Market Integration and Price Formation of Chili in Indonesia

Reni Kustiari


This paper examines the markets integration of chili in Indonesia uses monthly prices data from 2011-2016. Market integration was analyzed by the Johansen, co-integration model. The results of EG causality test show that producer price and wholesale price Granger cause consumer price. There is a causal relationship between one way. Therefore, the causality approach accepts the hypothesis of the Law of One Price (LOP). Whereas co-integration models provide evidence for a well-integrated chili market. The analysis of variance decomposition shows that Padang, as one of the center of red chili production area, becomes the reference market (price leader) of Chili price in Indonesia.


Market; integration; price formation; variance decomposition; causality.

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