Spatial Pricing Efficiency in Fiji's Municipal Food Markets

Abstract

The Fiji Islands economy is widely held to be constrained by a lack of market and transport infrastructure. Such infrastructure problems can reduce the efficiency of markets and result in wider than optimal disparities in food prices, both between markets and over time. In this paper we use monthly price data for 22 locally produced crops from Fiji's major municipal markets, for the period 2001-2006, to identify the extent of the spatial pricing efficiency between these markets. Short-run price responses are estimated through SURECM. Relative price movements between markets indicate the potential for profitable arbitrage which will maximise the economic value of food to the Fijian economy. The arbitrageurs might be middlemen or individual farmers shifting their own produce between selling centres. We find that the municipal markets are generally spatially price efficient in the technical sense that prices return to their long-run relationships after a shock. But after a disturbance prices generally still take some two months to return to their equilibrium with the reference market, the capital Suva. This suggests there is scope for policy action to improve the spatial pricing efficiency of Fiji's food markets. An enhanced market price reporting system is one option that deserves consideration.

Keywords: Law of One Price, pricing efficiency, arbitrage, Fiji

JEL Classification: N5, O53, Q13, R1