TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

Empirical Tests for Spatial Price Analysis
hold with an inequality sign). The importance of this flaw can be assessed only
verifying the frequency at which price differences are within the band of the
transport costs or exceed it.
3.2.2 Dynamic regression models based on a point location model
Dynamic models gained attention because price linkages might be of a noncontemporaneous
nature. All dynamic regression models basically refer to the
dynamic time-series properties of the data, using some version of a Vector
Autoregression (VAR) model:
n
A 0 Pt
= ∑ A k Pt
−k
+ DX t
k = 1
+ e
t
(3.7)
where Pt is a (n X 1) vector of prices, Xt is a (n X 1) vector of exogenous factors,
the Ak are the (n X n) matrixes of coefficients of the k-th included lagged prices,
and et is a (n X 1) vector of unobservable serially independent market shocks.
A common template comprising all dynamic regression models is provided by
Fackler and Goodwin (2001, p.996). Their economic model, a point location
model 22 , is based on the following linear excess demand functions (see figure 3.1)
qit = bi
( ait
− Pit
)
(3.8)
where q are the net exports in country i, a is a shock that causes parallel shifts in
the excess demand (for example, a change in the autarchy price), P is the i–th
price and b a coefficient.
Indicating with rt the transport cost from location 1 to location 2, the
equilibrium conditions for the two-location model in which 1 always exports to 2
can be written as:
⎡
⎢
⎣
b2
⎤⎡
P1
t ⎤ ⎡ b1a1t
+ b2a
⎥⎢
⎥ =
1
⎢
⎦⎣P2
t ⎦ ⎣ r
b1 2t
−1 t
⎤
⎥
⎦
(3.9)
where both net exports and prices, net of transport costs, are equalized.
22 In point location models the network structure links serve only for commodity transportation flows. On the
contrary, in agents-on-links models, markets or firms are located at network nodes and consumers or
commodity producers are located continuously along the network links. These models are used to represent
spatial oligopoly situations. The differences in behaviour attributed to this model and the point location model
have then more to do with the competitive structure of the market than with the spatial one (Mc New and
Fackler 1997).
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