AbstractThis paper presents a dynamic model of farm and retail prices and quantities. Central to the model is the notion that increases in wholesale prices are transmitted to the retail level via markup‐type pricing behavior. This behavior is shown to be consistent with firm optimization under the assumption of constant returns to scale and Leontief production technology at the retail level. The markup hypothesis is tested using the Granger‐Sims causality tests. Markup‐type price relationships are then estimated for twenty‐two food commodities.