# _Multi-Market Models_

All the above assumes that prices are exogenous. In<sup>somecircumstancesthis may be</sup> reasonable - such as homogenous tradeable goods<sup>whose price will be determinedby the</sup> world price. But the literature on growth linkages<sup>(Haggblade,Hazell et al.1989;Hazell</sup> and Haggblade 1991) points clearly to the<sup>factthat many of the goods whichmatter to the</sup> poorest people are non- or at least not very readily<sup>tradeable.In such situations pricesare</sup> going to be determined by local market clearing.

Multi-market models model the impact of household<sup>supply and demand decisions upon</sup> the prices of key commodities and thereby<sup>on household income(see Bravermanand</sup> Hammer (1986) for an early exposition; Arulpragasam<sup>and Conway (2002) providea</sup> practical guide to the use of such models). Rich and<sup>Lundberg (2002)describethe</sup> application of a multi-market model to the analysis<sup>of policy reforms in Malawi. Their</sup> model contains explicit supply and demand<sup>equationsfor a limitedset of commodities</sup> using supply and demand elasticities estimated from<sup>previousstudies.However,the key</sup> difference from the household model above<sup>is the inclusion of a set of price equations</sup> linking domestic producer and consumer prices<sup>for eachcommodity with import and</sup> export prices given estimates of various transport<sup>and transactioncosts andtaxes.</sup> Producer and consumer prices are then made endogenous<sup>by theinclusion of a market</sup> clearing equilibrium equation which ensures<sup>that theoverallsupply and demandfor each</sup> commodity is equalized. Household agricultural<sup>incomeis determinedby the value of the</sup> commodities produced by each of four household<sup>types minus theircosts of production;</sup> non-agricultural income is exogenous to<sup>themodel.</sup> Minot and Goletti (2000) present an interesting<sup>variationof this approach by constructing</sup> a spatial multi-market model for Vietnam. This<sup>issimilar to the model of Richand</sup> Lundberg but with a number of innovations. Most<sup>significantly they estimatesupplyand</sup> demand elasticities for several different regions of<sup>the country,rather than for different</sup> household groups. Markets in their model follow rules of<sup>spatial arbitrage-that is, trade</sup> between two regions occurs when the price difference<sup>between themreaches the transfer</sup> cost (the full cost of transporting and marketing<sup>the goodfrom one region totheother).</sup> The model generates estimates of the impact of changes<sup>in transaction costsandexport</sup> quotas upon production, consumption and prices of<sup>a set of commoditiesaswellas</sup> average incomes in each region. In order to estimate<sup>the distributionaland poverty</sup> impact of these changes, the price changes predicted<sup>by the model, along with the</sup> estimated supply and demand elasticities, are applied<sup>to household data on production</sup> and consumption to predict the change in net income<sup>for eachhouseholdusing the basic</sup> methodology described above.

Multi-market models are a useful tool for the analysis of reforms<sup>if thosereformsare</sup> likely to give rise to supply and demand responses<sup>which may significantly.change prices.</sup> However, multi-market are heavily dependent on<sup>beingable to obtain reasonable</sup> 23