Testing for Food Market Integration: A Study of the Vietnamese Paddy Market

Abstract

This study examines whether there is spatial integration between and within paddy markets in the North and South of Vietnam. The empirical model developed uses estimates of transfer costs to generalize Ravallion’s model of spatial market integration to allow for threshold effects. A sequential testing strategy is used to test for market segmentation, the number of thresholds, long-run integration, informational efficiency, and the ‘Law’ of One Price within an error-correction framework. We find no threshold effects and weak evidence of paddy market integration between northern and southern Vietnam. There is, however, evidence of both threshold effects and stronger market integration within the Red and Mekong River deltas. Whenever price spreads exceeds their thresholds at least 60% percent of price changes are transmitted between regional markets within a month. Nonetheless, the instantaneous version of the ‘Law’ of One Price only holds for a few regimes and market pairs. These results suggest that national level policies cannot be relied upon to stabilize or support paddy prices in Vietnam. Instead, policies need to be designed with the specific production, consumption and marketing characteristics of northern and southern Vietnam in mind.