TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

3 EMPIRICAL TESTS FOR SPATIAL PRICE
ANALYSIS
3.1 Introduction
While chapter 2 provides a general outline of the fundamental theoretical
framework underlying price transmission analysis, this chapter will focus instead
on the econometric techniques which have been used so far in empirical
applications (a review of the economic models of price determination, also
surveyed in Fackler and Goodwin, 2001, is on the other side beyond the
objectives of this work) 15 .
A fundamental important premise is that, as we will see, prices are often the
only data available to examine spatial relationships. Accordingly, increasingly
sophisticated econometric devices have been developed. Barrett (1996, p.825)
notes that “agricultural economists’ toolkits have changed nearly as rapidly and
dramatically as have developing economy markets, but these methodological
refinements have not been accompanied by conceptual advance”. In much of the
existing literature, indeed, the analysis typically relies on price data only, and
focus on the special case of “perfect integration, when two markets are both
integrated and in competitive equilibrium. Yet actual market relationships are
messy” (Barrett and Li 2002, p.294). Clearly, in order to be informative, market
(price) analysis will also have to be accompanied by a thorough study of the
conditions in which trade takes place.
Amongst all empirical models used, time series analysis and in particular
cointegration techniques have been considered as very appealing, as they allow to
disentangle short and long run market dynamics and to remove the exogeneity
hypothesis of one of the prices.
15 Also, a parallel literature has emerged in “pricing to market” (PTM) models. The canonical PTM model
compares fob prices from a single source country to multiple destination markets (Barrett 2001, p.25).