Market integration of Red chilli commodity markets in Indonesia

Many researches have been examined price transmission and market integration of staple food in Indonesia, while relatively few studies are there on market integration of vegetable commodities markets. Mostly previous study assessed the information to what extents and to which markets prices are transmitted across spatially different markets. However, there is scarce literature that determines the factors influence market integration or lack of integration in Indonesia. Thus, the analysis of market integration remains weak without further analysis on factors that explain such of market integration or segmentation. Hence, it becomes a gap to be occupied by this research. The author believes that the study on commodity markets integration might be more useful if it is complemented with further discussion on factor that could explain the process of market integration or lack of integration in Indonesia. Therefore, by using prices dataset from 23 producer markets and wholesale market in Jakarta that covering the years from January 2000 to December 2011 and from January 2005 to December 2011 this paper aims to investigate two types of spatial market integration with focus on red chilli commodity markets. A series of techniques, such as the Engle-Granger cointegration test and ECM were used to test red chilli market integration. With this approaches, then it is possible to analyze price transmission, identify market integration or segmentation that occurs in red chilli commodity markets in Indonesia, and specify the long-run and short-run dynamic. Moreover, some variables such as the number of production, population, distance between markets, the quality of infrastructure, and the numbers of markets have been obtained to discuss on factor that might drives interconnectedness between red chilli markets. The result of model 1 indicates that generally producer markets are not cointegrate with PIKJ as central market. However, these markets tend to have short-run relationship. On the other hand, the results of spatial market integration model 2, which test cointegration across 23 producer markets, imply that red chilli markets across producer provinces tend to integrate in the long-run. In addition, in the short-run changes in the red chilli‟s price in one producer market also seem to have immediate impact on red chilli‟s price in other producer markets. Finally, the research has shown evidences that red chilli commodity markets integration in Indonesia are influenced by the good quality of infrastructure, location or distance between market, and trade opportunity that can be indicated by the large consumer area such as the number of populations and the number of markets.