Testing for Price Co-Integration between Producers and Retailers: Evidence from Ethiopian Milk Market

The purpose of this paper is to test how producers’ and retailers’ prices are horizontally integrated, and to show the direction of causality that exists between producers’ price and retails’ price in Ethiopian milk market. The study was conducted making use of secondary data extracted from Ethiopian central statistics agency. The data was time series having 120 observations of monthly recorded price series of producers and retailers, for the period from January, 2004 to December 2013. For this purpose, descriptive statistics and time series econometrics approach (Johansen’s test for co-integration and Vector Error Correction Model) were employed. The study shows that there is strong long run co-integration between producers’ price and retailers’ price. The policy implication is that the markets are co-integrated in terms of price transmission. However, the causality test shows that retailers are dominant over price determination. In other words, producer’s price is caused by retailers’ price; but producers’ price doesn’t cause retailers’ price. This shows that the market structure is in favor of retailers/traders, which can adversely affect the welfare of producers and consumers.