Integrated markup rules for optimal pricing decisions in expanding markets for organic produce

In expanding markets, firms face uncertainty about demand response to changing conditions and the appropriate pricing response. Inclusion of retail demand factors in explaining markup decisions by wholesalers is crucial to accurate evaluation of the effects of price and market changes on profitability. We apply an integrated demand and markup model to markets for organic broccoli and carrots where wholesalers set markups facing retail demand. The estimated integrated system includes cross-equation restrictions on organic and conventional prices received from retail, publicity about food safety scares and availability of a competing certification programme. The results show that organic wholesalers behave strategically in response to observable demand factors as they expand into fresh produce markets. Wholesalers arbitrage markups across items to increase market share, combining crop-specific and overall market information to decide on appropriate responses. Wholesalers also attempt to moderate markups in response to demand fluctuations in order to smooth market development.