Fair Pricing and Farm Supply

We consider a model of fair pricing in which a monopoly retailer jointly exercises market power in the upstream farm product market and downstream consumer market. The fair pricing standard is endogenous and determined by solving an activist's problem for a fair pricing demand that maximizes the farmer’s share of the food dollar subject to costly sanctions. We demonstrate that fair pricing standards decouple farm supply from the retailer's optimization problem, resulting in retail prices that maximize sales revenue in the downstream consumer market. Such behavior can cause farm products to be oversupplied even for small increments in price fairness to farmers. We provide a simple and intuitive rule for predicting changes in farm surplus from a fair pricing standard. When consumer demand is more price elastic than farm supply, fair pricing has desirable welfare implications for farmers and consumers; however, when consumer demand is less price elastic than farm supply, we demonstrate that farm surplus increases for a sufficiently low fairness standard, but decreases for higher levels of price fairness.