CHAPTER 2

THEORY OF MARKET INTEGRATION

2.1 Introduction

Market integration is a term used to identify a phenomenon in which

markets of goods and services that are related to one another being to
experience similar patterns of increase or decrease in terms of the prices of
those products. The term can also refer to circumstances in which the
prices of related goods and services sold in a defined geographical location
also begin to move in some sort of similar pattern to one another. Market
integration occurs when prices among different locations or related goods
follow similar patterns over a long period of time. Group of prices time and
again move proportionally to each other and when this relation is very clear
among different markets these markets are said to be integrated. Thus
market integration is an indicator that explains how much different
markets are related to each other. At times, market integration may be
intentional, with a government implementing certain strategies as a way to
control the direction of the economy. At other times, the integration of the
markets may be due to factor such as shifts in supply and demand that
have a spillover effect on several markets. When market integration exists,
the events occurring within two or more markets are exerting effects that
also prompt similar changes or shifts in other markets that focus on related
goods. For example, if the demand for wheat within a given geographical
market is suddenly reduced, there is a good chance that the demand for
rice or other staple food would increase in proportion within that same
geographical market. If the wheat requirement increase, this would usually
mean that the market for other staple food may decrease. Both markets
would have the chance to adjust pricing in order to deal with the new
circumstances surrounding the demand, as well as adjust other factors,
such as production.

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 Market integration may occur in any type of related markets. With
stock market integration, similar trends in trading prices for assets related
to a given industry may found in two or more markets around the world. In
a like manner, market integration may occur when lending rates in several
different markets begin to move in tandem with one another. In some cases,
a market integration within a nation may involve the emergence of similar
patterns within the capital, stock, and financial markets, with those trends
coming together to exert a profound influence on the economy of that
nation.

Market integration can often be a very positive situation, especially if

the emerging pattern regarding pricing is indicative of an increasingly
prosperous economy. At the same time, assessing integration between
markets can also be a useful tool in identifying trends that are less than
desirable, and having the chance to begin reversing those trends while
there is still time. For this reason, financial analysts as well as economists
often monitor activities in related markets, identify any signs of integration
and make recommendations on what strategies could be used to make the
most of the emerging situation.

The market integration is always related to efficiency of markets. To

understand the market integration, it is necessary to understand the
concepts of 'market' and 'integration' separately and the way in which these
are interconnected. Generally market is any physical location where the
buyers and sellers can interact with each other and in which the price of a
good tends to the uniformity. Usually, price existing in any market is
depending on the scope of market; which in turn depends on the nature of
competition or efficiency prevailing in the market. The scope of competition
or marketing efficiency or competence in its turn depends on the market
structure, market conduct and market performance. Marketing efficiency is
determined by two factors - economic efficiency and technical efficiency.
Economic efficiency deals with matters related to trading or pricing to

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improve the degree of competition. Technical efficiency depends on the least
cost input combination. There are two criteria to measure marketing
efficiency. One is price spread and the other is market integration. This
chapter deals with a detail understanding of market structure, analysis of
various statistical and econometric tools employed by previous researchers
to measure the degree of market integration, and integration in food
commodities market of India.

2.2 Market: An Overview

There are many definitions of the term 'market'. These definitions in

general, can be grouped into three categories. The first category emphasizes
the existence of a public place for transaction. The term market is a
derivative of a Latin word 'mercatus' to denote a market place - thereby
meaning merchandise, trade or a place where business is carried out
(Gravii, 1929). Cochrane (1957) described that market is some sphere or
space, where the demand and supply are at work together, to decide or
modify price since the ownership of some quantity of a good, or service was
transferred and certain physical and institutional arrangements might be in
evidence. Jevons defines market as, "the central point of market is a public
exchange mart or auction rooms, where the traders agree to meet to
transact business… the traders may be spread over a whole town or region
of country, and yet make a market, if they are by means of fairs, meetings,
published price lists, the post office or otherwise in close communication
with each other" (Marshall, 1961). The second category of definitions
undermines the need for any specific location or space. Cournot (1971)
described that "not any particular market place in which things are bought
and sold, but the whole of any region in which buyers and sellers are in
such free interaction with one another that the prices of the same goods
tend to equality easily and quickly". Bliss and Stern (1982) suggested that
market is a place to exchange services of factors and the arrangements for

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organizing that exchange. They does not implicated that the market is in
any sense a formal one with a specified location. They also suggested that
the market may be perfect or competitive. According to Stonier and Hague
(1982) market is "any organization where the buyers and sellers of a good
are kept in close touch with each other. As per them whenever the market
is open, it is either because they are in the same building or because they
are able to talk by telephone". Other than the existence of location or space;
the third group of definitions gives weightage to the prevailing price out of
the interactions of agents. Hotelling (1929) analyzed the relationship
between prices in competing markets and focuses on market for identical
goods separated by distance. Stigler (1969) defined market as "the area
within which the price of a good tends to uniformity, allowance being made
for transportation costs". Similar observation was made by Cournot (1971),
where he stated that in short run, deviations of prices are allowed, but
arbitrages or substitutability insure that they are related in the long term.
"A market is a group of people and firms who are in contact with one
another for the purpose of buying and selling some commodity. It is not
that every members of the market may be in contact with every other one;
the contact may be indirect" (Dorfinan, 1979).

Thus in simple manner market is a place where exchange takes place

and a market comprises a group of buyers and sellers, who can interact
with each other to by sell goods and services. They can interact with each
other with or without physical contact. The transaction can be conducted
over the phone or on the internet. Sellers communicate their offering, price,
availability to the prospective buyers. The buyers purchase there offering by
paying money to the seller. Also the seller seeks feedback about the goods
and services sold to the buyer to determine his satisfaction level.

2.2.1 Types of Markets

At the macro level, resource markets are found. These markets are
raw material market, labour market and money markets. Markets can be

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classified into various types depending on the nature of purchasing and
consumption, geographical coverage, magnitude of selling, or time period.

Markets on the basis of Purchasing and Consumption

This is classification on the basis of the type of user and the nature of
product purchased. Products can be defined as either for industry or for
consumer products depending on buyers' intentions. The main distinction
between two types of products is their intended use. Industrial products are
used to manufacture other goods or services, to facilitate an organization's
operations, or to resell to other costumers. Consumer products are bought
to satisfy an individual's personal wants. Sometime same product can be
classified as both. Industrial or business and consumer products are
marketed differently. They are marketed to different target markets and
may use different distribution, promotion and pricing strategies.

Markets on the basis of Products in Trade

These are basic goods markets, intermediary goods market and

consumer goods market. Goods such as steel, cement, chemicals are very
basic for industrial and infrastructural development, these are called basic
goods. Markets for machines, machine tools, equipments, spare parts
constitute the intermediary good markets. Consumer products can be
classified according to how much effort is normally expended to by them.
These are convenience products, shopping products, specialty products and
unsought products.

Markets on the basis of magnitude of selling

Wholesale and retail markets vary in the quantum of goods sold.

Wholesale markets are lesser in number but sell in large quantities whereas
the goods sold by retailers or other intermediaries are large in number.
They usually sell to end consumers who buy lesser quantities.

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Markets on the basis of geographical areas coverage

Markets can be classifies on the basis of geographical coverage are local

markets (in a city or town), regional markets (in a state or a few states),
national markets (in a country), or international markets (across the
countries).

Markets on the basis of time period

Markets can be short term markets (money markets), weekly markets

(a village bazaar) and a long term seasonal markets (markets for
agricultural produce).

2.2.2 Extent of the Market

One of the major roles of market is to smooth the process of exchange

between buyers and sellers. Market area embraces the buyers who are
willing to deal with any seller or the seller who are willing to deal with any
buyer and vice versa. It is important to maintain that the actual test of
market is the uniformity of price movements within the market. This
criterion includes the decisive role of competition in dominating the price
movements within each and every section of the market. Stigler and
Sherwin (1985) clearly described the idea of exchange and price formation.
They stated that, "It is inherent in any exchange, whether of one good for
another good or for money, that there be a rate of exchange between the
quid and the quo; a quantity of something is exchanged for a quantity of
something else. Therefore to say that a market facilitates the malting of
exchange is equivalent to saying that markets are where prices are
established. One may quote a price for a commodity on the moon if one is
visiting that celestial body, but one can only establish a price by making a
trade. The market is the area within which price is determined; the market
is that set of suppliers and demanders whose trading establishes the price
of a good". The extent or scope of market depends on several factors.
According to Bain, (1968) market structure, market conduct and market

15
performance are three distinct approaches important to understand the
extent of competition or marketing efficiency in the marketing system.
These three aspects have been described below in brief.

2.2.3 Market Structure

The term market structure refers to the organizational features of a

market that influence the firm's behavior in its choice of price and output.
Market structure is an economically significant feature of the market. It
affects the behavior of firms in respect to their production and pricing
behavior. Market structure is classified on the basis of organizational
features more specifically on the basis of degree of competition among the
firms. In general the organizational features include the number of firms,
distinctiveness of their products, elasticity of demand and the degree of
control over the price of the product. Salvatore (1998) identifies three
different types of market organizations. Market structure is generally
classified on the basis of the degree of competition is given in Table 1.

Table 2.1: Kind of Market Structures

Sl. Type of No. of Firm's

Nature of product over price
No. Market firms control
1 Perfect Very Homogeneous (eg. wheat, sugar, None
competition large vegetable markets)
2 Imperfect
competition
a) Many Real or perceived difference in some
Monopolistic (Most product
competition retail i) Product without some
b) Oligopoly trade) differentiation, eg. Bread, steel
Few etc.
ii) Differentiated products (tea,
soaps, detergents, automobiles
3 Monopoly Single Products without close Full but
substitutes, like gas, electricity usually
regulated

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 The organizational structure of market powerfully determines the
course of action by which prices and output are determined in the real
world. Koutsoyiannis (1979) has suggested three basic criteria for market
classification. They are product, substitutability and interdependence
criterion. Bain has suggested another criterion for market classification,
namely the condition of entry, which measures the ease of entry in various
markets. Harris, (1984) stated that the analysis of the structure of
commodity markets normally proceeds down a list of characteristics of their
organization: size, distribution, location, entry condition, agent and product
differentiation, information and so on. These authors observed that the
numerical size of the sector and its concentration are the two structural
aspects most important for the analysis of commercial power. However, it
can be maintained that the actual market strength is depends on the
competition or monopoly power. The tilt of this power determines the
benefits either to the buyer or to the seller. Competitive power is one of the
basic criteria to distinguish various forms of market. To understand the
extent of competition or efficiency, it is necessary to understand the
structure of market.

The characteristics of market organization emphasized are the degree

of seller concentration, size of the distributing firms, degree of buyer
concentration, degree of product differentiation and the condition of entry
in the market. These elements in one way or the other influence market
integration. Seller concentration or buyer concentration inhibits the free
flow of goods and services among markets. These in turn disturb the spirit
of a unified or integrated market. Similarly if the entry condition is
restricted, the biggest firm may control the entire market and this lead to
weakly integrated markets. Thus, these elements of market structure affect
the degree of competition in the market and that in turn influence the
magnitude of market integration. Therefore the degree of market integration
is determined by the structure of market. Bain describe market structure

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as characteristics of the organization of a market which seems to influence
strategically the nature of competition and pricing within the market.
However, this view is not able to give importance to the significance of
various marketing channels and intermediaries in analyzing the market
structure. In the view of Schultz (1946) market structure, includes all the
strategic variables, which control or influence the behavior of different
agencies involved in the market. According to Cundiff and Still (1972)
market structure was the whole network of marketing organizations those
serve for need of society. At one end of the network, producers initiated the
flow of goods and services and various intermediaries such as wholesalers
and retailers maintained the flow, finally discharging the goods and services
for consumer's use. As per Lele (1973) market structure included various
market channels, intermediaries, and traders involved in moving the
produce from producers to the consumers. According to George (1984)
market structure could be defined as all the agencies involved either
vertically or horizontally in the selling and buying of the produce. It
includes different marketing channels, their form and market shares and
the market environment. Thus, the market structure through various
marketing channels influences the nature of competition and pricing within
the market through the intermediaries.

2.2.4 Market Conduct

Market conduct means the manners in which market agents behaves

with regard to price determination, sales promotion tactics and the
regulatory activities of government. Market integration has a direct link
with all these activities. If market agents determine prices on the basis of
some secret or illegal cooperation or conspiracy, it may lead to an
inefficient, non-integrated market. On the other hand if price is determined
in the way of a perfectly competitive market, it resembles an integrated
market. Similarly, regulatory actions of government also determine the
market conduct and thus market integration. Government restriction and

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regulation obstructs dissemination of market information and it can lead to
distorted price determination by the economic agents. This ultimately
accommodates an inefficient and non-integrated market. On the other
hand, the behavior of economic agents in an economy which is liberated
from controls will be conducive for an efficient and well integrated market.

In the opinion of Bain (1968), “market conduct refers to the prototype

of activities followed by the enterprise in adopting or adjusting to the
markets in which they sell or buy, in particular methods employed to
determine prices, sales promotion and co-ordination policies and the extent
of rapacious or exclusionary tactics directed against established opponents
or potential entrants”. According to Moore et al. (1973) market conduct
comprises all methods adapted by traders to attract the customers in their
periphery. It includes several price competition methods and non-price
inducements. According to Purcell (1973) market conduct refers to the
actions and behavior of firms within the given structure. Pricing policies,
selling cost, non-price competition are all some of the activities of market
conduct. Thus, market conduct resembles the behavioral pattern of
enterprise. It comprises of various decision making techniques in
determining price, output, sales promotion policies and other tactics to
achieve their economic goals. Thus, given the structure of the market,
market conduct determines the outcome.

2.2.5 Market Performance

The economic result of market structure and market conduct

characterizes the market performance. Market performance resembles price
level, profit margin, level of investment, reinvestment of profit etc. In an
economy, if the price fixed by the firm is just equal to total cost then the
market is said to be performing well or competent or can be said as a well
integrated. Similarly, a less profit margin normally indicates an efficient
market performance. In other words, through the level of prices, the level of
profit margin etc., one can determine the degree of market integration.

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Therefore, market performance has a direct correlation with market
integration. Actually market performance deals with the economic results
that flow from the system in terms of its pricing efficiency, its flexibility to
adapt to new changing situation etc. It represents the economic results of
the structure and conduct. According to Narver and Savitt (197l), marketing
performance is the net result of the conduct and can be measured in terms
of net profits, rate of return on owner's equity, efficiency with which plant,
equipment and other resources were used and so on. Thus it can be
concluded that market performance is the cumulative outcome of market
structure and market conduct. Narasimham (1994) pointed out that to
study the extent of competition in marketing a commodity, market
performance approach seems to be more appropriate. This means that
marketing performance actually percolates marketing efficiency. As per
Shrivastava (1996), if the structure, conduct and performance of the
marketing system bears a proof about the efficiency, it can penetrate in the
form of greater income, saving, capital formation and investment.

2.2.6 Marketing Efficiency

Marketing efficiency is considered to be a pre-requisite for prompt

delivery of goods. Delivery of goods at a realistic price is possible only if the
market works in a competitive way. Competitive system is possible only
when the market agents are free to work. An efficient marketing system
implies that price spread or marketing margin is fairly less. In market
integration terminology, prices in spatially separated markets may get
differed only by transaction costs among markets. Lower price spread also
implies that both consumers and producers are gaining from reasonable
price and logical profit. Hence, an efficient marketing system implies the
existence of market integration. The concept of marketing efficiency can be
presented as (i) maximization of input-output ratio as a equivalence of
marketing efficiency. (ii) competition or effective market structure as an
indicator of marketing efficiency and (iii) lower price spread or marketing

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margin as a condition of marketing efficiency. These approaches are
described below.

(i) Maximization of input-output ratio as a resemblance of marketing efficiency

Kohls (1967) analyzed this on the basis of optimizing behavior of

economic agents. It is the maximization of input-output ratio, output being
consumer's satisfaction and input as labour, capital and management that
marketing firms employed in the productive process.

(ii) Competition or effective market structure as an indicator of marketing

efficiency

According to Clark (1954) the three components of effectiveness, cost

and their effect on performance on marketing functions and services affects
the production and consumption which constitute marketing efficiency.
Jasdanwalla (1966) stated that marketing efficiency signifies the
effectiveness or competence with which market structure performs its
chosen functions.

(iii) Lower price spread or marketing margin as a condition of marketing

efficiency

The higher the price spread; greater is the inefficiency in the

marketing system whereas a minimum price spread denotes an efficient
marketing system. One can consider a marketing system efficient if it
performs functions where an adequate marketable surplus is ensured,
prevalence of price spread is lower and accessibility of agricultural inputs
to be ensured to farmers at a reasonable price (Singh et. a1. 1987).

On the whole, there is no agreement of opinion on the concept of

marketing efficiency. Some are giving emphasis to raise output by lowering
input. In the second view, importance is given to abolition of wasteful
marketing costs or competence of market structure. As per the third view,
price spread is considered as an indicator of marketing efficiency and it is
more realistic one. A regulated market with low marketing costs and
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marketing margin is said to be an efficient one. Marketing efficiency or the
integrated marketing system also depends on market structure, the nature
of commodity and the socio-political system. Price stability can also be
considered as a marker of efficient market system. There are several factors
that can decide marketing efficiency.

2.2.6.1 Determinants of Marketing Efficiency

Economic efficiency and technical efficiency are the two determinants

of marketing efficiency. They are explained below:

(a) Pricing, Trading or Economic Efficiency

Generally economic efficiency is a matter of improved conditions for

competition and pricing of commodity in a market. Chahal and Gill (1991)
observes that pricing or economic efficiency either relates to functional
deficiencies or to the degree of competition or monopoly and to economic
structure existing within the marketing system. In an efficiently operating
market, prices can be related in the manner that (i) prices should only differ
(due to transportation costs) between geographic areas of a country; or (ii)
the price of storable commodity at one point in time should not exceed price
in a previous period of time by more than the cost of storage plus normal
profit, and third case may be (iii) the price of the processed products should
only exceed the price of unprocessed product by processing costs plus
normal profit.

Lipsey and Harbury (1992) divided economic efficiency into

productive efficiency and allocative efficiency. Productive efficiency is a
situation when it is not possible to produce more of any one good without
producing less of any other good. Allocative efficiency involves choosing
between productively efficient bundles. Resources are said to be allocatively
efficient when it is not possible to produce a combination of goods different
from that currently being produced, which will allow any one person to be
made better off without making at least one other person worse off.

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 Thus, as the term denotes it concerns matters related to trading or
pricing so as to enrich the degree of competition. When there is enrichment
in the degree of competition, the possibility of price spread will be lower.
Lower price spread ensures remunerative and reasonable prices to various
economic agents. Hence, effective measures of pricing efficiency ensure an
efficient market system.

(b) Operational, Technical or Organizational Efficiency

The prominence of operational efficiency is on the cost of marketing

inputs by keeping the cost of physical operations to the least possible. One
of the primary purposes of marketing research is to find ways of increasing
efficiency in the physical handling and processing of good. Lau and
Yotopoulos (1971) defined technical efficiency of market where a firm is
considered more technically efficient than another, if it consistently
produces a larger output under given the similar quantity of measurable
inputs. Henderson and Quandt (1971) described that, “the production
function differs from the technology in that it presupposes technical
efficiency and states the maximum output attainable from every possible
input combination. The best utilization of every particular input
combination is a technical, not an economic problem”. All these definitions
are undisputed in pointing out that a technically efficient market ensures
least cost combination. Thus a perfect marketing system originates from
optimum marketing efficiency resulting from operational and economic
efficiency. Hence, a market through economical and organizational
efficiency tries to function effectively. If the organizational and pricing
structure smoothen free flow of market information it will lead to an
integrated market. Therefore, marketing efficiency is concerned with
enhancement of utility with the most efficient utilization of meager
resources available in the marketing system; which is the basic principle of
economics.

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Price Spread: Criteria for Marketing Efficiency

A product has to move through a number of distribution channels

before reaching to the consumer. Therefore, it is important to have a fair
share at every distribution channel. Longer the channel greater will be the
share of these intermediaries in the consumer's price. Price spread is
defined as the difference between the price received by the producer and
the price paid by the consumers for a commodity at a point of time. Lesser
the difference in price, more efficient is the market system. If the charges of
intermediaries appreciate transaction costs, consumers in the central and
peripheral markets can get the article almost at the same price. If this is
reality, it is a situation of efficient marketing system or it characterizes an
integrated market in true sense. According to Dhondyal (1989) price spread
simply compares the total value of the product that comes in the backdoor
of the business with the total value of that which goes out of the front door.
By distinguishing price spread from marketing margin, Dhondyal (1989)
stated that price spread can be within the same city but the marketing
margin is a wider term which is used for various levels of outstation
markets. The concept of price spread was elaborated by George (1972) as
the difference between the retail price of product and its value in
production. The cost incurred and the profits gained by intermediaries are
generally included as charges for assembling, processing, storing,
transporting, wholesaling and retailing. This definition gives emphasis on
the difference between what producers are able to get and what consumers
are bound to pay. A positive price spread can provide an opportunity for
traders to make uncharacteristic profits. The method followed by Hays and
McCoy (1978) is simple in which almost all the intermediary charges are
included in the calculation. Without deviating much from the method,
another way of calculation was developed by Naik and Arora (1986). In
Hays' method while computing price spread all sorts of transaction cost has
taken into consideration. It indicates the actual share retained by the

24
intermediaries after providing necessary allowances. However, both
techniques assert that lower price spread indicates greater marketing
efficiency. A zero price spread is the optimum level in attaining highest
marketing efficiency. But this is only a theoretical possibility which can be
attained in a perfectly competitive market.

2.3 Market Integration

Markets are said to be integrated if they are connected by a process

of arbitrage. A well integrated market system is central to a well functioning
market economy. The economic proposition of integration is that an
element of efficiency is attainable in the unified operation than in the
independent actions. According to McDonald (1953), “the integrated
economy is one in which various economic processes are so functionally
related to every other processes that the totality of separate operation form
a single unit of production with characteristics of its own. He gave some of
the signs of integration as below:

(a) Many diverse, specialized and independent economic processes or

operations, none of which is complete or self sufficient.

(b) A system of relationship between the various processes which serves to

register this interdependence upon the conduct of each process so that all
are caused, in some manner to fall under the overall plan.

(c) A concatenation of processes in unified pursuance of the aims and

purposes of the larger scheme of things.

(d) A mutual replenishment to spent resources to the end that the

continuity of each and all processes shall not be jeopardized”.

Distribution of productive resources in proper manner is the

essential part of integration. An efficient management of the overall
industry is the idea behind integration so that the economy can serve for

25
the well-being or betterment of society. Market integration is considered to
be a useful parameter to measure marketing efficiency for temporal and
spatial analysis. Horowitz (1981) said that it defining market integration on
the basis of price determination is common in economics. Significance of
the concept of market integration will be clear if one understand the view of
Dercon (1995). He states that "Market integration analysis can assess the
transmission speed of price changes in the main market to the peripheral
markets. A reduction in the time lag of transmitting price signals suggests
better arbitrage and therefore an improvement in the functioning of
markets".

Market integration is the phenomenon by which price

interdependence takes place. As per Faminow and Benson (1990)
integrated markets are those where prices are determined interdependently;
which is assumed to mean that price change in one market affect the prices
in other markets. Goodwin and Schroeder (1991) described that markets
that are not integrated may convey inaccurate price information which
might distort producer marketing decision and contribute to inefficient
product movements. What market integration delivers to the economy will
be clear from the following views. Information on market integration
presents specific evidences as to the competitiveness of the market, the
effectiveness of arbitrage (Carter and Hamilton, 1989) and the efficiency of
pricing (Buccola, 1983). Monke and Petzel (1984) defined, “integrated
market in which prices of differentiated products do not perform
independently. Spatial market integration refers to a situation in which
prices of a commodity in spatially separated markets move together and
price signals and information are transmitted smoothly across the markets.
Spatial market performance can be evaluated by the knowing relationship
between the prices of spatially separated markets and spatial price behavior
in regional markets may be used as a measure of overall market
performance (Ghosh, 2000)”.

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 Another definition given by Behura and Pradhan (1998) described,
“market integration as a situation in which arbitrage causes prices in
different markets to move together. Here two markets are said to be
spatially integrated; when even trade takes place between them, if the price
differential for a homogeneous commodity equals the transfer costs
involved in moving that commodity between them. Equilibrium will have
the property that, if trade takes place at all between any two places which
are physically separated, then price in the importing area equals price in
the exporting area plus the unit transport cost incurred by moving between
the two”. If this holds then the markets can be said to be spatially
integrated as per Ravallion (1986). According to Slade (1986), “two trading
localities are integrated if price changes in one locality cause price changes
in the other. The transmission machinery could be that price increases in
one location result the product moving into that location from the other,
hence reducing the supply of product in the exporting region and causing
price to increase. Hence, an interrelated or interdependent movement of
prices between spatially separated markets can be said to be a situation of
market integration”.

Several statistical techniques are in use to test the nature and

intensity of market integration. These techniques to test of market
integration hypothesis are briefly reviewed here.

2.3.1 Techniques to Test Market Integration Hypothesis

Many practical techniques have been developed and employed to

examine the relationship that exists across space and time. It is from these
results drives the conclusion about the magnitude of competition or
integration or marketing efficiency that exists in a marketing network.
These are the techniques employed over the years in the area of market
integration research of agricultural products are compiled below
(Kanakaraj, 2010).

27
(i) Price Series Correlation.
(ii) Variance Component Approach.
(iii) Ordinary Least Square Framework.
(a) Ordinary Least Square method.
(b) Autoregressive Model.
(c) Koyck's Distributed Lag Model.
(d) Ravallion Model.
(iv) Co-integration Technique:
(a) Stationarity and unit root tests
- Dickey - Fuller Test
- Augmented Dickey - Fuller Test
- Phillips - Perron Test
(b) Engle-Granger Model of Co-integration
(c) Error Correction Model.
(v) Parity Bound Model.

(i) Price Series Correlation

The degree of association of price among markets can be shown

through a zero order correlation matrix of prices in these markets. The
method assumes that with random price behavior expected of a non-
integrated market, i.e., bivariate correlation coefficient will tend to zero. In a
perfectly integrated market, correlation coefficient is expected to be unity.
Correlation coefficient is considered to be a suitable parameter of market
integration on two counts - price data is the only required data and is easily
accessible and calculation is simple. This method is based on the
assumption that if markets are absolutely competitive and spatially well
integrated, price differences among markets may reflect only processing
and transportation costs; and correlation coefficient can be equal to one.
Accordingly, higher correlation coefficient means the markets are robustly
integrated; and a lower coefficient reflected a weak form of market

28
integration signifying lack of market information, transport bottlenecks,
lack of product homogeneity or an element of monopoly power.

However a lot of criticism rose in using correlation coefficient as a

measure of market integration. Blyn (1973) pointed out that there may be
an upward bias to the results because of common trends. He further stated
that the trend may be due to rising demand occurred by population
increase that may affect all parts of the region or due to common climatic
condition. Thus all price series in a region can be affected by such
influences even if each market within the region is independent of others.
Therefore time series correlation need to be restricted to residuals
remaining after removal of the trend and seasonal components. Price series
correlation method has also been criticized by Harris (1979) on the ground
that, “a high correlation between the markets does not necessarily mean
that these two markets are well integrated in the sense that a competitive
network of traders exists which ensures that agricultural goods move
between market places in swift response to price difference that exceed
transport cost”. Lundahl and Petersson (1982) have also cited their
criticism similar to Blyn and Harris. Heytens (1986) observed problems in
using correlation coefficient that though prices in an efficient market
system tend to move together, they may do so for other reasons (general
inflation, common seasonality) or other common factors may produce
sympathetic but unrelated price changes. It is further maintained that a
perfect monopoly or price fixing by a central authority can just easily
produce a coefficient of one as a perfectly competitive market. Therefore
correlation coefficients are not unequal indicator of market conditions and
applications become more indiscriminate. Harris (1979) and Timmer (1974)
too pointed out that markets may be spatially integrated, but demonstrate
low price correlation because of changes in the geographical direction of
price structure.

29
(ii) Variance Component Approach

This technique was developed by Delgado (1986) to test time series of

prices for seasonal differences in the price integration of markets. This is an
approach to decompose the variance of prices into components. Two
important assumptions for this method are (i) variance of prices for a given
crop is constant over the season, and (ii) transport and transaction costs
for marketing a given crop among two markets are constant, subject to a
random disturbance over the season. The variance component method
permits statistical inference from a sample of time series of market prices
concerning seasonal and regional differences in the variance of prices. The
major limitations of this model are (i) it assumes constant variances of price
over the season (ii) transaction cost between two markets are also assumed
to be constant. Once these restrictions are relaxed, the model may not be
able to measure the exact degree of market integration.

(iii) Ordinary Least Square Framework

(a) Ordinary Least Square Method

Several researchers have tested integration of agricultural commodity

markets with this method. This OLS method has a few limitations. In this
method no serious attention has been given to the properties of the error
term. It shows that the error term has no discernible structure, otherwise
the price of central market cannot be said to possess all market information
and the past history of peripheral market price.

(b) Autoregressive Model

The autoregressive model was employed by Heytens (1986) to

investigate market integration. However he observed that some problems
are obvious in this model. Determination of appropriate reference prices
and variable specification will be a matter of concern where a broad
understanding of the market is limited. There can be the existence of
simultaneous equation bias. The model's parameters are likely to be

30
sensitive to the time length of data. This model can handle problem raised
by common time trend but it cannot deal the situation when direction of
commodity flow between rural and urban areas reverses with the season.

(c) Koyck's Distributed Lag Model

When the regression model includes the current as well as the lagged
values of the explanatory variables, it is called a distributed lag model.
Koyck has proposed this method of estimating distributed lag models
(Madnani, 1986). Koyck's distributed lag model gave rise to biased and
inconsistent estimates. Here it assumes that the impact of past periods
decline successively in a specific way, but in reality this may not be the
case.

(d) Ravallion Model

Ravallion (1986) proposed an econometric model of spatial price

differentials. It is assumed that there are a number of local markets along
with a central market. The pattern of price formation among all markets is
considered as the central as per first market. The Ravallion model extracts
more information on the nature of spatial price differentials. This model
avoids the inferential threats in using spatial price correlation. It allows
price series for each local market to have its own autoregressive structure
and a dynamic relationship with market prices in a trading region.
Ravallion's dynamic approach permits an unambiguous distinction between
short run market integration and integration as a long run tendency in the
short run adjustment process.

The Ravallion model is overwhelmed with several problems. Palaskas

and White (1993) observed that, “even if the correct estimation procedure is
adopted, the coefficient estimates of the stochastic equation can be
imprecise. If the dynamics are of a relatively high order, the reason being
multicollinearity between lagged values of the explanatory variables. The
specification in levels raises the problem of spurious correlation associated

31
with the regression of trending variables in levels”. Baulch (1997) blamed
that Ravallion model is based on assessing the co-movement of price data
alone and fail to recognize the pivotal role played by transfer cost.

(iv) Co-integration Technique

Co-integration can be regarded as the practical counterpart of the

theoretical notion of long run equilibrium relationship. The development of
Co-integration technique forms a difficult achievement of time series
econometrics during 1980. Co-integration analysis has been necessitated
by the earlier approach which normally ignored or misrepresented the time
series properties of the price series and hence, serious flaws in the
estimation procedure. As a matter of fact, several macroeconomic time
series exhibits trend like behavior. Granger (1966) expressed this as the
series having much of their spectral power at low frequencies, and Nelson
and Plosser (1982) argued that this determination was captured by
modeling the series as having a unit auto regression root which is being
integrated of order one. Stock (1999) mentioned that the achievement of
Co-integration analysis, as developed by Granger et al. was to provide a
unified framework in which to understand and to reconcile the apparent
conflict between spurious regressions and economically meaningful long
term relations. Co-integration technique is a three-stage procedure. Firstly,
variables have to be pre-tested for stationarity. Once stationarity is
obtained, variables are to be tested for Co-integration or long run
relationship. After getting co-integrated relationship, the residuals from the
equilibrium regression can be used to estimate the error correction model.
The model can be given an error correction representation.

(a) Stationarity and Unit root tests:

To develop models for time series, it is important to know whether the

underlying stochastic process that generated the series can be assumed to
be invariant with respect to time or not. If the characteristics change over

32
time that is; if the process is non stationary, it will be difficult to represent
the time series over past and future intervals of time by a simple algebraic
model. On the other, if the stochastic process is fixed in time, that is; if it is
stationary, then one can model the progress via an equation with fixed
coefficients that can be estimated from the past data. The presence of unit
roots in time series points toward non-stationarity of the series. Regression
will be spurious if both independent and dependent variables show the
presence of unit root. In a compatible model, variables should be of same
order of integration. Unit root test starts with the level series, takes the
difference and tests for the presence of unit roots by regressing in the first
difference on lagged variable of the series. If one observes the presence of
unit root, the series is said to be non-stationary. The exercise is needed to
be repeated by taking the second difference and so on until the series
become stationary. Some of the important tests used to check stationarity
are Dickey-Fuller test, Augmented Dickey-Fuller test and Phillips - Perron
test.

(b) Engle-Granger Model of Co-integration

This model of Co-integration is given by Granger in 1986. In this

model first the estimated residuals from Xt = α + λYt +Zt are used to
construct a Durbin-Watson statistics (CDRW) and is compared with the
critical value given in Engle and Yoo (1987). If the estimated CRDW is above
the critical value, the null hypothesis of non-Co-integration is rejected.
Then CRDW test is reinforced by constructing Dickey-Fuller and
Augmented Dickey-Fuller statistics. The limitations of Engle-Granger Co-
integration are (i) Engle-Granger procedure is a bivariate model which
ignore the linkage that may operate through a third market, (ii) the
existence of more than one long run relationship cannot be captured by Co-
integration technique and (iii) the tests conducted for identifying the driving
forces in the market ignore the probability of existing multiple common
trends; which would imply multiple dominant markets.

33
(c) Error Correction Model

Granger (1986) and Engle and Granger (1987) have demonstrated

that if Y and X are both variables and are co-integrated, an error correction
model exists. The principle behind this model stated that "there often exists
a long-run equilibrium relationship between two economic variables. In the
short run, however, there may be disequilibrium. With the error correction
mechanism, a proportional disequilibrium in one period is corrected in the
next period" (Ramanathan, 1995). Error Correction Model includes last
periods' equilibrium error as well as lagged values of the first difference of
each variable. The degree of disequilibrium can be assessed by examining
the relative magnitude and statistical significance of the error correction
coefficient.

(v) Parity Bound Model (PBM)

Baulch (1997) proposed a PBM to test market integration. Baulch

argued that, “time series techniques involving Granger causality, error
correction and Co-integration rely on price data alone and fail to recognize
the role of transfer costs. These approaches are unable to distinguish
integrated from independent markets when both are subject to a common,
exogenous inflationary process. PBM expands earlier work on stochastic
frontier and switching regression models. Transfer costs (comprising
transportation, loading and unloading costs and trader's normal profit)
determine the parity bound within which the prices of a homogeneous
commodity in two geographically distinct markets can vary independently.
PBM assesses the extent of market integration by distinguishing among
three possible trade regimes: Regime 1, at the parity bound (spatial price
differentials equals transfer costs) Regime 2, inside parity bound (price
differential < transfer costs) Regime 3, outside parity bound (price
differential transfer costs). Deviations of the inter-market price spread from
extrapolated transfer costs in any period may be composed into three
components. The first error term (et) allows transfer costs to vary between

34
periods. The second error term (ut) captures the extent to which price
differentials fall short of the parity bound and the third error term (Vt)
measures by how much price differentials exceed transfer costs. The PBM
allows for market to be integrated in some periods but not in others.
Statistical reliability of the PBM can be assessed with Monte Carlo
experiments. Baulch also gives the limitations of PBM. It state that (i) Since
only contemporaneous spreads are used in its estimation, it is hard for the
PBM to take into account the type of lagged price adjustment postulated by
causality and Ravallion models, (ii) Precise estimation of transfer cost is
essential. Inaccuracies in estimation of transfer costs will lead to problems
with the convergence of the maximum likelihood procedure, and (iii)
Violations of the spatial arbitrage condition indicate lack of market
integration but they do not pinpoint its causes”.

2.4 Agricultural Market Integration in India

Delgado (1986) stated that a well integrated market system is vital to

household food security in both food deficit rural areas and those
witnessing a rise in the relative importance of non-food cash cropping. To
know the working of market, an understanding of market integration
measurement is very useful. Agricultural produce markets established
under market regulation program have been playing an important role in
providing market places to the farmers to dispose of their produce. These
markets have also provided physical facilities and institutional environment
to the traders, processors and other market functionaries for conduct of
their trading activities. Natures of agricultural commodities are
characterized by seasonality, variability perishability and sometimes
bulkiness. Spatial and seasonal characteristics of the agricultural produce
market are significant because of domestic transport costs and regional
trade. This might be due to the location of specifics of maximum crop in
particular region and some are spread more evenly throughout the country.

35
The costs of agricultural storage and storage matter because they have a
strong influence over prices and therefore over quantities produced,
consumed, stored and traded. They are hidden cause of future of
agricultural market.

Many developing economies have implemented structural adjustment

and market reform programs. An important component of the program is
liberalization of food markets. The liberalization, privatization and
globalization process is required for achieving allocative efficiency and long
term growth in agriculture. Market integration is one of the ways to
ascertain the extent of competitiveness in market. The marketing system is
seen as efficient if the movement of goods from producers to consumers is
undertaken at the lowest cost consistent with the provision of services and
facilities that consumers desire and are able to pay for. Improving the
efficiency of marketing system is not as easy task. It requires a holistic,
multi-disciplinary, multi level systematic and coordinated approach in the
identification and analysis of constraints in the production, marketing and
consumption sectors that hamper marketing system development. It may
be noted that the present structure of the agricultural marketing system
development prevailing in developing countries like India does not lead to
efficient marketing. Poor market integration is quite uncompetitive. The
fragmented and small farm size with low volume of marketable surplus
make the performance of marketing functions more difficult and expensive.
Poor management practices and lack of operating capital among others
affect the quality of the produce and hence, price. Besides this, poor
infrastructure and information technology acts as the main barriers for
better market integration in agricultural markets.

Market integration is two types, viz. horizontal market integration

and vertical market integration. Horizontal market integration means prices
of one market responds to change in the price of same commodity in other
markets. Vertical market integration means integration of price to price of

36
its product at different levels. The vertical integration in product price was
much quicker as compared to horizontal integration in product prices
because characteristics of perfect market condition by its quick adjustment
to price changes. In vertical integration, base of price is disturbed so
reaction is quicker whereas in horizontal integration, substitute of products
are affected by changes in prices so it takes some decision and time
involved is more. Two conditions of market integration must be fulfilled (i)
flow of commodities from one market to another with intent of arbitrage of
traders, and (ii) free flow of information and other connections of one
market to another.

The range of market integration depends upon the nature of

commodities, levels of physical and communication infrastructure in the
market, level of competition, farm to market roads, transport facilities,
scientific storage, drying facilities, grading and standardization, prevailing
marketing channels, market information and marketing extension support
to the small farmers and traders. The range of market integration is
between 0 and 1. If market integration is near to zero than market
segmentation is there. If market integration value is close to one than
markets are near to perfect competition. Marketing integration may be
defined as a situation in which arbitrage causes prices in different markets
to move together. Thus, more specifically, two markets may be said to be
spatially integrated whenever trade take place between them, if the price
differential for a homogeneous commodity equals the transfer costs
involved in moving that commodity between them. However, imperfections
in the market, particularly those arising from activities of traders are
generally taken as important causes for the existence of differential price
movements in different markets. Market integration helps in the
development of a single economic market at national level. Prerequisite is
integration of intra state and interstate regional markets and linked
together into single economic market. An economic market is defined as

37
"the area within which the price of a good tends to uniformity, allowances
being made for transportation costs. If the geographical dispersed regional
markets are found to be linked spatially in the long run (i.e. if the price
series are co-integrated" then it may be argued that a form of spatially
efficiency exists for regional linkages and the overall market performance
may be indicated in terms of this efficiency. The market are considered to
be spatially integrated if in the presence of trade between them, the prices
in the importing market is equal to the price in the exporting market plus
the transport and other transfer cost involved in moving goods between
them. The approaches generally used for testing market integration are law
of one price and Co-integration. The terminal market acts as a price setter
for the entire national because of the concentration of traders, speculators
and consumers. Once the prices are decided in the terminal market, they
filter down to the lower level markets. The study attempts to discern the
nature, pattern and extent of market integration and also to quantify the
transmission of prices in spatial and vertical markets in selected
agricultural commodities.

As per Acharya et al. (2012) “the integration among domestic markets

was analyzed by selecting a sample of five major wholesale markets, five
retail markets and eight primary wholesale markets for rice. In the case of
wheat, the sample included five wholesale markets, five retail markets and
four primary wholesale markets. Monthly prices for 16 years (1996 to 2011)
were used for the analysis. The international prices were taken from the
World Bank Pink Sheet. The Indian prices for each selected market were
taken from the official publications. The monthly price series in nominal as
well as real terms were logarithmically transformed for analysis. Both
horizontal and vertical integration in the domestic markets were analyzed.
The sequence of econometric analysis for assessment of market integration
and price transmission has been checking for stationarity of price series;
testing for Co-integration; testing for causality; and testing for asymmetry.

38
Apart from the econometric analysis, the transmission of international
prices to the domestic markets and to the farmgate was also analyzed by
looking at the movements in MSPs, prices actually received by sample
farmers, wholesale price index during the peak marketing period, and
prices in the primary assembling markets, and comparing these with the
movement in international prices”.

2.4.1 Rice Market

Acharya et al. (2012) established that “there exists the long-run

equilibrium relationship in rice markets. In the short-run, markets,
however, can deviate from the long-run equilibrium path due to exogenous
shocks, and the original long-run equilibrium path is reinstated only when
some error correction process begins. Competitive conditions will force the
price to adjust instantaneously to any new piece of information so that all
available information is reflected in the prices (Wilson, 2001). The markets
are integrated and these are interdependent and there exists price
dissemination across markets. At wholesale prices level, it shows Co-
integration between Mumbai and Kolkata; Delhi and Chennai; and
Hyderabad and Chennai, although these markets are far apart
geographically. Granger causality tests suggest bi-directional causality
between Delhi and Chennai markets. However, Delhi Granger cause
Chennai is more significant. There is also bi-directional causality between
Hyderabad and Chennai markets. The causality between Mumbai and
Kolkatta markets is unidirectional from Mumbai to Kolkatta. Coefficients of
the long-run co-integrating equations (Johansen maximum likelihood
approach) for different pairs of markets (Hyderabad-Chennai; Chennai-
Delhi, and Kolkata-Mumbai) are statistically significant and established a
long-run equilibrium relationship between these pairs of markets. The
wholesale prices in different pairs of markets tend to converge in the long-
run. The speed of adjustment between Chennai and Hyderabad is relatively
fast with around 22% of divergence from the long-run equilibrium being

39
corrected each month. In the short-run, both Delhi and Hyderabad
wholesale prices have a tendency to come closer to the wholesale prices in
Chennai, while shocks in Chennai market have a tendency to move away
from its equilibrium process. In Kolkata market, its own lagged wholesale
prices and prices in Mumbai market tend to move closer. The short-run
dynamics, thus, indicates that changes in wholesale prices in Chennai,
Delhi, Hyderabad, Kolkata and Mumbai are transmitted to Chennai and
Kolkata markets. We conclude that these markets are well-integrated in the
short-run.

In order to examine whether price transmission between these pairs

of markets is symmetric or not, we tested hypothesis of equal coefficients of
the negative deviations and positive deviations. For symmetric price
transmission between a pair of wholesale markets, the coefficient on the
negative deviation should be equal (statistically) to the coefficient on the
positive deviation. Using this criterion, it was found that there is a
symmetric price transmission between Chennai and Hyderabad, and
asymmetric price transmission in other pairs of markets. Asymmetric
response of one price to another implies non-linear adjustment. Slow and
incomplete transmission of price signals from one market to another may
occur due to several factors like lack of competition, collusive behavior
among traders and increased role of middlemen, in addition to the
differences in market resources, infrastructure, policies and institutional
capacity (Scherer and Ross, 1990; Abdulai, 2000; Serra and Goodwin,
2007; Mukim et al., 2009). The pair-wise integration of retail markets of
rice exhibits the same pattern of integration as the wholesale markets.
Three pairs of markets, namely Mumbai-Kolkata, Delhi-Chennai and
Hyderabad-Chennai are integrated.

Integration of different pairs of farm gate price (primary wholesale

markets) of Bankura and Cooch Behar, adjoining Kolkata, are neither
integrated themselves nor with any other market in the country, except

40
with Amritsar. However, in the southern region, primary wholesale markets
of Nizamabad and Vijyawada in Andhra Pradesh, and Kumbhakonam and
Chidambaram in Tamil Nadu are integrated. Primary wholesale market of
Nizamabad is also integrated with Kumbhakonam and Chidambaram
markets, while Vijawada is not. In the north, primary wholesale rice
markets of Karnal and Amritsar are integrated. This gives an idea of intra-
state and inter-state regional primary wholesale market integration and
linkages with the national market. Geographically far apart markets, like
Karnal shows integration with Nizamabad and Chidambaram, and Amritsar
with Vijaywada, Kumbhakonam and Chidambaram. Hence, we conclude
that geographically dispersed markets are linked spatially in the long-run,
which implies regional linkages even among primary wholesale markets.
Spatial pricing relationships are consistent with market integration,
suggesting that prices provide relevant signals to the regional markets
within and across states; hence all exchange locations are in the same
economic market.

The long-run co-integrating equations for price transmission from

wholesale to farmgate for different pairs of markets (Delhi wholesale-
Amritsar and Karnal primary wholesale; Chennai wholesale-Kumbhakonam
and Chidambram primary wholesale; and Hyderabad wholesale –
Nizamabad primary wholesale) establish that there is a long-run
equilibrium relationship between wholesale and farmgate prices. Simply, in
the long-run the wholesale prices and farmgate prices move in tandem.

The results on speed of adjustment between wholesale and farmgate

prices show that here is a considerable difference in the speed of
adjustment. In the northern region, prices in Amritsar primary wholesale
market adjust slowly, that is 11% percent per month, while prices in Karnal
primary wholesale market adjust at a faster rate (27%) in response to a
disturbance in the equilibrium. In southern markets, the speed of
adjustment is between 15 and 20%. However, for different markets, short-

41
run dynamics are different. In Amritsar market, a change in wholesale price
(lagged) in Delhi causes a marginal tendency to move away, while reverse
happens in the case of Karnal. In southern region, a change in wholesale
prices in all the selected markets causes them to drift apart. It may be
pointed out that contemporaneous effect of the independent variable, which
we could not include, may change some of these results. The dynamics of
price transmission from wholesale to farmgate is contrasting between
northern and southern markets. In southern region, price transmission is
asymmetric, while in northern region it is symmetric”.

2.4.2 Wheat Market

Acharya et al. 2012 stated that, “the results of Johansen Co-

integration test on pair-wise integration of wholesale markets reveal two
patterns of integration. One, there is integration of Delhi wholesale market
with geographically far apart wholesale markets of Mumbai, Bangalore and
Hyderabad. The Granger causality test indicates a direction of price signals
from Delhi to Mumbai, Bangalore and Hyderabad. This is expected as
wheat production is concentrated in north India. Two, there is integration
between geographically proximate markets of Bangalore and Hyderabad
with Chennai. Here, the direction of Granger cause is from Bangalore and
Hyderabad to Chennai wholesale market. More long-run co-integrating
equations between different pairs of wholesale markets provide evidence of
a long-run equilibrium relationship between these pairs of markets and the
speed of adjustment for different pairs of markets implies convergence of
wholesale prices in the long-run. The process of adjustment, however, is
relatively faster between Chennai and Hyderabad and between Mumbai and
Delhi wholesale markets. In the short-run, price shocks are
contemporaneously transmitted in these markets but not fully. For
example, while a change in wholesale prices in Delhi market would lead to
divergence in wholesale prices in Mumbai and Bangalore in the short-run,
the changes in wholesale wheat prices in these markets themselves have a

42
tendency to cause convergence. Moreover, price transmission in these
pairs of markets is asymmetric. The asymmetry in price transmission is
very high in the markets which are integrated with Delhi market. This is
expected as Delhi is the main supplier of wheat to the geographically
distant markets. The transfer and transaction costs from the major
producing region to the deficit region are high. This also implies that there
is a considerable scope for spatial arbitrage in these markets.

Retail prices of wheat in different markets exhibit a similar pattern of

integration as observed for the wholesale prices. Since wheat production is
concentrated in northern India, farmgate price series in all primary
wholesale markets are co-integrated, except Kota with Karnal. This is
expected because Kota and Karnal are independently linked to different
secondary wholesale markets. Moreover, government’s procurement
programme, available storage facilities and adequacy and otherwise of
transportation infrastructure may cause relatively less price integration
among this pair of primary wholesale markets. The quality of wheat
produced in Kota region is relatively superior, which also comes in the way
of perfect price integration. The demand-supply dynamics of durum wheat
is different than the normal wheat.

The co-integrating equations for price transmission from wholesale

(Delhi) to primary wholesale wheat markets (Amritsar, Moga and Karnal)
revealed a long-run equilibrium relationship between farmgate and
wholesale prices. The value of the coefficient in all the equations is close to
unity suggests a 1% change in Delhi wholesale prices will cause almost an
equal change (0.90-0.96%) in the farmgate prices. The speed of adjustment
between wholesale and farmgate prices is fairly fast (-0.33 to -0.57) in all
the markets feeding Delhi wholesale market, implying that 33% to 57% of
divergence from long-run equilibrium is being corrected each month. The
speed of adjustment, however, is faster in Karnal, followed by Moga and
Amritsar.

43
 In the short-run, changes in farmgate prices lead to divergence in the
equilibrium adjustment process. On the other hand, the changes in
wholesale prices in the Delhi market cause a convergence in Moga and
Karnal markets. The price transmission from wholesale to farmgate is
asymmetric there. However, the nature of price transmission in Karnal and
Moga is symmetric. Amritsar market is far away from Delhi than the other
two markets, hence there is a larger scope for arbitrage in Amritsar
market”.

2.4.3 Chickpea Market

Chickpea is a major pulse crop grown in India as it is the only pulse

crop similar to pigeonpea. It account for more than 40% of total pulse
production in India. Two types of markets exist for chickpea namely
terminal markets and secondary/primary markets. In the terminal markets
(Delhi, Mumbai, Chennai and Kolkata), the chickpeas traded are mainly
from major chickpea growing regions as well as imports from other
countries. The primary/secondary markets are those where the chickpea
being marketed mainly from domestic chickpea producing regions in India.
The interstate buy and sell in chickpea is growing due to the removal of
interstate movement restrictions and due to the expansion into south and
central India where chickpea consumption is low (Reddy, 2012).

Chickpea are sold in primary or secondary wholesale markets directly

by the producer to a broker, a commission agent, and middlemen. The bulk
of the chickpea from brokers and agents are sold to primary wholesalers
who in turn sell them to the millers and processors of dal or to secondary
wholesalers. A proportion of the dal from dal millers and primary
wholesalers goes to secondary wholesalers, and then sold to consumers as
dal through the retailer. A major portion of chickpea production also goes
to retailers without any post-harvest process for consumption as a whole-
grain. Some whole-chickpea from secondary wholesalers are sold to frying
mills. Puffed or roasted chickpeas are sold to consumers via retail markets.

44
 The chickpea trade in India has been subject to many restrictions
during pre independence up to 1994, such as the regulations of the
Essential Commodities Act of 1955, compulsory levies on millers, stocking
limits for private traders, milling reserved only for small scale industries,
occasional restrictions of interstate movements and prohibition of future
trading. Most of these restrictions have recently been lifted. Now there is no
direct government regulation on chickpea marketing in India, with a few
exceptions like the prohibition of the export of split chickpea. This makes
export of split chickpea more costly, as the additional cost of packaging is
estimated to be approximately Rs.315-495 per ton which is about 3 to 4%
of the chickpeas, which makes it non-competitive.

The Indian government removed the import levy on chickpeas in

1998. Procurement of chickpeas at Minimum Support Price (MSP) by the
government agencies during the harvest period is another major
government intervention in the chickpea markets. However, over the years,
for the pulses including chickpea, the MSP has generally remained below
the market price, and therefore has had no noticeable procurement by
government agencies and have negligible impact on the price of chickpea in
India (Reddy, 2012). Overall, the chickpea markets in India are functioning
under little restrictions from the government and the market price is more
or less determined by a supply and demand situation in a free competitive
environment. The data relating to chickpea prices quoted in 12 spatially
separated markets are available in various issues of the Agricultural
Situation in India, a monthly journal published by the Ministry of
Agriculture, Government of India. All these markets are major chickpea
producing and consuming centers, even though the choice of the states and
the markets from each state has been constrained by the availability of
consistent data for the period under consideration. On that basis, the
following are important markets: Patna and Matihari from Bihar, Dohad
from Gujarat, Rohtak from Haryana, Jaipur and Sriganganagar from

45
Rajasthan, Allahabad, Jhansi, Hapur, Kanpur and Kalpi from Uttar
Pradesh and market from Delhi.

2.5 Co-integration of International and Domestic Prices

Acharya et al. (2012) have concluded that, “there is no co-integration

between domestic and international rice prices. Since Delhi wheat prices
are co-integrated with international prices. To capture short-run dynamics
between international and domestic prices, three co-integrating equations
reveal the effect of changes in international prices (i) on wholesale prices,
(ii) farmgate prices, and (iii) retail prices. It is concluded that there is a
long-run equilibrium relationship between international and domestic
prices at different levels of market. The long-run elasticity for price
transmission from international to wholesale and retail is larger than to
farmgate prices.

The speed of adjustment reveals the correction in wholesale prices, in

response to changes in international prices, is slow than in farmgate and
retail prices. In the case of wholesale prices, approximately 4.4% of the
divergence from long-run equilibrium is being corrected as against 47.5% in
the case of farmgate prices and 29.6% in the case of retail prices.
Interestingly the short-run shocks in international prices do not have any
significant influence on domestic prices at any level of the wheat supply
chain. India allows a small fraction of international prices to be transmitted
at the level of price discovery in the domestic market (wholesale prices).
This could be explained by policy of government of India that provides
support prices to producers which is evident with a co-movement of
support prices and international prices though the increase in the former is
not commensurate with surge in international prices. The price
transmission from international prices to farmgate and retail prices is
asymmetric. The farmgate and retail prices respond differently to

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international prices in its rising and falling phases. The price transmission
is symmetric in the case of wholesale prices”.

Spatial price integration of primary wholesale market of pulses

especially (soybean) in Maharashtra works on the theory of radial market.
Latur and Akola are two main markets in state and are geographically
separated far apart. But these two markets serve as main market in each
region and other markets are peripheral markets. Here central market
influences the prices of peripheral markets. Simply price is formed in
central market then transmitted to peripheral market. This provides an
insight that central market is the focal point for giving policy intervention to
improve the market performance of the state.

Kar et al. (2010) revealed that wholesale markets of major fruits and
vegetables in India are weakly connected among themselves. The Co-
integration of prices in different pairs of markets ranges among 0.2 to 0.6.
It clearly reveals that inefficiency in these markets is very high. This could
be attributed to the poor and /or lack of proper market infrastructure such
as farm to market roads, poor or absence of transport facilities, lack of
scientific storage, poor drying facilities, poor grading and standardization,
overlapping marketing channels, lack of market information and poor
marketing extension support to the small farmers and traders. Supports for
marketing research and development is inadequate and lack of attention is
given to facilitating agencies are common. This is a clarion call for
intervention of government machinery for regulation of the functioning of
market and development of prerequisite market infrastructure. The
ultimate goal should be to have an integrated, modern and efficient system
of food grain handling and scientific storage and distribution of food grain
to the consuming centres through special bulk wagons so that losses are
bought down to the minimum levels and the cost effectiveness is achieved.

The wholesale markets of major fruits and vegetables in India are

weakly connected among themselves. Inefficiency in these markets is very

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high due to lack of proper market infrastructure and poor marketing
extension support to the small farmers and traders. The government has to
move towards an integrated, modern and efficient market system in general
and high value perishable commodities in particular. All this will bring
down losses to the minimum levels and the cost effectiveness is achieved.

As the government go on augmenting infrastructural and other

facilities in markets, markets demonstrating higher degree of interaction,
have certainly become more integrated both in terms of sizes and timing of
effects. The spatial and inter-temporal integration of food markets became
more closely integrated markets imply the more efficient allocation of
resources and products across regions and time necessary to achieve
sustainable agriculture development.

2.6 Conclusion

In this chapter the theoretical background of market integration

related various concepts have been discussed thoroughly. This chapter also
reviewed various statistical and econometric techniques from the earlier
literature to verify the validity of market integration hypothesis. A series of
techniques right from correlation coefficient, variance component approach,
autoregressive model, distributed lag model, Ravallion model, Engle-
Granger Co-integration technique to Parity Bound Model are explained in
detail. Market integration of agricultural products in India is also discussed
briefly with specific examples of markets for rice, wheat and chickpea in
India. Overall this chapter provides consolidated review of theories of
market integration with practical implementations.

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