equal. It is possible that price differences exist between integrated markets, as long as these differences are stable over time and explained by transport and distribution costs. Indeed, when these costs are substantial, high price differences between markets can exist without implying a failure in how price signals flow to guide consumers’ and producers’ decisions. This section starts exploring the patterns of these price differences, and then, it formally tests for market integration within India, and between India and world markets.<sup>3</sup>

# Patterns of price dispersion

## Overall dispersion across states and products

Retail and wholesale prices vary substantially across cities and districts in India.

For bananas, in retail markets in the northeast city of Shillong, consumers could pay prices up to three times higher than those paid by Delhi consumers. While this is an extreme example, on average, retail price differences for bananas are at 49.6 percent across Indian cities, high among the products analyzed, likely related to its perishability. This is affected by some atypical differences such as that reported for Shillong. Indeed, pooling all products, in 90 percent of the cases, the price difference paid in any given city with respect to Delhi for a given product ranges from ‐28 percent to +28.6 percent (the area delimited by red bars in Figure 1). In absolute terms, the median price difference with respect to Delhi is 13.3 percent, with 90 percent of differences between 1.3 percent and 40 percent (the area delimited by red bars in Figure 2). And these differences are not randomly distributed. For 55 percent of the state‐city/product combinations in retail, prices tend to be higher in Delhi.

Figure 1: Distribution of retail price differences (with respect to Delhi) across cities Figure 2: Distribution of retail absolute price differences (with respect to Delhi) across districts <!-- Start of picture text -->
-2 0 2 4 6 0 1 2 3 4 5<br>Proportional Retail Price Differences with Respect to Delhi Proportional Retail Price Absolute Differences with Respect to Delhi<br>Source: Authors’ calculations.  Source: Authors’ calculations.<br>2.5 4<br>2<br>3<br>1.5<br>2<br>1<br>Density Simple Differences Density Absolute Differences 1<br>.5<br>0 0<br><!-- End of picture text -->

The distribution of price differences is more spread out at the wholesale level. In this case, about 60 percent of district/product combinations display higher prices in Delhi than elsewhere in the country, with 90 percent of differences with respect to Delhi lying in the range of ‐44.4 percent to +41.6 percent (Figure 3). In absolute terms, the median price difference (with respect to Delhi) is greater than in retail at 17.2 percent, with 90 percent of the differences lying between 2.8 and 58 percent (Figure 4).

Figure 3: Distribution of wholesale price differences (with respect to Delhi) across districts Figure 4: Distribution of wholesale absolute price differences (with respect to Delhi) across districts

> 3 To measure price differences and to test for price transmission, it takes Delhi as a reference point. Apart from being the nation’s capital, and being economically crucial, Delhi’s geographical location, at the center of the northern landlocked land mass makes it a major redistribution hub for consumer products.

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