Testing Asymmetric Price Transmission in the Vertical Supply Chain in De-regulated RiceMarkets in Bangladesh

Abstract

Market liberalization at the domestic level and at the boarder level has been a dominant feature of market reforms in most developing countries including Bangladesh during the last two decades. A pre-requisite for producers and consumers to benefit from this new and changing market environment is the ability of market to function efficiently at their spatial or through the value chain dimensions which are very often constrained by different factors. The vertical integration of grain markets plays a crucial role in improving the welfare of the producers and the consumers. Therefore, the better the market integration, the lesser the intervention required by the government. There was a widely-held belief about the domestic markets in Bangladesh on possible manipulation in the agricultural markets as well as concerns about the sources of asymmetry. In the domestic markets, a price increase passes very quickly though the supply chain compared to a price decrease. As a result, perception by consumers and the government exists that at least the market is being manipulated, raising food prices unfairly, at the expenses of the poor households who are net buyers and for whom food is a major expenditure share (about 40-50 percent). Examining, the market functioning at the vertical level in developing countries is of importance to evaluate how the private traders delivering to the market. That is why it is important to identify what kind of policy can be introduced and at what level of the marketing chain to correct the market inefficiency, if needed. The vertical price leadership at the wholesale level to the retail in the marketing literature is inferred but not empirically verified. Therefore, this paper is an attempt to fill up this gap. It first examines the price transmission between the wholesale and retail level of the rice market in Bangladesh in the regime of the changing market environment. Secondly, it examines whether the wholesale market dominates the retail one. Thirdly, it analyzes whether the price relationship is symmetric with respect to price increases and price decreases. The paper uses the average wholesale and retail price of rice for Bangladesh. The monthly price data used for this study are taken from FAO and different published series of Statistical Yearbook and the Economic Trend. The data period cover from February 2002 to June, 2007. From our unit root test, we find that the level data contain one unit root but are stationary at their first differences. Both Engel-Granger (1987) bi-variate and Johansen (1990)multivariate cointegration tests were applied to determine a linear combination which is stationary. Then the existence of long run causality was tested within the framework of Johansen cointegration by standard Wald test. To test the asymmetric transmission in the prices we used the asymmetric ECM-EG approach. The results show that the wholesale and retail prices are integrated, and in the line of the industrial organization theory, the wholesale price plays a leadership role to determine the retail prices. Results also confirm that the consumer and public concern about the asymmetric price transmission holds true.