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.