Market Integration, Efficiency of Arbitrage, and Imperfect Competition: Methodology and Application to U.S. Celery

TLDR

The paper develops and applies a methodology to test interregional commodity arbitrage efficiency. Using only time‑series price data, the authors estimate a switching‑regression model with efficient arbitrage, relative shortage, and relative glut regimes to assess market integration, arbitrage efficiency, marketing margins, substitutability, and competitiveness. When applied to U.S.

Abstract

Abstract This paper develops and applies a methodology to test for efficiency of interregional commodity arbitrage. Application of the methodology requires only time‐series data on prices for alternative cities, regions, countries, or product forms. Yet, the approach is capable of generating evidence on a number of market parameters including market integration, arbitrage efficiency, the magnitude of marketing margins, product substitutability, and competitiveness of markets. Estimation is based on a switching regression model with three regimes: efficient arbitrage, relative shortage, and relative glut. Results from application of the model to U.S. celery marketing indicated significant departures from efficient arbitrage for both California and Florida celery.