Spatial price behavior: An exploration of static and dynamic price relationships in efficient markets

The implications of spatial market efficiency and market integration on spatial price relationships are investigated. This is done within the context of a model of interregional trade in which the shipments among locations are endogenous. Using the equilibrium price solutions from this model, it is shown that traditional tests of static and dynamic pricing efficiency may be inadequate.;Static pricing efficiency tests are based on a slope coefficient of one from a linear regression between any two spatial prices. However, the analysis of this study suggests that spatial prices are likely to exhibit a non-linear relationship with slope different than one. This occurs whenever there is positive probability that the two locations are not connected in trade. For dynamic market efficiency tests, which are based on tests for cointegrated spatial prices and stationary price spreads, the results depend on the time series structure of unobserved regional excess demand shocks and transportation costs. Thus, in practice, one is unable to distinguish between binding price arbitrage and the time series characteristics of these economic fundamentals.;While price efficiency tests appear elusive without more adequate data, the model does lead to useful insights about modelling spatial prices in efficient markets. Using the implications about spatial price relationships, along with some results concerning the role of storage on intertemporal price behavior, a seasonal soybean price model is estimated for two North Carolina locations. This estimated model can be used by individual grain producers to determine the optimal selling date for grain in store.