The identification of market exogeneity and market dominance by tests instead of assumption: An application to Indian material

Abstract

It is normally the case in research on market price to identify the central market either by looking at population data, the volume and directions of flows of commodities, and by identifying nodes on transport networks or by spotting it as the physical centre of regulatory intervention. This however may not be the most safe way to proceed if the geographical flows of a commodity among the domestic markets do not provide strong evidence about the spatial direction of price causation. In the present paper the central market is defined in terms of dominance and exogeneity and a series of tests are provided to help to define and distinguish an exogeneous and dominant (central) market among the marketplace price series. The tests are applied to three crop markets and to three market places in India. The results strongly suggest that it is possible to identify the central market by testing instead of simply by making a more or less empirically justified assumption.