Integration and Price Transmission in Key Food Commodity Markets in India
This paper examines patterns of market integration for food commodities in India. First, it tests the extent of domestic spatial market integration for retail and wholesale markets in 2006–14 and 2008–15, respectively, and looks at patterns of price transmission of shocks from international sources. Second, it measures vertical integration from wholesale to retail markets and tests for asymmetric speed of adjustment to shocks. Third, it examines the determinants of spatial integration. The results reveal that in India, food markets are imperfectly integrated across space, with the law of one price being systematically rejected, with heterogeneities across states and products. There is substantial co-movement between wholesale and retail prices, although integration is still imperfect in all commodities but one: rice, for which perfect vertical integration cannot be rejected. Retail prices adjust faster when wholesale prices rise than when wholesale prices fall. The analysis of the determinants of spatial integration reveals that prior to implementation of the Goods and Services Tax, the mere act of crossing a state border increased prices; unexploited gains from arbitrage persisted after considering the effects of transport costs; and information frictions and menu costs reduced market integration.
| Main Authors: | , |
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| Format: | Working Paper biblioteca |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019-02
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| Subjects: | COMMODITY PRICES, FOOD MARKET, VERTICAL INTEGRATION, LAW OF ONE PRICE, SPEED OF ADJUSTMENT, ASYMMETRIC PRICE TRANSMISSION, MARKET INTEGRATION, BORDER EFFECTS, PANEL COINTEGRATION, SHOCK TRANSMISSION, SPATIAL INTEGRATION, PRICE ADJUSTMENT, GOODS AND SERVICES TAX, |
| Online Access: | http://documents.worldbank.org/curated/en/896891551117861857/Integration-and-Price-Transmission-in-Key-Food-Commodity-Markets-in-India https://hdl.handle.net/10986/31329 |
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| Summary: | This paper examines patterns of market
integration for food commodities in India. First, it tests
the extent of domestic spatial market integration for retail
and wholesale markets in 2006–14 and 2008–15, respectively,
and looks at patterns of price transmission of shocks from
international sources. Second, it measures vertical
integration from wholesale to retail markets and tests for
asymmetric speed of adjustment to shocks. Third, it examines
the determinants of spatial integration. The results reveal
that in India, food markets are imperfectly integrated
across space, with the law of one price being systematically
rejected, with heterogeneities across states and products.
There is substantial co-movement between wholesale and
retail prices, although integration is still imperfect in
all commodities but one: rice, for which perfect vertical
integration cannot be rejected. Retail prices adjust faster
when wholesale prices rise than when wholesale prices fall.
The analysis of the determinants of spatial integration
reveals that prior to implementation of the Goods and
Services Tax, the mere act of crossing a state border
increased prices; unexploited gains from arbitrage persisted
after considering the effects of transport costs; and
information frictions and menu costs reduced market integration. |
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