Testing the Law of One Price Under Nonlinearity: An Application to Iranian Broiler and Egg Markets

Abstract

This study tests the validity of the law of one price (LOP) in Iranian broiler and egg markets. It uses daily retail prices in West Azerbaijan, East Azerbaijan, Ardebil, Tehran, and Zanjan provinces for the period 2006–2014. Our results confirm the existence of nonlinear behavior in the different series. Emmanouilides and Fousekis’s (Agric Econ 43(6):715–723, 2012) nonlinear unit root test, which is an auxiliary regression for the ESTAR model, shows that both broiler and egg markets are well integrated and LOP holds in all market pairs. For the broiler market, a strong version of LOP holds for Tehran-West Azerbaijan, Tehran-Ardebil, Tehran-Zanjan, West Azerbaijan-Ardebil and the West Azerbaijan-Zanjan pairs, and a weak version of LOP holds for the Tehran-East Azerbaijan and West Azerbaijan-East Azerbaijan pairs. In the egg market as well, a strong version of LOP holds for all market pairs except for Tehran-Ardebil. Hence, the study recommends that managers and policymakers need to be careful while adopting stabilization policies and market management for these two products because the related markets in the other provinces are integrated and the effects of these policies in each province will influence producers and consumers in all the other provinces as well.