Testing the law of one price: Cotton market integration in Pakistan's Punjab
2007
Mushtaq, K. (University of Agriculture, Faisalabad (Pakistan). Dept. of Agricultural Economics) | Abbas, F. (Bonn Univ. (Germany). Centre for Development Research) | Abedullah (University of Agriculture, Faisalabad (Pakistan). Dept. of Environmental and Resource Economics)
Regional market integration in many agricultural commodities has been extensively studied for the insight it provides into the functioning of such markets; such studies provide valuable information about the dynamics of market adjustments, and whether there exist market imperfections, which may justify government intervention. This study empirically estimated the degree of integration in cotton markets of Pakistan's Punjab using the law of one price (LOP) framework and cointegration analysis. Cointegration Results show that all seed cotton markets are highly integrated in the long run. Regression results show that government intervention in terms of seed cotton procurement negatively influenced the degree of market integration. The high degree of market integration observed in this case is consistent with view that Punjab's seed cotton markets are quite competitive and provide little justification for extensive and costly government interventi on designed to improve competitiveness to enhance market efficiency.
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