Product differentiation and dynamics of cost pass-through in the German fish market: An error-correction-distance measure approach

Abstract Product differentiation is an important tool to target different consumer groups and to generate price premiums for different commodities. Product differentiation affects the level of competition, consumer costs and can alter the dynamics of cost pass-through. In this study, we focus on the natural differences in nutritional levels (omega-3, fats, proteins, vitamins) across fish species to differentiate fish products. We model and test the importance of nutritional differences as an explanatory factor in the dynamics of cost pass-through for different fish species in the German retail frozen fillet market. We combine a large consumer panel of fish purchases at the retail level with trade data on fish import prices covering the period January 2006 to December 2010. A distance measure is used to aggregate over product nutrients. Combining the distance measure within an error-correction equation shows that cost pass-through is (statistically) negatively correlated with the degree of product differentiation. Commodity differentiation matters in the dynamics of convergence to equilibrium.