Spatial linkages of green chili prices between a dedicated economic centre and other regional markets in Sri Lanka

This study assesses the green chili markets in Sri Lanka from 2012 to 2016 by examining the degree of market integration in the country. The analysis was carried out in the first differenced form, which conformed to the Augmented Dickey-Fuller tests of stationary. The pairwise comparison between Dambulla Dedicated Economic Centre (DDEC) and 25 other regional markets in Sri Lanka was carried out. All market pairs co-integrated with the price at DDEC in the long run according to the results of Johansen Co-integration test. Therefore, the DDEC has clearly played an important role in price discovery in the long run. Error correction terms indicated that the adjustment process from short-term disequilibrium in prices to long run price equilibrium is slow providing evidence of weak short run co-integration in green chili markets in Sri Lanka. Results revealed only six regional markets out of 25 had serial correlation in the short run. Negative coefficients of prices in the short term indicated that some unknown factors are playing predominant role in spatial price transmission such as sluggishness in market convergence and inappropriate involvement of middleman in the market chain. Farm gate to the collecting centre and collecting centre to the regional markets were identified as the main two points in the market channel where high price influence has occurred. A systematic government inspection and a strong market information system could prevent such short term price disequilibrium in the regional chili markets in Sri Lanka to a greater extent.