Agris on-line Papers in Economics and Informatics

The study examined the horizontal price transmission and market integration between the local and foreign rice market in the Southern region of Nigeria. The study used average monthly prices of local and foreign rice in the rural and urban markets from January 2005 to June 2014. The findings show that, prices of local and foreign rice in the rural and urban markets have constant exponential growth rate of 0.60%. The Pearson correlation coefficient revealed a strong positive relationship between prices of local and foreign rice in both rural and urban markets. The cross-product Granger causality test revealed bidirectional relationship between prices of local and foreign rice in the region. The results of the cross co-integration test revealed the presence of co-integration between prices of the two products. The coefficients of the price variable in the cross co-integration equations for the local and foreign rice markets converge to the law of one price which connotes instantaneous price adjustment and competitiveness. The result of the cross product error correction model also confirmed the existence of the short run market integration between the two markets. The study established the fact that, price of local rice competes favorably with its foreign counter part and thus a perfect substitute especially in the rural area. Based on the finding, it is recommended that, short term policies should be used to intervene in the rice sub sector in the region. Policies aimed at boosting local production of rice should be encouraged, while value additions in the domestic produced rice should be pursuit vigorously.