Spatial Price Adjustment with and without Trade

In this paper we introduce a switching error correction model (SECM) estimator that allows for the possibility that price transmission between markets might vary during periods with and without physical trade flows. Applying this new approach to semi-weekly data on tomato markets in Zimbabwe, we find that intermarket price adjustment occurs quickly and as much when there is no trade as when product flows from one market to another. This finding underscores the importance of information flow for market performance.