Contrary to the commonly held notion that the market power exercised by a handful of unscrupulous traders in the local market has resulted unnecessary hike in prices, this paper presents evidence against this allegation. Findings show that market shocks originate at the farm level that are transmitted as price changes at the wholesale market before it is reflected at the retail market. In addition, symmetry test cannot confirm the presence of market power among Filipino traders. Nevertheless, estimation of price symmetry model does not lend credence to the claim that government’s absence in the market can lead to chaos.price level

Reeder, Meyra M.

English

Research Papers in Economics

Number 49, Volume XXVII, No. 1, First Semester 2000
Asymmetric Prices: Implications on Trader's
Market Power in Philippine Rice
MEYRAM. REEDER*
INTRODUCTION
The dynamics of prices is of profound interest among
policymakers in the Philippines, particularly because increasing
prices are more frequently experienced than decreasing prices.
Rising prices are commonly blamed on the oligopolistic structure of
the local marketing system, where a handful of Filipino traders are
allegedly able to amass unreasonably huge profits at the expense of
the impoverished and already disadvantaged Filipino consumers.
Most Filipinos believe that this is because traders have market power
which enables them to deliberately manipulate market prices. It is
perceived that because of market power, unscrupulous traders
exploit abnormal market situations by unfairly raising prices when
the market is distressed while not allowing them to fall when market
conditions improve. For example, during the critical months of
September to November when the market is tight or during
inclement weather, traders have been known to hoard thereby
creating an artificial market shortage enabling them to inflate prices
which further accentuate the market crisis (Manila Times,
November 9, 1998). On the other hand, they have been known to
*Address all correspondence toMeyra M. Reeder at MeyraR@aol.com. The author gratefully
acknowledges the helpful comments ofan anonymous reviewer. Any remaining discrepancies
are solely the author's.60 I JOURNAL OFPHILIPPINE DEVELOPMENT
equals that of falling prices specified as:
k k
H_" Z O_ POS/_, -- Z _l NEG/-i (4)
i=l i=1
against the alternative hypothesis that price response to increasing
and decreasing prices are asymmetric:
k k
Z o,POS/ , Nm/_, (5)
i=1 i=1
The second null hypothesis tested is whether the speed of
adjustment is the same for price increases and price decreases
specified as:
2.
H0 .01 = a'.,02 = a-2,t93= a-3......... 0,-k = G-k (6)
against the alternative hypothesis that the response to rising prices
occurs much quicker than to failing prices:
HA2:01. erl.02 _:er2,03 aar3, ........ 0,_k :/:re,_k (7)
Each of thesehypothesesistested separately usinga joint F test
statistic on all coefficients specified on theright hand side ofequation
(1). Failure to reject these two hypotheses would indicate price
symmetry and a very flexible market. Symmetric prices would
likewise confirm that Filipino rice traders use cost plus pricing in
valuing the rice they sell in the market.
RESULTS AND DISCUSSION
Table 3 summarizes the results of the symmetry tests for two
statistically significant price relationships: one specifies the
wholesale price changes as the dependent variable, and the positive
and negative price changes at the farm as independent variables;
the other specifies retail as the dependent variable and the positive
anc_ negative price changes at wholesale as independent variables.
The results for the subperiods 1973-1985 and 1986-1996, as well asTable 3. Results of the symmetry test across the vertical marketing channels for Philippine rice.
Tests All periods 1973-1985 1986-1996
(1973-1996)
W -> R F -> W W -> R F -> W W -> R F -> W
Overall F-Statistic 6.70*** 1.82" 9,78"** 6,41"** 2.68*** 1,55"
Coefficient of
determination, R2 0.33 0.09 0,56 0.45 0,29 0,17
Cumulative price effects:
Rising prices 0.01 0,02 0,85 0.44 0.75 0.02
Failing prices -0.03 -0.03 -0.63 -0.44 -0.76 -0.02
Symmetry test: a 0,41 ns 0,07ns 0.008 ns 1.81ns 1.02 ns 0.03ns
Response time (months) to: t-_
Rising prices 3 1 2 2 2 1 ,_
..
Falling prices 3 1 2 2 2 1 r._:_
Speed of response test: b 16.21"** 0.05 ns 0.33ns 7,50 *** 5.62 *** 2.03 *
SeasonaliLy effects 1,02 ns 2.05 *** 0.80 ns ZI9 *** 1,66 * 1.92 * _(_
Source of basic data: gAS (1997)
Note: The direction of the arrmv indicates that causation originates from the left variable to the right variable. _'_t-r.l
•_*Statistically significant at 1% level.
•* Statistically significant at 5% level.
• Statistically significant at 10% level.
ns = not stalisiicaily significant.62 [ JOURNAL OFPHILIPPINE DEVELOPMENT
for the entire 1973-1996 period are presented in the table.
Overall, estimates of the coefficients of determination, R2, from
Table 3 reveal a reasonably good fit with values ranging from 0.09
to 0.56 and highly significant overall F values for each of the
estimated equations , indicating high explanatory power of the
models specified. These significant causal relationships indicate that
market shocks generally start at the farm, which are then transmitted
to the wholesale market and finally, to the retail market. These
findings are consistent with those obtained by Ward (1982), Heien
(1980) and Miller (1979). Results in Table 1 also show that most of
the coefficients on the right hand side of equation (1) have the
expected signs and are statistically significant, thereby, lending
greater confidence on the results of the symmetry tests conducted.
Estimates for the entire 1973-1996 period presented in the first
two columns reveal a higher explanatory power in the wholesale
and retail price relationship as shown by the coefficient of
determination being equal to 0.33 when compared to 0.09 in the
price relationship between the farm and wholesale levels. This
simply means that price changes at retail can be better explained by
decreasing and increasing changes in wholesale prices while the
effects of positive and negative changes in farm prices exert a rather
weak influence on price changes at wholesale. Results of the
symmetry tests for this period as shown in the fifth row indicate
that the effect on retail prices of rising wholesale prices is not
significantly different than those of falling wholesale prices. That
is, there is no statistical difference between the cumulative sum of
the coefficients associated with positive wholesale price changes
being equal to 0.01 and falling wholesale prices at 0.03 on price
changes at the retail level. Similarly, increasing farm prices at 0.02
and decreasing farm prices at 0.03 is not significantly different and
exert the same effect on changes in wholesale prices.
The speed by which adjustment occurred between these market
pairs, however, varies for the 1973-1996 period. Results of the
F tests conducted show that the positive and negative farm price
changes are transmitted as positive and negative changes inREEDER:ASYMMETRIC PRICES I 63
wholesale prices within one month while changes in wholesale
prices take three months to effect a change in retail prices. Within
each market pairs, results reveal that wholesale prices adjust to rising
and falling farm prices within the same period of one month. In
contrast, retail prices seem to adjust more quickly to rising wholesale
prices than to falling wholesale prices. These findings suggest that
retailers take more time to adjust to a market disturbance emanating
from the wholesale market while wholesalers tend to react more
rapidly from shocks at the farm level.
To determine if the dynamics in price relationships between the
significant market pairs differ under varying degrees of government
control, the 1976-1996 period was subdivided into two periods: 1973-
1985 as the period of control and 1986-1996 as the period of
deregulation. The results of the estimation for these periods are
presented in the third to the sixth columns in Table 3. For the 1973-
1986 period, the coefficients of determination obtained for the farm
and wholesale market pair, and the wholesale and retail market pairs
are large---0.45 for the former and 0.56 for the latter--indicating high
explanatory power for both market pairs. Price symmetry was
validated for these market pairs in this period. Results of the
symmetry tests show no significant difference between the effects
of increases and decreases in price at the farm level on wholesale
prices, 0.44. Similarly, price symmetry between the wholesale and
retail rice markets cannot be rejected. This is validated by the F test
statistic which showed that the cumulative effect of rising wholesale
prices, 0.85, on retail prices is not significantly different from the
cumulative effect of falling wholesale prices, 0.63.
Overall, the magnitude of the cumulative effects of wholesale
prices on retail prices are larger than the effects of farm prices on
wholesale prices. These findings show a greater sensitivity of retail
prices to upward and downward changes in price at the wholesale
market compared to the reaction of wholesale prices to positive and
negative price shocks at the farm level. Table 3 reveals that retail
prices would increase by as much 0.85 centavos for a P1.00 increase
in wholesale prices that occurred over a period of two months, while66 I jOURNALOFPHILIPPINE DEVELOPMENT
presence of market power among Filipino traders. Statistically
insignificant results of the price symmetry tests validate the price
symmetry hypothesis that Filipino rice traders respond similarly to
a rise and fall in rice prices in the market. This implies that traders
adjust their prices upwards when they experience an increase in
costs while similarly passing on savings to consumers as price
discounts when prices are falling. There is no evidence to support
the popular contention of many Filipinos that traders over-react to
unanticipated market news as the magnitude of the cumulative
effects of rising and falling prices at any point on the market channels
are less than one. These results contradict popular allegations that
Filipino traders exploit a market crisis by inflating prices
unnecessarily. This may be because traders tend to be vigilant over
their stakes on an already very fragile local rice market. The presence
of social sanctions against dishonest traders, along with ready access
to a broad network of verifiable private market information may
likewise effectively deter Filipino traders from exploiting a market
crisis, even when a few have some degree of control in the local
trading of rice. Thus, even if profit-making market opportunities
for arbitrage exist in some markets, traders are unable to exploit
them to the disadvantage of the Filipino consumers.
Results of the price symmetry model estimated for the subperiods
further show that the concern shared by many that market chaos
will result should the government withdraw from the rice market is
unwarranted. Findings validate that price responses to increasing
and decreasing rice prices are symmetric and less volatile even in
the absence of government regulation of the rice market.
The findings of price symmetry also confirm that Filipino traders
employ a constant margin in valuing rice. This cost plus pricing
strategy suggests that traders maximize their profits by adjusting
prices upward in response to cost increases, and then downwards
when there are cost savings.
However, although response to increasing and decreasing prices
is equal, the response time of the market to these changes differs.REEDER:ASYMMETRIC PRICES I 67
Generally, consumers will experience cost increases in the form of
price hikes much more quickly, whereas the benefits from cost
savings from price reductions will take some time before they are
reflected as price discounts. But this result alone is not sufficient
evidence to indicate that traders are able to exert market power as
there are some factors that could delay the timing of their response
to market news. A plausible explanation is that traders may perceive
regular increases as permanent changes and, therefore, would be
most likely to immediately pass these on to consumers as price
increases. Declining prices are experienced less frequently and
may be perceived by traders as temporal and therefore, would
decrease their prices only after some period of time, making the
necessary adjustment only when they feel that the market has
settled. Overall, markets take more time to adjust to changing
market conditions, about one to three months, which is significantly
longer than the time necessary to ship rice between major ports in
the Philippines. This slow response may also be attributed to the
presence of market impediments rather than to market power.
Factors such as the country's heavy dependence on costly and
irregular inter- and intra- island transportation to bring rice from
surplus areas to deficit areas and poor roads to better link
production points and market destinations may slow down price
response considerably. This retarded market response can occur
even if traders can immediately move enough rice out of storage.
The existence of these bottlenecks in the market place emphasize
the Philippine governments' important and continuing role in
increasing public investments in providing these services in the
market, most especially in areas where the private sector is unable
to take over.
Overall, the findings obtained in this paper contradict the
popular local belief that Filipino rice traders scrupulously take
advantage of an impending market crisis. Price hikes are passed on
to consumers in the form of high prices, and favorable prices are
equally passed on as price discounts. However, there is some delay68 [ JOURNAL OFPHILIPPINE DEVELOPMENT
in how these prices are transmitted in the market as inflationary
prices tend to persist for some time than decreases in prices. The
persistence of inflationary prices due to constraints in infrastructure
and transportation support in the market, if allowed to fester, has
serious implications for the country's poor. High prices, if allowed
to linger for some time, could jeopardize food consumption and a
balanced nutritional intake of poor households. Prolonged delay in
the delivery of rice due to poor inter-island shipping and intra-island
road and transportation networks and ill-timed importation
schedules further aggravates chronic rice shortages already being
experienced by many Filipinos, especially those in deficit and remote
areas, and in areas where markets are still missing.
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Asymmetry in Retail, Wholesale, and Whipping Point Pricing for Fresh Vegetables.

Evaluating Demand for Calories for Urban and Rural Populations in the Philippines: Implications for Nutrition Policy Under Economic Recovery. World Development18:281-299.REEDER:

Fitting Autoregressive Models for Prediction.

Markup Pricing in a Dynamic Model of the Food Industry.

Positivistic Measures of Aggregate Supply Elasticities: Some New Approaches - Some Critical Notes.

Pricing Behavior in Philippine Corn Markets: Implications for Market Efficiency. International Food Policy Research Report 101,

Testing for Philippines Rice Market Integration: A Multiple Cointegration Approach.

The Food Problem in the Philippines - Situation, Issues and Policy Option. Quezon City: Philippines:

Asymmetric Prices: Implications on Trader’s Market Power in Philippine Rice

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