Asymmetric price transmission (sometimes abbreviated as APT and informally called "rockets and feathers" http://www.slate.com/id/2196273/https://web.archive.org/web/20080805205338/http://www.knowledgeproblem.com/archives/001444.htmlhttps://ssrn.com/abstract=978022, also known as asymmetric cost pass-through) refers to pricing phenomenon occurring when downstream prices react in a different manner to upstream price changes, depending on the characteristics of upstream prices or changes in those prices.
The simplest example is when prices of ready products increase promptly whenever prices of inputs increase, but take time to decrease after input price decreases.
See main article: Pass-through (economics).
In business terms, price transmission means the process in which upstream prices affect downstream prices. Upstream prices should be thought of in terms of main inputs prices (for processing/manufacturing, etc.) or prices quoted on higher market levels (e.g. wholesale markets). Accordingly, downstream prices should be thought of in terms of output prices (for processing/manufacturing, etc.) or prices quoted on lower market levels (e.g. retail markets).
Since (by definition) upstream and downstream prices are related:
Price transmission is best illustrated by an example. Assume that:
Given the above, one might expect that:
Such behaviour, predicted by all canonical industry / market pricing models (perfect competition, monopoly) is called symmetric price transmission.
In contrast to symmetric price transmission, asymmetric price transmission is said to exist when the adjustment of prices is not homogeneous with respect to characteristics external or internal to the system. As an example of asymmetric price transmission consider a situation when:
One should remember that the size asymmetry cannot occur on its own. If that had been the case the upstream prices and downstream prices would drift apart. Since downstream prices and upstream prices are by definition related to each other, this cannot be the case. Accordingly, size asymmetry can occur only together with time asymmetry and only when the long-run relationship between prices is restored after the impulse shock to upstream prices.
The issue of asymmetric price transmission received a considerable attention in economic literature because of two reasons.
Firstly, its presence is not in line with predictions of the canonical economic theory (e.g. perfect competition and monopoly), which expect that under some regularity assumptions (such as non-kinked, convex/concave demand function) downstream responses to upstream changes should be symmetric in terms of absolute size and timing. Secondly, because of the size of the some markets in which asymmetric price transmission takes place (such as petroleum markets), global dependence on some products (again oil) and the share of income spent by average household on some products (again petroleum products), asymmetric price transmission is important from the welfare point of view. One must remember that APT implies a welfare redistribution from agents downstream to agents upstream (presumably consumers to large energy companies); it has serious political and social consequences.