Economic theory and econometric methods in spatial market integration analysis

The study of Spatial Market Integration (SMI) has been of great concern for agricultural economists, with the Takayama and Judge Price and Allocation Model (TJM), in which prices are bounded by the Spatial Equilibrium Condition (SEC), being the core economic theory. The SEC implies that no profits are made from trading goods among spatially separated regions and is a weak form of the Law of One Price (LOP). Indeed, the LOP is regarded as perfect market integration and a perfect equilibrium. Another theoretical concept in SMI is market efficiency, which can be understood as markets being cleared, hence there is an optimum allocation of the resources, which leads to the correct pricing of the goods. In theory, when trade occurs among regions, the excess supply and demand signals are transferred to the prices of the goods among trading regions, so that prices move together among the regions; nevertheless it is important to point out that price co-movement does not necessarily lead to Pareto efficiency, so that co-movement can occur for markets in disequilibrium. Following such theoretical foundations, most of the empirical research in the field of SMI deals with prices....