Market Integration in European Union’s Fruits and Vegetables Sector

Alfred Marshall in “Principles of Economics” (1890) contributed to state the so called Law of One Price arguing that « [...] the more nearly perfect a market is, the stronger is the tendency for the same price to be paid for the same thing at the same time in all parts of the market ». This Law has been the basis to formulate the concept of market integration. Nowadays there is still no clear consensus in the recent literature about either the definition and the empirical toolkits available to assess the integration of markets.
Integration is a key feature of a Region to ensure the efficacy of macroeconomic policies and to manage risks associated with shocks on demand or supply sides. According to Gipson (1993, p. 231) « competition equalizes prices of identical products sold in different countries when trade barriers and transportation costs are eliminated». New literature is mainly focused on models that take into account potential non-linearity in price transmission due to the “inactivity band” of transaction costs. A recent approach relies on modeling the “inactivity band” using the threshold autoregressive (TAR) models.
Another important issue in market integration is the symmetric (or asymmetric) nature of price transmission. Meyer and Cramon-Tabaudel (2004) surveyed the literature on asymmetric price transmission identifying some of the possible causes of asymmetry: market power and adjustment costs, non-equivalence of demand and supply shocks, distorted price reporting process, asymmetric information. Although the survey is very explicative of many aspects of APT, we argue that part of the explanation might lie on different causes.
Although the literature associated with market integration of agricultural markets is extensive, a vast majority of empirical studies dealt with few categories of products and for many agricultural goods the topic remains under investigated.
The fresh fruits and vegetables (F&V) sector is influenced by some peculiarities of the products: seasonality, perishability and sensitiveness to climate conditions. European Union (EU) is either the largest import Country and one of the most important producer in the World. Therefore, the European Commission is really concerned about the sensitiveness of the F&V sector to price variability.
In a recent Council Regulation (EC 1182/2007) « the production of fruit and vegetables (has been defined) unpredictable [...] and surplus on the market, even if (they are) not too great, can significantly disturb the market ». Fresh F&V sector is often affected by market crisis, due to factors as product perishability and production and consumption sensitiveness to climate variations (EC, 2007a). The measure of market integration assumes relevant importance for crisis management and prevention: Integration could increase both the probability and the scale of an event.
Despite the serious policy implications and relevance of assessing market integration in F&V sector, the topic remains under-investigated in few articles and literature lacks of studies on EU F&V sector.
The challenge of this dissertation is to assess the degree of market integration in some F&V sectors through econometric techniques. In particular we aim to estimate the speed of price transmission among closely located markets as well as the price transmission across different Regions. By selecting products that different products we are able to generalize our findings to the whole EU F&V sector. The dissertation is articulated as following.
Chapter 1 is dedicated to the description of the EU F&V sector.
The second chapter is a survey of the literature on Law of One Price and Market Integration. We review the definitions and the theory of market integration and LOP, examine advantages and limitations of various empirical approaches and describe the main issues of the recent debate.
The third chapter illustrates the methodology adopted in this dissertation. This empirical study, carried out on a large set of markets located in 6 different EU Countries, consists of two main steps: the identification of the markets that mainly influence the prices of other markets in the same Region and the analysis of integration either inside and among Regions. We employed threshold autoregressive models and contributed to the debate by testing whether price transmissions are asymmetric.
Chapter 4 reports the empirical findings. We found that the speed of price transmission depend on the distance of markets and on storability of F&V. In most of the cases we estimated different speed of adjustments for positive and negative price movements. A second consideration relies on the relationship between storability and market integration.
According to its purpose, the study offers some pioneeristic estimates of market integration in the EU F&V sector.