Spatial Price Dynamics and Pricing Conduct of Wheat Markets in Ethiopia
Keywords:
Price dynamics, long‐run multiplier, speed of adjustment, composite index, pricing behaviorAbstract
This paper has examined the spatial integration, price dynamics, and pricing
behavior of wheat markets in Ethiopia using 72 months retail price series (July
2001‐June 2007) and cross‐section data of structural determinants of spatial
integration. Dynamic measures of spatial integration including long‐run
multipliers, speed of spatial price adjustment, and composite index were
estimated to measure the magnitude, speed, and extent of spatial linkages and
to identify the relative importance and pricing conduct in these markets. The
common assertion that Addis Ababa is a central market dictating commodity
price formation process in Ethiopia was disproved. Nazreth wheat market was
found to be the center of price discovery in the country by dictating price
formation in supply markets. The three hypothesized oligopolistic pricing
behavior of wheat markets— spatial price discrimination, instantaneous and
cooperative pricing, and perfect price matching — were tested. The two
hypotheses that wheat markets exercise spatial price discrimination and
cooperative pricing were rejected. However, the hypothesis of spatial price
discrimination was accepted for some markets trading with Addis Ababa and
Nazreth. This is verified to be the result of price discrimination exercised in Addis
Ababa and the response of supply markets against the conduct in the destination markets. Supply markets with alternative market outlets were trying
to establish short‐run market independence depending on the pricing conduct
prevalent in the destination markets while those without alternative market
outlets were victims of the pricing behavior. This is an indication of inefficient
pricing system prevalent in the wheat marketing system. Structural
determinants of spatial market integration including inter‐market road distance,
road density, dissimilarity in per capita wheat production, and dissimilarity in
population density were estimated and tested for their possible effect on the
level, speed and extent of market integration to identify alternative market
development interventions. Except for population density, all the selected
factors of market integration were found to significantly determine market
integration in Ethiopia. The spatial integration of Ethiopian wheat markets was
found to be generally low in magnitude and sluggish in speed because of lack of
flexibility and responsiveness of the marketing system.
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