Dynamic Price Adjustment in Spatially Separated Food Markets with Transaction Costs

This paper presents an alternative technique to analyze market integration using price data, linking the cointegration version of Ravallion's dynamic model with the recent switching regression approaches as in Baulch's Parity Bounds Model. The Band- Threshold Autogression (Band-TAR) model allows for dynamic analysis of the adjustment process as well as for trade discontinuities and transaction costs, thereby avoiding some of the unrealistic assumptions of both approaches. We apply the model to the same rice price data on the Philippines as Baulch and find that, contrary to Baulch, the efficient arbitrage conditions are often not satisfied and unexploited profits are common, albeit relatively small. At least on one important trade route, we find evidence of substantial inefficiences.