The Takayama and Judge Price and Allocation Model and its Application in Non-linear Techniques for Spatial Market Integration

Abstract

To what extent space plays a role in markets performance is a question of interest for economist. Well-functioning markets involves issues such as monetary policy, international trade, exchanges rate and gains distributions among others; and although equilibrium should characterize the markets, there is strong evidence concerning arbitrage opportunities taking place. Spatial distribution plays a major role in the markets performance, for instance consider lack of markets access, if that would be the case isolated firms might neglect the adoption of new technologies (Barret, 2008). The economic theory concerning markets and space deals with the concept of “Spatial Market Integration”, the concept has received much attention, for instance consider authors such as Harris (1979), Ravallion (1986), Goodwin and Schroeder (1991), Roll (1979), Barret (2008), Fackler & Goodwing (2001) and Barret (2008), and although to some extend there is not a unique definition, the core theory behind market integration deals with tradable goods. Assuming excess supply and demand among regions, tradability is the linkage among markets; furthermore prices play a fundamental role by ensuring the optimal allocation of resources under perfect competition. Indeed the economic model that serves to understand “Spatial Market Integration” is the so called Takayama and Judge Price and Allocation Model (TJM) which denotes a partial equilibrium on which two or more regions trade one or more goods subject to linear constrains. For understanding the model consider a single commodity and two separated markets, the equilibrium between the regions is subject to the spatial equilibrium condition denoted as (1) being