
 
Due to the inelasticity of the demand for food the recent price increases have had a negative 
effect on the consumers' purchasing power, and th ere are indications of changes in purchasing 
behaviour (e.g. switching to disco unters) and reductions in the purchase of number of food 
products they typically purchased. Households in the new Member States were hit harder than 
others. At the EU level the food price incr eases of 2007 and early 2008 reduced household 
purchasing power by around one percent. 
 
After having reached its peak in May-June 2008, consumer food price inflation has been on a decreasing trend in all Member States with the exception of Slovenia. This decrease in 
consumer price inflation followe d the decline in pr oducer price inflati on, which peaked in 
                                                                                                                                                        
 
vegetable juices' and 'Alcoholic beverages'. The 'unprocessed food' category is a weighted average of 
the following product categ ories: 'Meat', 'Fish', 'Fruit' and 'Vegetables'. 
 
EN 12   EN April-May 2008. However, differences between Me mber States in terms of price stickiness 
can be observed. While in some countries consum er food prices appear  to have adjusted 
downward rather quickly following the decline in agricultural pri ce levels, in others consumer 
prices have reacted more slow ly (see also section 4.3).  
 
Figure 5: Consumer and producer food price changes 2007:7 - 2008:8 (average 
annual growth rate) 
 
0 5 10 15 20 25ptnlfritgrEU RO AREAsefilubedecyesiedkukplskatmtczrosihueeltlvbg
%Producer price index - food
Harmonised consumer price index - food
Source: Eurostat  
 
Changes in agricultural commodity prices can on ly partly explain the changes in consumer 
food prices observed. Other macroeconomic f actors and factors related to the degree of 
competition along the food supply chain, the regula tory environment, wage developments and 
changes in tax rates have played a role as well.  
A salient aspect of the analysis is the observation that th e largest food price increases have 
occurred in the new Member States (see figure 5). This has been influenced both by the generally higher levels of wage and price inflation in these count ries, but also by the fact that 
agricultural commodities take up a greater share in  the cost structure of food products in the 
new Member States than in the old Member St ates. Prices in the ne w Member States would 
therefore be more sensitive to increases in th e price of agricultural commodities. Prices and 
price changes could also be impacted by the functioning of downstream market conditions in 
these countries. Currency appreciation appears to  have had a dampening effect on food prices 
in countries such as the Czech Re public, Poland, Romania and Slovakia. 
 
EN 13   EN 4.2. The pass-through and price sticki ness along the food supply chain 
 
When investigating the pass-thr ough of agricultural commodity pr ices and producer prices to 
consumer prices, a distinction should be made between the ma gnitude and the speed of the 
pass-through. The magnitude measures how much of  the initial price change is reflected in the 
changes in consumer prices observed. The shor ter the lag with which consumer prices follow 
commodity and producer prices, respectively, the higher the speed of pass-through. Finally, 
one needs to consider the degree of asymmetr y between the effects of price increases and 
price decreases. One could make the proposition that in order to rais e their profit margins 
actors along the food supply chai n would have an interest to  pass through price increases 
more rapidly than price decreases. As a resu lt the measured pass-thr ough would differ in the 
case of price increases from that in the case of price decreases. The magnitude, the speed and 
the degree of asymmetry in th e pass-through are influenced , among others, by market 
conditions.  
4.2.1.  The pass-through from agricultural comm odity prices to consumer prices 
 
This section investigates the extent to whic h agricultural price increases have been passed 
through to the final consumer prices. For the pu rpose of this analysis, this pass-through is 
calculated as the ratio of the pr ice increase of consumer food product over the price increase 
of the agricultural commodity us ed as an input, taking into ac count the necessary time lag. 
 
The pass-through has been computed for two sp ecific supply chains: from cereals (as a raw 
material) to "bread and cereals" and from milk  (farm gate) to "milk, cheese and eggs". The 
pass-through for the "Food" category as a whole has not been calculate d given the difficulty 
to aggregate agricultu ral input prices.  
 
The average pass-through across the EU of an increase in the cereal price to "bread and 
cereals" supply chain is 28% (see box 1). In other words, the consumer price increase is 
around one third of the price incr ease of the agricultural input us ed. However, there is a large 
cross-variation in this pass-through, which varies from 9% in  France to 64% in Estonia. With 
the exception of Greece and Spain, the countr ies with a pass through above the EU average 
are all new Member States. Even though the levels of pass-through for "milk, cheese and 
eggs" are generally higher than that of "br ead and cereals", their variation across Member 
States is less pronounced, ranging from 25% in  Greece to figures abov e 100% in Slovenia, 
Finland and Estonia. 
 
The analysis of the pass-through in these two speci fic supply chains globally confirms the fact 
that food related markets in the Member States have different cost stru ctures and appear to 
have reacted very differently to the 2007 agricu ltural price rise. This observation is confirmed 
in the following two sub-sections, which focu s on the developments in the upstream and 
downstream parts of the s upply chain, respectively. 
 
The recent drop in agricultural raw material pri ces has not yet fully reflected in consumer 
food prices in most Member Stat es. Downwards price adjustment seems especially slow in the 
specific supply chain 'Bread-making Common Wh eat' to 'Bread and Cereals'. However, the 
decline in milk raw material prices is startin g to push consumer milk prices down in some 
 
EN 14   EN Member States.  
 
Box 1.Relation between bread-making common wheat prices and bread and cereals prices 
During the year 2007, the price of  bread-making common wheat in the EU has increased by 63% in nominal 
terms. Behind this average increase, there is a wide va riation of price increases ac ross Member States, ranging 
from around 35% in Lithuania and Slovenia to  more than 70% in Sweden and Denmark.  
As can be seen in the figure B.1, the average pass-through from bread-making common wheat prices to bread 
and cereals prices – defined as the ratio of the percentage increase in prices of food products over the percentage 
increase in prices of the agricultural commodity used as an input – was 28% in the EU during the recent period 
of exceptional increase of agricultural commodities.  
Figure B.1: Ratio of changes in bread prices over common wheat prices, 2007 
0,090,110,130,16 0,170,180,20 0,20 0,20 0,22 0,23 0,230,28 0,290,340,36 0,36 0,370,520,550,64
0,00,20,40,60,8
FR
FI
DE
DK
SE
PT
BE
SI
UK
AT
HU
IT
EU average
PL
GR
SK
ES
CZ
LV
LT
EE
 
Source: Statistical Analysis of the Food Price Increase, DG MARKT, mimeo  
The most striking feature of this graph is the wide magnitude in the differences in levels as regards the pass 
through in the “Bread and cereals” supply chain, ranging from 9% (France) to 64% (Estonia). This could be the 
result of different market situations at different levels of the supply chain (e.g. competition and efficiency along 
this supply chain). These differences ma y also be due to composition effects a nd reflect the fact that the share of 
the primary input (i.e. wheat) is likely to be lower in those countries where the observed ratios are low, and the 
cost share of inputs other than wheat is consequently higher. The value of the pass-through amounted to around 
20% in nine Member States (Denmark, Sweden, Portuga l, Belgium, Slovenia, the UK, Austria, Hungary and 
Italy). In Poland, Greece, Sl ovakia, Spain and the Czech Republic th e ratio was between 30% and 40%, while it 
exceeded 50% in Latvia, Lithuania and Estonia.  
With the exception of Greece and Spain, the countries with a pass through above the EU average are all new 
Member States. The three Baltic States  for which the price increase of wh eat have been among the lowest, rank 
in the top 3 in terms of a pass-through.  
4.2.2.  Production costs and producer prices in the food processing industry 
 
This section aims to assess whether the changes in producer prices, i.e. the prices that the 
industry charges to wholesalers and retailers, observed in the different Member States (see 
figure 5) reflect changes in the production cost s in the food and beverages industry. As no 
direct information on production co sts is available, input-output (I/O) tables and price changes 
of the main inputs categories (i.e. compensation of employees, agricultural input s, energy and 
transport, inputs coming from f ood processing industry itself, as well as other intermediary 
products) are summarised in a weighted cost index for the food and beverage industry of 
 
EN 15   EN individual Member States. The changes in this index are then compared to the observed 
changes in the producer pr ice index for the food a nd beverage industry.  
Figure 6: Cost structure of the food and beverage industry by Member States 
0% 20% 40% 60% 80% 100%ATBECZDEDKEEESFIFRHUIEITNLPLPTROSESKSLUK
Agriculture Food and beverages industry Energy and Transport Other intermediary products Compensation of employees Other
Source: own calculation and sub-aggregations based on ESTAT. Only Member States included where 
Input/Output tables for 2003 or after are available.  
 
As the cost structure of the food and beverage s industry differs quite substantially between 
Member States (see figure 6), the impact of a ch ange in input prices wi ll be different as well. 
Factors that play a role  include the degree of  technological advancemen t of a country and the 
composition of its food industry. In the new Memb er States, the input share of the agricultural 
sector and the food process industr y itself tends to be higher, wh ile in the old Member States 
the share of business services  (including advertising) and compensation of employees is 
relatively large. The analysis has been carried out at the level of the food and beverages 
industry as a whole due to data limitations.  
 
Figure 7 compares the evol ution of changes in the calculated  cost index with changes in the 
observed producer price index ove r the period 2005-2008 in the larger EU Member States. In 
all countries, the rise in input costs was relatively moderate early  on but rose to higher levels 
later within this period before slowing dow n most recently, suggesting that the order of 
magnitude of observed price changes is to a larg e extent justified by changes in the underlying 
input costs. However, there seem to be differences betw een countries, which are more 
apparent when comparing the changes in input  costs with the changes in producer prices. 
While in the UK and, to a lesser extent, in  the case of France and Poland, changes in 
producers prices seem to track changes in inpu t prices, albeit with a small time lag, in the 
other large EU Member States this  seems to be much less the case. 
 
EN 16   EN Figure 7: Comparison between changes in the food and be verages producer price index 
and the production cost index  
Germany
-2024681012
janv-05
mars-05mai-05 juil-05 sept-05
nov-05
janv-06
mars-06mai-06
juil-06
sept-06
nov-06
janv-07
mars-07mai-07
juil-07
sept-07
nov-07
janv-08
mars-08
mai-08
juil-08 sept-08
Observed food PPI Cost indexSpain
024681012
janv-05 mars-05
mai-05
juil-05
sept-05
nov-05
janv-06
mars-06
mai-06
juil-06sept-06
nov-06 janv-07
mars-07
mai-07 juil-07 sept-07 nov-07 janv-08 mars-08
mai-08juil-08
sept-08
Observed food PPI Cost index
France
-4-2024681012
janv-05
mars-05mai-05 juil-05 sept-05 nov-05janv-06 mars-06mai-06
juil-06
sept-06
nov-06
janv-07
mars-07mai-07
juil-07
sept-07
nov-07
janv-08
mars-08
mai-08
juil-08 sept-08
Observed food PPI Cost indexItaly
-4-2024681012
janv-05
mars-05
mai-05 juil-05 sept-05
nov-05 janv-06 mars-06mai-06 juil-06
sept-06
nov-06
janv-07mars-07mai-07
juil-07
sept-07
nov-07
janv-08
mars-08
mai-08
juil-08
sept-08
Observed food PPI Cost index
Poland
-6-4-20246810
janv-05 mars-05
mai-05
juil-05 sept-05
nov-05
janv-06
mars-06
mai-06
juil-06
sept-06
nov-06
janv-07
mars-07
mai-07juil-07
sept-07
nov-07
janv-08 mars-08mai-08 juil-08 sept-08
Observed food PPI Cost indexUnited Kingdom
02468101214
janv-05 mars-05mai-05 juil-05
sept-05
nov-05
janv-06
mars-06mai-06
juil-06
sept-06
nov-06
janv-07
mars-07
mai-07
juil-07
sept-07
nov-07
janv-08
mars-08
mai-08 juil-08 sept-08
Observed food PPI Cost index 
Source: Own calculations based on ESTAT data 
4.2.3.  The pass-through from producer to consumer prices 
 
This section considers the pass-through in the downstream segment of the food supply chain. 
Over the most recent period, a structural break7 in the pass-through of changes in producer 
prices to consumer prices ( now measured as an elasticity8) was observed in some of the EU 
countries. In most of the euro area countries, increases in producer  food prices started to rise 
faster than consumer food pr ices from mid 2007 onwards, whereas  the opposite had been true 
in the period from 2002 to mid- 2007 (see figures 8 and 9). This  could suggest that the recent 
producer price increases have not been transmitted fully to consumer food prices. This could 
                                                 
7 The structural break was confirmed by Chow test results in the case of Belg ium, the Czech Republic, 
Denmark, Spain, France, Italy, Latvia, Lithuania, Hungary, Poland, Romania, Slovenia and Sweden). Accordingly, the period chosen for the estimation of the pass-through is from January 2002 to June 
2007. 
8 The pass-through is estimated by the application of a simple OLS regression. In order to test the 
robustness of our estimation results, we introduce the additional estimation results achieved by 
application of the GMM (Genera lised Method of Moments).  
Individual country single equation regressions were carried out, regressing overall food prices on 
lagged food producer prices, world food commodity prices, unit labour costs, oil, lagged values of the 
dependent variables and seasonal dummies.  
 
EN 17   EN be an indication that the effects of the increase  in producer prices were  partially absorbed by 
the food retail sector  through a reduction of  profit margins. 
 
Figure 8 Percentage point difference between inflation of consumer and producer prices 
(January 2002-June 2007)  
-15-10-50510
RO BG LV HU ES SI DK GR UK LT PL NL SE CZ FR AT SK FI IE BE DE CY IT LU PTpercentage points
 
 
EN 18   EN  
Figure 9: Percentage point difference between inflation of consumer and producer prices 
(July 2007-July 2008)  
-8-6-4-2024
NL CY PT RO IT FR SE DE ES LU UK LT AT SK FI LV GR BE CZ PL DK IE SI BG HUpercentage points
 
 
A further investigation into the link between consumer and  producer food prices reveals a 
different level and speed of pass-through across the EU countries. The re sults show that the 
magnitude of the pass-through of producer prices to consumer prices is  relatively large in 
most of the new Member States wh en prices go up. In fact, in this case, the elasticity is larger 
than one suggesting that margin s increase. Interestingly, when  producer prices decrease, the 
estimated elasticity is less th an one and there are lags (see Annex 1 ). For the euro area, the 
magnitude of the transmission is similar in the case of price increase and decrease and prices 
decreases are actually transmitted rapidly. Thus, th e results confirm that price stickiness is not 
an issue in the euro area, whereas there is f ound evidence of downwards price stickiness in the 
new Member States. While it is difficult to gene ralise and these result s should be interpreted 
with care, they suggest that in the euro area retail markets are relatively competitive whereas 
this seems to be less the case for the new Member States.  
 
Several additional caveats have to be kept in mind when comparing the size of the pass-
through and market structure in the new Member  States and in the euro area respectively. 
There are a number of f actors which may have contributed to  the different trends in the pass-
through in the old Member States compared to  the new Member States. First, in the new 
Member States with the lowest price levels, the contribution of (unprocessed) food to the 
(final) retail price also tends to be greater, wh ich leads to higher percentage increases in the 
retail prices. In addition, an increase in indi rect taxes contributed to  the relatively higher 
consumer food price increases in most of th e new Member States. Moreover, energy price 
increases were stronger in most new EU memb er states. Given that some food products are 
highly tradable, food price arbitr age within the EU may have taken place and exerted upward 
price pressures on food products in  the Member States with the lowest price levels. Finally, 
 
EN 19   EN the market structure has changed more in the ne w Member States over the recent period. This 
aspect is analysed further in the following section. 
4.3. The role of the food ret ail market structure  
 
This section presents the results of an econometric analysis9 of the determinants of consumer 
food price developments (see annex 2). The an alysis distinguishes between two groups of 
countries: new and old Member States. This choice is based on the heterogeneity of these 
countries as discussed above.  
 
Producer prices explain a high pr oportion of consumer food pr ice developments in both the 
old and new Member States in the period from 2003 to 2007. Unit labour costs appear to have 
a significant impact on consumer food prices in  the old Member States only. The reduction in 
the number of individual retail outlets does not appear to have had an impact on consumer 
food price development in the old Member States. This suggests that th e consolidation of the 
food retail sector has not led to higher consumer prices in the old Member States. In the case 
of the new Member States, there seems to be  some evidence of a negative link between the 
number of individual food retail outlets and c onsumer food prices. Indeed, the number of 
retail outlets per inhabitant is lower in the ne w Member States but has increased rapidly. A 
higher number of alternativ e outlets at the local level should in principle benefit consumers. A 
consumer satisfaction survey conduc ted in the meat and vegetables  sectors has shown that still 
in many new Member States consumers seem to  have less possibility  to switch between 
stores. 
5. REGULATORY ISSUES  
 
This section discusses the effects of the re gulatory framework on co mpetition and prices 
along the food supply chain. A dis tinction is made between regul ation creating entry barriers, 
such as planning regimes, regulations restri cting shop opening hours a nd regulations limiting 
price competition. It is important to bear in mi nd that these regulations can have an impact on 
other general policy objectives that must not be overlooked when assessing their overall 
impact on social welfare and their compatibility with the EU Treaty. 
5.1. The effect of the regulatory framework and price levels 
 
The regulatory framework affects the food supply  chain at all levels from the agricultural 
sector down to retail. Regul ation may affect the func tioning of markets through 
industry/sector-specific regulati on (e.g. urban planning regulati ons and opening hours in the 
case of the retail sector) or economy-wide provisions (e.g. labour market regulation, or 
competition policy). The regulatory framework can raise compliance costs for firms, which will be passed on to customers in the form of hi gher prices. Regulation can also directly affect 
prices through price regulation. Another aspect that needs to be  taken into account is the level 
at which the regulatory framework is designed, decided and enforced (i.e. EU-wide, national, 
regional, local). To the extent that the applicable regulatory framework va ries across countries 
(and even regions), the regulator y impact across the EU is cons equently likely to differ as 
well and may explain some of th e observed price differentials. 
                                                
 
9 The analysis is carried out by the application of  a simple OLS regression on pooled annual data. 
 
EN 20   EN  
While an analysis of regulation should take in to consideration the costs imposed on firms and 
ultimately passed on to consumer prices, it should also take into account the regulatory 
benefits and the contribution of regulation to ove rall social well-being. For example, planning 
restrictions or opening hour restrictions are often identified as  competition-inhibiting 
regulations that raise en try barriers for potential entrants and protect incumbents. At the same 
time they aim to address congestion issues, nois e pollution or considera tions about the image 
of town-centres. Therefore, an in-depth ex amination of the impact of the regulatory 
framework on the functioning of the food supply chain needs to  fully take in to account the 
different objectives of regulati ons that are imposed on firms a nd whether those objectives are 
met in a proportionate manner and in a manne r consistent with other general policy 
objectives.  
5.2. Entry regulations 
 
Certain regulations have the effect of potentially hampering competition by constituting significant barriers to entry. Su ch regulations, which effectively shelter incumbents from 
potential rivals, occur frequently, notably at the local and/or regi onal level, and tend to lead to 
increased margins, higher prices  and lower productivity of retailers. This is for example the 
case for general regulation on commercial esta blishments, or land and urban planning 
regulations affecting the attrib ution of construction permits, which limit the establishment of 
new stores.  
 
For instance, in some Members States, specific  regulations foresee au thorisation procedures 
for shops above a certain size (the  threshold being sometimes desi gned to focus especially on 
a certain type of commercial format). The pr ocedure can be based on a number of criteria 
(amongst them criteria of an economic nature, such as the impact of the establishment on 
competitors or on the “balance” between different  forms of shop formats) which give a very 
large margin of discretion for the authorities de livering the authorisation.  The procedure itself 
is not such to guarantee an obj ective and impartial application of the relevant criteria. 
Consequently, these conditions restrict entry to the market. 
 
A survey carried out amongst national competition authorities also suggests that planning regimes place more limited constraints on the extension of existing stores by retailers 
compared with new entry. An incumbent retailer,  by extending its store more easily, will thus 
make new larger store entry by a rival retailer more difficult.  
 
As indicated in section 6, a consolidation is taki ng place in the retail sect or and this sector is 
already highly concentrated, especially in th e old Member States. This consolidation may 
under certain conditions give rise  to efficiency gains leadi ng to lower consumer prices. 
Evidence suggests that the presence of several large retail chains appears to contribute to 
increased price flexibility and greater economie s of scale and scope, achieved for example, 
through lower logistic costs. However, high concentrat ion levels may have a potential 
negative impact on competition, particularly if entry barriers are high. Therefore, regulations 
that restrict entry in the medi um-term need to be scrutinised with a view to ensuring that 
incumbents face a constant threat of rapid en try by newcomers. This is being done in the 
context of the transposition of the services directive and will be further checked in the context 
 
EN 21   EN of the retail monitoring report . However, when examining such  regulations, their social and 
environmental objectives must not be overlooked. 
5.3. Shop opening hour restrictions 
 
Different regulations restricti ng opening hours of certain  types of retail formats are in place 
all across Europe and often even vary within Member States. Thes e restrictions may also have 
a potential negative impact on competition but to a lesser extent than planning regulations, according to the survey made amongst national competition authorities. They may also reduce 
retailers' efficiency by limiting the possibility to sell their products, and thereby increase 
operational, logistics and wastage costs of retail outlets. According to some studies relaxing 
opening hour restrictions could significantly reduce costs.  
 
The most marked differences in shop opening hour regulations relate to Sunda y opening. In 
practice, some Member states do not impose cl osing days (except a fe w public holidays such 
as Christmas day), while othe rs impose Sunday clos ing or limit the number of Sundays per 
year that larger shops can open. Furthermore, in some Member States shop opening 
regulations vary according to regions. For ex ample in one Member State, depending on the 
region a variation of 6 to 20 Sundays for whic h opening is allowed exis ts. In many instances, 
derogations to Sunday closing ar e permitted for touristic regions. 
 
Given that Saturdays are key volume sales days for retail stores, it is clear that the risk of 
having unsold stock in stor es at closure is high.  As fresh or primary processed food needs to 
be kept in refrigerators, average costs of st oring food in stores w ith more limited opening 
hours will be higher and risks of wastage will be greater. Moreover, restrictions of shop 
opening hours may prevent significant levels of the working populati on from having access to 
certain retail stores, which is problematic if th e restrictions affect the most price competitive 
outlets. Nonetheless, the efficiency consideratio ns of lessening restrict ions of shop opening 
hours should be see in the light  of the potential social impact , notably on smaller shops and 
shop-keepers.  
5.4. Regulations restricting the abili ty to compete on prices  
 
Some regulations contribute to limit price co mpetition between retailers and may create 
distortions and a lack of transparency in th e relationships between suppliers and retailers. 
Sales below costs restrictions a nd associated regulations fixing invoice price le vels belong to 
this category. These regulations can be complemented by additional regulations limiting, for example, listing fees (i.e. payments by suppliers to retailers to be granted shelf access) or 
reverse payments (i.e. fees to be  paid by suppliers to retailers for services such as in-store 
promotions, etc.). The extent of such practices  can also be affected  by the negotiation power 
of suppliers and retail ers and may under certain circumstan ces have detrimental effects for 
competition. In some Member States (e.g. the United Kingdom) some of these commercial practices are addressed by codes of conduct. 
 
In many Member States restrictions of sa les below costs are in place through specific 
regulations prohibiting sales below costs 
per se . These latter regulations aim to establish a 
certain threshold price under whic h operators are not allowed to sell except in a limited set of 
circumstances. Where these regulations exist, the coverage of the prohibition to sell below 
 
EN 22   EN costs vary widely across Member States (e.g. ap plication of the prohibition to all retail sectors 
or only to certain firms or pr oducts; circumstances under which a sale below cost would be 
allowed even if the practise is generally prohibited; elements included in the calculation of "costs", etc). 
 
Such regulations were originally designed to de ter predatory behaviour by larger firms to the 
detriment of smaller market ope rators, under the hypothesis that th e latter would be driven out 
of the market if their larger competitors coul d systematically engage in sales below cost. 
Recent studies were not able to show that the structure of the retail se ctor was influenced by 
the existence of such sales-below-cost prohibitions. Therefore, they do not appear to be efficient in protecting small shops which is their primary justification. Th is is further backed 
up by national competition enquiries in the Me mber States where sales below costs are 
allowed that have concluded that this has not re sulted in predatory pricing. Other justifications 
invoked can be linked to protec tion of small suppliers (by avoiding excessive pressure on 
them to lower the purchase price), protection of  consumers (which would be attracted in the 
store by the low price of a give n product but would then buy the rest at a higher price), and 
finally protection of brands (poten tial devaluation of the value of  a brand if the retail price is 
too low). 
 
In effect, sales-below-cost restrictions set a price floor – often being defined as the invoice 
price – which amounts to resale price maintenance, limiting intra-brand price competition between retailers. Furthermore, they lead to higher stock-management costs as retailers may 
face more difficulties in selling excessive stocks . These costs are likely to be higher for 
perishable products. Regulation defining how this  price floor ought to be calculated can also 
contribute to exacerbate price stickiness. In market segments where food suppliers have 
considerable market power, these restrictions ca n lead to the establishment of relatively high 
price floors. Indeed, there is tentative evidence to show that the imposition of such bans has 
reduced price competition between major reta ilers. Food products as necessities are an 
essential part of the consumer's typical s hopping basket and where sales below cost are 
allowed, retailers can use temporary sales be low costs on food products to attract customers 
from their competitors. Selling below cost may also ease the introduction of new products on 
the market. 
 
Regulations fixing invoice price levels are often the practical translati on of sales below costs 
restrictions. By stipulating th at retailers cannot sell below a pre-defined invoice price, this 
may strengthen the negotiation power of the strong suppliers. Likewise, the option of 
compensating higher invoice prices by a reverse margin (i.e. a fee not included on the invoice) 
may significantly lessen a retailer's incentive to ne gotiate low prices in the first place. Finally, 
as negotiations on this price floor are typically  national and annual, th is tends to lead to 
differences in prices across nationa l markets and to price stickiness. 
 
However, if sales below costs and invoice price rules were rela xed, there should be sufficient 
safeguards in order to preserve competition an d consumer protection. For instance, it should 
be ensured that such a relaxa tion does not result in price wars and predatory pricing. 
However, this risk can be covered by stringent competition monitoring. Furthermore the 
accessibility to food retailers for all consumers shoul d be ensured. It should also be warranted 
that a relaxation of such rules does not affect the development of "qua litative" relationships 
 
EN 23   EN between suppliers and retailers in the food ch ain that encourage i nvestment and innovation 
throughout the chain.  
5.5. Enforcement of consumer protection rules 
At a time of sharply fluctuating food prices, the risk of misleading price advertising may 
increase. For example, consumers may be misled by suppliers altering pack  size or contents in 
order to apparently maintain the sa me price for the relevant product.  
 
In general, transparency measures allowing better price comparisons across products and 
stores for consumers, as set dow n for instance in the Unit Pricing Directive, can facilitate 
consumer choice. Misleading commercial practi ces, which distort cons umers' behaviour and 
actions in a way that turns out detrimental to them (e.g. provision of false information or 
omission of relevant information) are pros cribed by the Unfair Commercial Practices 
Directive. To be effective, both Directives obviously need to be adequately enforced.  
6. THE ROLE OF COMPETITION ALONG THE FOOD SUPPLY CHAIN  
 
The functioning of the food supply chain is also affected by the degree of competition at all 
stages of the chain. Continuous vigilance is t hus required to ensure that competition rules are 
enforced at EU and Member State level in or der to avoid competition infringements such as 
anticompetitive agreements and practices. This section reviews the role that competition can 
play for the functioning of the food supply ch ain. The practices iden tified in table 2 and 
described in sections 6.3 and 6.4 constitu te the most frequent competition concerns 
encountered in relation to the food sector at large but they do not constitute an exhaustive list.  
6.1. Market structures along the food supply chain  
 
The assessment framework for competition between firms is the relevant market. It is defined 
according to a product and a geographic dimensi on at a moment in time. Food retail markets 
typically involve bundles ("food baskets") sold by individual stores and are local in scope – 
encompassing a so-called catchment area. In th e presence of entry barriers, the competitive 
constraints faced by a particular retail store thus depend on the presence of other nearby 
stores. The geographic size of a food retail market also depends on the substitutability of 
stores from a consumer perspective, which is influenced by the stores' formats and by 
consumers' valuation of time and travel. Retail er chains themselves act as buyers of food 
products on a large number of upstream mark ets. These markets tend to have a much 
narrower, product-specific, delimitation and are t ypically much larger in terms of geographic 
scope – often country-wid e or international. 
 
 
 
EN 24   EN Figure 10: Combined market share of the five largest retailer chains (2007) and 
change (2004-2007) 
 
0102030405060708090
BE BG CZ D K DE IE GR ES FR IT H U NL AT P L P T RO SK FI SE U K5-firm concentration ratio
200 4 2007 
Note: There are no data for CY, EE, LT, LV, LU, MT and SI. Market shares are based on turnover and
 include non-food items sold by retailers.  
Source: Euromonitor International 
 
Following a period of consolidation, the degree of concentration in the EU food retail sector is 
relatively high – in most Member States the five  largest retailer chains account for over 50% 
of the market (see figure 10). It is higher in the old Member  States, but the consolidation 
movement is stronger in the new Member States . In many of the old Member States this 
consolidation movement has been accompanied by a switch from smaller to larger store 
formats and an overall reduction in the number of stores (see figure 11). In contrast the 
number of individual stores in most new Member States has in creased. In all Member States 
with exception of Sweden food re tail surface has increased as ha s the number of large retail 
stores (i.e. hypermarkets, s upermarkets and discounters).  
 
 
 
EN 25   EN Figure 11: Change in number of  outlets per capita, 2002-2007 
-30%-20%-10%0%10%20%30%40%50%
be bg cz dk de ee ie gr es fr it cy lv lt lu hu mt nl at pl pt ro si sk fi se ukOutlets/capita (% change)
-150%-100%-50%0%50%100%150%200%250%
Large retail outlets/capita (% change)
Outlets/capita Large retail outlets/capita
Note: Large retail outlets include hypermarkets, supe rmarkets and discounters.  
Source: Euromonitor International  
Another trend which may contain prices is the increase in the market share of discounters, 
who typically focus on low prices at the expens e of other product dime nsions (see figure 12). 
Indeed, it is plausible that the presence of di scounters exerts pressure  on other retailers to 
increasingly focus on the price dimension. Their growing presence may also have been 
spurred by changing household purchasing habits  and a higher price sensitivity. Over the 
period 2002-2007, covered in the figure, the share of discounters has increased almost 
everywhere and in particular so  in some of the new Member States (Slovakia, Romania and 
the Baltic States). With a market share of ove r 30%, discounters are by far most successful in 
Germany and Austria, where they have a long -established presence. In the new Member 
States, discounters are pa rticularly strong in Poland, Hung ary and the Baltic States, where 
they account for a significant market share (over 20%) and continue to grow at a high rate.  
 
EN 26   EN  
Figure 12: Combined market share of retail discounters, 2002 and 2007 
0%5%10%15%20%25%30%35%40%45%
uk fi mt fr ie sk gr es lu it se be nl pt cy si ro ee lt cz lv hu pl dk at de
2002 2007
Note: Market share calculated as the share of discounters'  turnover in turnover of large retailers (hypermarkets, 
supermarkets and discounters).  
Source: Euromonitor International  
 
Even though high concentration levels may prima facie  be suggestive of weak competition, 
the size of a retail chain may also allow it  to better exploit economies of scale and scope, 
equipping it in turn to co mpete more intensely. As indicated  above, the presence of more than 
one retail store in a catchment area is crucia l for competition to occur and there do not seem 
to be any indications that this has been reduced as a result of the consolidation trend in the 
sector. Furthermore, the market position of a retail chain will condition its market power vis-
à-vis suppliers. A potential upstrea m consequence of consolidation at the retail le vel is that 
suppliers are limited in the number of alternative outlets. The fact that many large retailers 
increasingly operate in more than one Member State and thus have acc ess to wider potential 
consumer base strengthens their position. Analog ously, when concentration occurs in the food 
industry, retailers themselves face a reduc tion of alternative sources of supply.  
 
Given the large number and the heterogeneity of  food products, the f ood processing industry 
needs to be analysed more narrowly on the basis of groups of similar products. As the types of 
products and characteristics of these groups strongly vary, str ong differences are observed in 
the structure of sub-industries. Market concentration is typica lly higher in markets for product 
categories in which brands play an important role. A strong brand may serve as a signal of 
quality and may contribute to the differentiation  of a good, thus helpin g to secure consumer 
loyalty. At the same time it ma y make it harder to compete ag ainst, thus dissu ading potential 
rivals from entering and making it difficult for retailers not to ca rry it (so-called 'must-stock' 
products). Sectors that are ch aracterised by high concentrati on and strong brands include 
biscuits, confectionery and soft  drink production. Food products th at are less differentiated 
such as bread, meat or flour are typically produced by food sub-indu stries that are less 
 
EN 27   EN concentrated, including craft produc tion (e.g. bakeries, butcheries ). The incidence of private 
label and no-label products is more widespread in the latter categories. However, the geographic scope of these products is  also likely to be narrower.  
 
6.2. The link between competition, price levels and inflation 
 
The more intense the level of competition, the lower price levels  are likely to be, as firms face 
competitive constraints that compel them to lower their costs and bring prices down. The effect of competition on price 
changes  resulting from increasing input costs is more difficult 
to assess as on the one hand, firms operating at  low margins in competitive markets will be 
forced to increase output prices and on the othe r hand, firms in less competitive markets may 
use the occasion to exploit their market power and raise output  prices as well. 
 
Consumer decision-making is based on consumers'  characteristics and preferences. The so-
called 'retail offers' among which they can choo se consist of many dimensions (e.g. quality, 
range, services, proximity) – the price being ju st one of them. As a consequence of this, 
different retailers are likely to focus to a diffe rent extent on these resp ective dimensions. All 
of these are equally valid dime nsions of competition. Even though the focus of this staff 
working paper is on prices, it is  important to recall that reta ilers compete on 'retail offers' 
rather than on product price only . Depending on the heterogeneity of consumers' valuation of 
the different dimensions, prices for similar pr oducts are likely to vary substantially across 
retail chains with in the same country, provided that thei r retail offers are different. To the 
extent that consumer characte ristics and preferences vary across countries and retailers 
respond to this, it is also likely to observe price diffe rentials across countries. 
 
The analysis of competition can be broken up into horizontal issu es (i.e. referring to 
interactions between acto rs at the same level of the supply chain) and vertical issues (i.e. 
referring to interactions between  actors at different levels of  the supply chain), the two of 
which are interrelated. The consequences of in teractions between firm s are situation-specific 
and consequently need to be assessed in terms of their effect on competition as well as from an efficiency perspective – i. e. in terms of innovative perfor mance, economies of scale and 
economies of scope, arising for exampl e from lower logistic costs.  
 
The potential and actual effects of  both horizontal and vertical agreements between firms are 
manifold. In some circumstances agreements may indeed result in price levels that are 
excessive in comparison to the competitive price.  The types of practices listed in table 2 may 
merit a closer scrutiny, always bearing in mind the context in which they take place.    
 
EN 28   EN Table 2: Overview of main practices that  may give rise to competition concerns  
Practice Description Main competition risk 
Cartels Agreements among competitors relating 
inter alia to price fixing, output 
restriction and market partitioning Maintenance of high prices and stalling 
of innovation to the detriment of 
consumers 
Purchasing agreements Agreements concluded by firms to 
achieve volumes and discounts similar to 
their bigger competitors Under certain conditions, tool for 
foreclosing rivals' access to essential 
inputs at competitive conditions; 
collusive behaviour between competitors 
on downstream markets  
Resale price maintenance Restriction of the buyer's ability to 
determine the sale price to end 
consumers Reduction of price competition  
Single branding Obligation or incentive scheme which 
makes the buyer purchase practically all 
of his requirements on a particular 
market from only one supplier, for a 
certain duration Restriction of in-store inter-brand 
competition and/or foreclosure of the 
market to competing and potential 
suppliers 
:   
Tying Purchase of a product (tying product) 
made conditional on purchase of other 
product (tied product) Foreclosure on the market of tied 
product, and indirectly of the tying 
product 
Exclusive supply agreements Direct or indirect obligation causing a 
supplier to sell a good only to one buyer Foreclosure of other buyers / retailers  
:     
Private label products Products made by third parties upstream 
in the supply chain and sold under 
retailers' brand Foreclosure of existing and potential 
competing buyers; restriction of in-store 
inter-brand competition 
Certification schemes Requirement to comply with a number 
of conditions set by individual buyers Risks of foreclosing competing buyers 
 
6.3. Horizontal practices  
The functioning of the food supply chain may be  affected by a lack of competition in the 
market. For instance, distortion of competition may arise from operations of concentration leading to dominant positions or anticompetitive unilateral conducts on either the purchasing/ procurement markets and on the resale markets for foodstuffs, as well as from agreements 
between firms or unilateral conducts violating respectively Articles 81 a nd 82 of the Treaty.  
 
Cartels 
Cartels constitute the main anti-competitive behaviour which should always be prohibited. 
Practices such as price fixi ng, output restriction or (dow nstream or upstream) market 
partitioning, could lead, amongst other effects,  to market foreclosure, the artificial 
maintenance of high prices and a stalling of innovation to the ul timate detriment of European 
consumers. Recent experience shows that cartels  can occur in the food sector. These cartels 
tend to vary in terms of territorial scope. Special attention should be given by competition authorities to uncovering the most harmful car tels amongst suppliers of both processed and 
non-processed foods. 
 
EN 29   EN  
Purchasing agreements 
 
Other horizontal agreements, such  as joint purchasing agreemen ts ("buying alliances") among 
several large retailers s hould also be scrutinised.10 These purchasing agreements are often 
concluded by small and medium-sized retaile rs and wholesalers to achieve volumes and 
discounts similar to their bigger competitors. Th ese agreements between SMEs are therefore 
normally pro-competitive since even if a moderate  degree of market power is created, this 
may be outweighed by efficiency gains resul ting from economies of scale. The size and 
number of buying alliances in the food sector  has grown considerably  throughout the EU. The 
involvement of larger buyers in  such alliances has led to in creasing concerns expressed by 
producers of both processed and unprocessed food, as well as farmers. The impact of this kind 
of agreements on the functioning of the food s upply chain needs to be closely followed since 
such agreements may serve as a tool for fo reclosing rivals' access to  essential inputs at 
competitive conditions and/or for competitors to engage in collusive behaviour on downstream markets (i.e. price fi xing, output limitation or market allocation). The Guidelines 
on the applicability of Article 81 of the EC Tr eaty to horizontal cooperation agreements, as 
well as the Guidelines on vertic al restraints, provide the right analytical framework to address 
joint buying from a competition policy perspective. The Commission and National 
Competition Authorities will continue to use thes e tools to carry out the relevant analysis. 
Mergers 
 
Concentration at all levels of the food supply chain shall be continuou sly monitored. Through 
rigorous merger control mechan isms, which include the obligation for all companies involved 
to notify proposed structural operations to  the Commission or National Competition 
Authorities, European competition rules ensure th at the increased concentration resulting from 
mergers does not significantly impede effectiv e competition at any level of the food supply 
chain. Among the mergers with a so-called 'Community dimension'11 analysed by the 
European Commission since 2000 in sectors relating to the food supply chain, the large 
majority was unconditionally approved, indicating that they did not give  rise to impediments 
to competition. Only a small number was approved  subject to conditions. This distribution is 
fairly consistent with merger deci sions in other sectors of the economy12, suggesting that 
mergers in sectors along the food supply do a priori  not give rise to higher anti-competitive 
risks than those in other sectors of the economy.  
6.4. Vertical issues 
 
The degree of market power held by the firms in  vertically-related markets varies by product 
category and can potentially lead to imbalances in  the food supply chain. It is influenced inter 
alia by the position of firms in the markets in which they operate, be it as suppliers or as 
                                                 
10 The Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation 
agreements, as well as the Guidelin es on vertical restraints, provide the right analyti cal framework to 
address joint buying from a competition policy perspective.  
11 Council Regulation (EC) No 139/2004 of 20.01.2004 on the control of concentrations between 
undertakings. A 'Community dimension' exists where the merging parties have an aggregate Community-wide turnover  exceeding a certain threshold, of whic h two-thirds at most are achieved in 
one and the same Member State. 
12 http://ec.europa.eu/comm/competition/mergers/statistics.pdf 
 
EN 30   EN buyers. Consolidation in a sector may allow fi rms to countervail market or buyer power in a 
vertically-related market, but may also result in foreclosure.  The ongoing consolidation in 
both the retail sector and the food industry ca n generate efficiency gains and does not 
necessarily constitute a competitive risk, to the extent that it counteracts upstream market 
power or buyer power respectively. Nonethele ss, excessive concentration may ultimately 
result in anti-competitive developments lead ing to price increases. For this reason the 
developments in the sectors along the food supply chain a nd the behaviour of market 
participants need to be monitored closely to pre-empt anti-competitive situations that would 
ultimately fuel price increases. A number of f eatures other than the market share of firms 
involved in a vertical transacti on may affect their bargaining pow er or already be a reflection 
of it. These features include product attributes, for example th e relative importance of branded 
products, as well as contractual te rms between vertically -related firms. These features are by 
and large legitimate activities, but deserve consid eration in any deeper assessment of the food 
supply chain. 
 
The effects of vertical agreements on prices are ambiguous and may either foster competition 
by generating efficiency gains, or  inhibit it by leading to verti cal foreclosure or by facilitating 
collusion on any level of the supply chain. Besides resale price maintenance and some 
practices relating to market partitioning, whic h are considered hard-core restrictions of 
competition, a large number of vertical agreements (including exclusive distribution, single branding, tying, exclusive customer allocation,  selective distribution,  franchising, exclusive 
supply agreements and recommended and maximu m resale prices) can be identified which, 
given their ambiguity, typically require a cas e-by-case assessment, for which detailed rules 
exist at Community level.
13  
 
Resale price maintenance 
 
Practices relating to resale price maintenan ce are considered hard-core restrictions on 
competition. Such practices restricts the buyer's (i .e. the wholesaler or retailer's) ability to 
determine the price level at which he will sell the product to his customers. As a result, price 
competition in the downstream market is signifi cantly reduced. Practices relating to resale 
price maintenance often appear local in scope National Competition Authorities are also well 
equipped to address them. 
Single branding (and tying) 
 Other vertical agreements such as single br anding could also have detrimental effects on 
consumers. Single branding invo lves an obligation or an incentive scheme which makes the 
buyer purchase practically all of  his requirements on a particular market from only one 
supplier. As a result, the buyer will not buy and resell competing goods . This may lead to 
foreclosure of the market to competing and poten tial suppliers or a loss of in-store inter-brand 
competition. The market position of the supplier is  of importance since it is only likely that 
competing suppliers are foreclosed  if they are significantly sma ller than the supplier applying 
the non-compete obligation. In th e food sector, single branding, in cluding direct or indirect 
practices that result in brand exclusivity, requ ires a case-by-case analysis to determine the 
                                                
 
13 Regulation 2790/1999 on the application of the Article  81(3) to categories of vertical agreements and 
concerted practices, and Guidelines on vertical restraints 2000/C 291/01 
 
EN 31   EN potential detrimental effect on the food supply chain. The Commission's Block Exemption 
Regulation14 and the Guidelines on vertical rest raints provide detailed rules for such 
assessment. Other business practices such as tying the purchase of a produc t to that of another 
product may also result in brand exclusivity a nd consequently have similar effects requiring 
further analysis to determine their potential detrimental effects on the food supply chain.  
 
Exclusive supply agreements 
 
Exclusive supply agreements may also require careful scrutiny. Exclusive supply relates to 
any direct or indirect obliga tion causing the supplier to sell  the goods specified in the 
agreement only to one buyer inside the Community  for the purposes of a specific use or for 
resale. The main competition risk in this situ ation is foreclosure of  other buyers/retailers 
within the food supply chain. The market position of competing buyers on the upstream market is thus crucial since competitors are only likely to be foreclosed if their market 
position is significantly smaller than that of th e buyer benefiting from the agreement. If the 
buyer has market power downstream, appreciab le negative effects for consumers can be 
expected. However, countervailing power of supp liers is also of rele vance, since important 
suppliers will not easily allow themselves to be cut off from alternative buyers. 
 
Certification schemes 
 
Certification schemes can be mentioned as an example of arrangements that could indirectly 
compel the suppliers to sell to only one buye r. Certification schemes required by retailers 
often involve a significant financial and administrative burden for farmers and food 
producers. The functioning of these schemes in th e EU market needs to be scrutinised with a 
view toward reducing their costs and removi ng barriers to market access and integration. 
Recent years have indeed seen a substantia l growth in private and national food quality 
certification schemes. These schemes may be us eful for producers and consumers, as they 
guarantee quality and origin and therefore allow customers to make better informed choices. 
Furthermore, as many of these schemes are relate d to environmental standards their aim is to 
halt environmental degradation and to add to fo od security in the long-term, for example by 
promoting sustainable farming practices. Nonethel ess, the proliferation of schemes and labels 
in recent years has given rise to concerns about their transparency requirements, the 
credibility of the claims made and their possi ble effects on equitable commercial relations. In 
particular, the pressure to participate in more than one sc heme because of different customer 
requirements entails a significant financial and administrative burden for agricultural 
producers, and especially small-scale producers. There is thus a need to analyse to which extent certification schemes act  as barriers to market access and to the free movement of 
goods, thereby impeding the smooth functioning  of the Single Market . The Commission has 
opened a debate on the various aspects of agricultural product quality policy, including 
certification schemes and their functioning in the EU market.
15 Building on these reflections 
the Commission will develop strategic orient ations in a Communication on agricultural 
product quality policy sc heduled for spring 2009. 
                                                 
14 Guidelines on vertical restraints 2000/C 291/01 
15 COM(2008) 641 final, 15.10.2008, Green Paper on Agricultural Product Quality. 
 
EN 32   EN  
Private labelling 
 
The introduction of private labe l products by retailers is a gr owing trend in the food retail 
sector. The market share of such products varies by country, pr oduct-category and store 
format. In some Member States they now acc ount for more than 40% of products sold. For 
many store formats – in particul ar discounters – private labels represent the quasi-totality of 
listed products. While they widen the range of  available products an d thus represent an 
additional source of competition, they may lead to foreclosure effects as supplier of branded 
products become a direct competitor to the reta iler. Similarly, while private label products 
provide opportunities for their producers to ha ve access to a large cust omer base, they may 
also reinforce their dependency to wards a particular retailer. Th eir long-term impact on prices 
is ambiguous, but there is nonetheless some evid ence that they exert a downward impact on 
the price level of a given product category,  which is particularly strong upon their 
introduction. Nonetheless the effect of priv ate label products on  buyer power and on 
innovation in the food industry will c ontinue to deserve attention.  
 
The increased bargaining power of retailers re sulting from the introduction of private label 
products may be offset by the strong bargaini ng power of firms offe ring (internationally) 
branded products due to the 'must-have' stat us of such products. Producers of homogeneous 
products, for which brand awareness is not high, ar e likely to be in a mu ch weaker position. A 
stronger brand image results from product di fferentiation through in vestment in product 
innovation, quality and advertising. Ultimately st rong brands may constitute entry barriers, as 
new entrants would be faced with high levels  of upfront costs they could not recover 
subsequently (endogenous sunk costs). 
7. CONCLUSION  
 
This working document has provided a brief description of the food supply chain and has 
investigated the impact of the conditions of  competition and of the regulatory framework on 
the functioning of food markets in general and f ood price and inflation le vels in particular. 
With food prices forecast to rema in firm in the coming years, ev ery effort should be made to 
improve the efficiency of Europe's food s upply chain and to overcome its still existing 
fragmentation. This coul d provide relief to European househ olds in a context of low economic 
growth and rising unemployment.  
 
The document has shown that the sectors belongi ng to the food supply chain, in particular the 
food processing industry and the distribution s ectors are economically important and have 
many interactions with other sectors of the econo my, either as purchasers or as suppliers of 
intermediate inputs. The slow pr oductivity growth in these sectors indicates that there is room 
for improving the efficiency of the food supply chain. 
 
In this context, this document has examin ed how the degree of competition in the food 
industry and the downstream retail markets ma y have affected price developments. It 
identifies a number of fact ors and practices – notably be haviours lessening the degree of 
competition and unnecessary regulations – that may lead to higher price levels and explain the observed variation across Member States. While  it finds that price increases on specific 
 
EN 33   EN products in certain markets may well be the result of anti-competitive behaviour by a firm or a 
group of firms, it does not suggest that a direct causality link exists between the recent across-
the-board food inflation and competition along the food supply chain in Europe. 
 
The food supply chain is going through a process of consolidation in both food processing and 
distribution. While consolidation, when it reaches  certain levels in sp ecific markets, could 
constitute a competitive risk, it often generates efficiency gains and cost reductions also. According to the preliminary findings presented in this paper, no general conclusion can be 
drawn that the ongoing market cons olidation in food reta iling has raised c onsumer food prices 
levels in the old Member States. In the new Member States, the consolidation goes hand in 
hand with a higher and faster tr ansmission of consumer price increase. But the simultaneous 
increase in the number of retail outlets appears to have limited the increases in consumer food 
prices caused by the higher producer prices to some extent. A competitive framework, supported by vigilant competition authorities and a regulatory framework that does not 
unnecessarily hamper market entry should con tinue to ensure that the food supply chain 
delivers benefits to consumers. 
 
EN 34   EN Annex 1: 
Consider a simple OLS regression of the form: 
t t t P CP εβα +∆+=∆ 
with ⎩⎨⎧
<∆≥∆=−+
00
tt
P ifP if
βββ
 
where ∆CP is a change of the consumer food prices, ∆P is a change of th e producer prices and 
ε is an error term. The reaction of the consumer prices is symmetric to increases and decreases 
in P if 
0 : ≈−=∆− +βββ 
The estimates of β (and hence of ∆β) may be biased if the enti re reaction of consumer food 
prices to changes in producer pr ices is delayed. In order to  account for this possibility a 
regression with three lags can be estimated: 
t t t t t P P P CP ε β β βα +∆+∆+∆+=∆− − − 3 3 2 2 1 1  
with ⎩⎨⎧
<∆≥∆=−−−+
00
it iit i
iP ifP if
βββ
 for i=1,2..6 . 
According to the Wald test, the difference of the coefficients β+=1.09 (instant reaction) β-
=0.89 (3 lags) is significant at 1% test level in the case of the new Member States. Thus, the 
results show that the magnitude of the pass-thro ugh of producer prices to  consumer prices is 
relatively large in most of the new Member States  when prices go up. In fact, in this case, the 
elasticity is larger than one suggesting that margins increase . Interestingly, when producer 
prices decrease, the estimated elasticity  is less than one and there are lags. 
 
Table A1: Price stickiness: Transmission of  producer price decreases and increases into 
consumer prices in the new Member States 
Dependent Variable:
Estimation sample
Explanatory variablesproducer price 
decreases (-3 lag)producer price 
increases 
(instant 
reaction) R-squaredAdjusted R-
squared
Coefficient 0,85** 1,08*** 0,53 0,50
Std. Error 0,42 0,18
t-Statistic 2,04 5,99
(***) - indicates significance at 1% test level.
(**) - indicates significance at 5% test level.
(*) - indicates significance at 10% test level.Consumer food prices increases
2005 January - 2008 August
  
 
 
Table A2: Transmission of producer price decreases and increases into consumer prices 
in the euro area  
 
EN 35   EN Dependent Variable:
Estimation sample
Explanatory variablesproducer price 
decreases 
(instant reaction)producer price 
increases (-1 
lag)producer price 
increases (-3 lag) R-squaredAdjusted 
R-
squared
Coefficient 0,95*** 0,48*** 0,47*** 0,40 0,36
Std. Error 0,29 0,18 0,18
t-Statistic 3,31 2,65 2,59
(***) - indicates significance at 1% test level.
(**) - indicates significance at 5% test level.
(*) - indicates significance at 10% test level.Consumer food prices increases
2005 January - 2008 August
 
 
EN 36   EN Annex 2: 
 
Table 1: Results of the pooled data analysis  
Dependent Variable:
Estimation sample
Explanatory variablesProducer food 
prices 
increasesUnit labour 
costs increasesThe increase in 
number of outlets per 
person  R-squaredAdjusted R-
squared
Old member states Coefficient 0,20*** 0,45*** - 0,56 0,51
Std. Error 0,06 0,11
t-Statistic 3,40 3,97
New EU member states Coefficient 0,91*** - -0,32*** 0,82 0,81
Std. Error 0,10 0,08
t-Statistic 9,83 -3,88
(***) - indicates significance at 1% test level. Consumer food price increases 
2003 - 2007
 
Note 1) The analysis is carried out by the applica tion of a simple OLS regre ssion on pooled annual data  
Note 2) The new EU member states pool includes: the Czech Repub lic, Latvia, Lithuania, Hungary, Po land, Slovenia. The rest of t he 
countries are not   included due to missing food market structure or food producer price data.