Testing for Price Co-Integration between Producers and Retailers: Evidence from Ethiopian Milk Market
ABSTRACT
The purpose of this paper is to test how producers’ and retailers’ prices are horizontally integrated, and to show the direction of causality that exists between producers’ price and retails’ price in Ethiopian milk market. The study was conducted making use of secondary data extracted from Ethiopian central statistics agency. The data was time series having 120 observations of monthly recorded price series of producers and retailers, for the period from January, 2004 to December 2013. For this purpose, descriptive statistics and time series econometrics approach (Johansen’s test for co-integration and Vector Error Correction Model) were employed. The study shows that there is strong long run co-integration between producers’ price and retailers’ price. The policy implication is that the markets are co-integrated in terms of price transmission. However, the causality test shows that retailers are dominant over price determination. In other words, producer’s price is caused by retailers’ price; but producers’ price doesn’t cause retailers’ price. This shows that the market structure is in favor of retailers/traders, which can adversely affect the welfare of producers and consumers.
The purpose of this paper is to test how producers’ and retailers’ prices are horizontally integrated, and to show the direction of causality that exists between producers’ price and retails’ price in Ethiopian milk market. The study was conducted making use of secondary data extracted from Ethiopian central statistics agency. The data was time series having 120 observations of monthly recorded price series of producers and retailers, for the period from January, 2004 to December 2013. For this purpose, descriptive statistics and time series econometrics approach (Johansen’s test for co-integration and Vector Error Correction Model) were employed. The study shows that there is strong long run co-integration between producers’ price and retailers’ price. The policy implication is that the markets are co-integrated in terms of price transmission. However, the causality test shows that retailers are dominant over price determination. In other words, producer’s price is caused by retailers’ price; but producers’ price doesn’t cause retailers’ price. This shows that the market structure is in favor of retailers/traders, which can adversely affect the welfare of producers and consumers.
Cite this paper
Lemma, H. and Singh, R. (2015) Testing for Price Co-Integration between Producers and Retailers: Evidence from Ethiopian Milk Market. iBusiness, 7, 1-9. doi: 10.4236/ib.2015.71001.
Lemma, H. and Singh, R. (2015) Testing for Price Co-Integration between Producers and Retailers: Evidence from Ethiopian Milk Market. iBusiness, 7, 1-9. doi: 10.4236/ib.2015.71001.
References
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[1] Reza, M. (2008) Price Transmission in Horticultural Products Markets Case Study of Date and Pistachio in Iran. International Conference on Applied Economics—ICOAE, Kastoria, 15-17 May 2008. [2] USAID and Land O’Lakes, Inc (2010) Dairy Value Chains, End Markets and Food Security. The Next Stage in Dairy Development for Ethiopia. [3] Tesfu, W. (2013) Asymmetric Price Transmission in the Slovak Liquid Milk Market. Journal of Agricultural Economics—Czech, 11, 512-514. [4] Baghestany, A. and Sherafatmand, H. (2013) A Markov-Switching Vector Error Correction Model for Milk Market. International Journal of Agronomy and Plant Production, 4, 1782-1789. [5] Barahona, J., Trejos, B., Lee, J., Chulaphan, W. and Jatuporn, C. (2013) Asymmetric Price Transmission in the Artisan Dairy Industry of Honduras. Asian Journal of Empirical Research, 3, 851-859. [6] Octavio, F., Josef, B. and Jesus, C. (2010) Milking the Prices: The Role of Asymmetries in the Price Transmission Mechanism for Milk Products in Austria. Working Papers in Economics and Statistics, No. 2010-21. [7] Katrakilidis, C. (2008) Testing for Market Integration and the Law of One Price: An Application to Selected European Milk Markets. International Journal of Economic Research, 5, 93-104. [8] Rumankova, L. (2012) Examination of Market Structure in Selected Livestock Agri-Food Chains in the Czech Republic. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 60, 243-258. http://dx.doi.org/10.11118/actaun201260070243 [9] Bakucs, Z., Falkowski, J. and Ferto, I. (2012) Does Farm and Processing Industry Structure Matter for Price Transmission? Some Evidence from Transition Countries: A Comparison of Dairy Sectors in Hungary and Poland. Institute of Economics, Research Centre for Economic and Regional Studies, Hungarian Academy of Sciences. [10] Chalajour, M. and Feizabadi, Y. (2013) Marketing Price Transmission Analysis in the Iranian Rice Market. African Journal of Agricultural Marketing, 1, 41-46. [11] Asche, F., Jaffry, S. and Hartmann, J. (2005) Price Transmission and Market Integration: Vertical and Horizontal Price Linkages for Salmon. CEMARE Working Paper, No.1. [12] Bor, O., Ismihan, M. and Bayaner, A. (2004) Asymmetry in Farm Price Transmission in the Turkish Fluid Milk Market. www.iamb.it/share/img_new_medit_articoli/975_02bor.pdf [13] Verbeek, M. (2004) A Guide to Modern Econometrics. 2nd Edition, Erasmus University Rotterdam, John Wiley & Sons Ltd., Hoboken. [14] Johansen, S. and Juselius, K. (1990) Maximum Likelihood Estimation and Inference on Co-Integration—with Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52, 169-210. http://dx.doi.org/10.1111/j.1468-0084.1990.mp52002003.x [15] Reziti I. and Panagopoulos, Y. (2008) Asymmetric Price Transmission in the Greek Agri-Food Sector: Some Tests. Agribusiness, 24, 16-30. http://dx.doi.org/10.1002/agr.20144