Determinants of Market Integration and Price Transmission in Indonesia

This paper investigates the determinants of price differences and market integration among Indonesian provinces using data from retail cooking oil, rice, and sugar markets during the period 1993-2007; and wholesale maize and soybean markets during the period 1992-2006. We measure the degree of integration across provinces using cointegration techniques and calculate average price differences and use regression analysis to understand the drivers of price differences and market integration. For rice and sugar, we find wide market integration and low price differences in the range of 5-12 per cent. For maize, soybeans, and cooking oil, we find less integration and higher price differences (16-22 per cent). Integration across provinces is explained by the remoteness and quality of transport infrastructure of a province. Price differences across provinces respond to variations in provincial characteristics, such as remoteness; transport infrastructure; output of the commodity; land productivity; and income per capita.