suggests that states with higher markups could be the result of state specific effects such as rural infrastructure, storage capabilities, and rural political economy.<sup>14</sup>

# Patterns of price differences over time & overall dispersion

In aggregate, price differences between wholesale and retail markets have declined.<sup>15</sup> An assessment of price wedges, which is taken at both the state and commodity levels, between wholesale and retail markets reveals that a negative and significant pattern exists over time. The negative effect is around two‐ thirds of a percent, accumulating to a 4.9 percent decrease over the period of analysis: 2007‐2014 (Table 5).

Table 5: Regression on price wedge and year, controlling for commodities and states

|(1)<br>Price Wedge|
|---|
|Year<br>‐0.00683***<br>(0.00166)|
|Constant<br>14.05***<br>(3.348)|
|Observations<br>3,628|
|R‐squared<br>0.626|
|Standard errors in parentheses|
|*** p<0.01, ** p<0.05, * p<0.1|
|Note: Commodity and state fixed effects are included, but<br>not reported.|

# Measures of Vertical Market Integration and Price Transmission

To examine how price shocks transmit vertically from wholesale to retail, we rely on the same methodological approach used to analyze spatial integration in Section 2 (see methodological section for details). In this case, the focus of analysis would be in the parameters that describe how price changes originating in wholesale markets are transmitted to retail markets.

Three questions are addressed. First, do wholesale price shocks fully transmit to retail prices in the long run? This would imply a pass‐through coefficient from wholesale to retail prices equal to 1. Second, do retail prices adjust in the short run, to gradually return to the long‐run equilibrium relation with wholesale prices, after a shock that affects the latter? This would imply a speed of adjustment coefficient that is negative (to gradually correct for the disequilibrium). Third, is the short‐run adjustment to return to the long‐run equilibrium after a shock symmetric upward and downward? This would imply that there is no difference between the speed of adjustment that implies an increase of retail prices, and that implying a decrease of retail prices after a shock in wholesale prices.

The hypothesis of full price transmission is rejected for all but one commodity. Yet, the price co‐ movement is substantial. Shocks to wholesale prices are not fully transmitted to retail prices, because the pass‐through coefficient is less than one for all but one commodity. However, the pass‐through is highly significant and ranges from 52 to 97 percent. For example, 89 percent of a price shock at the wholesale market is transmitted, in the long run, to the retail market for gram. In the case of rice, it is not possible to reject the hypothesis that the pass‐through equals one (Figure 18).

The speed of adjustment is both statistically and economically significant for all commodities, and heterogeneous. Prices in the onion retail market adjust back to equilibrium for around 30 percent of the disequilibrium per period caused by a price shock in the onion wholesale market (Figure 19).

> 14 See Government of India “Economic Survey 2015‐16, Volume I” pgs. 79‐83.

> 15 Due to the lack of availability of time series farm‐gate data, this analysis had to focus on the trends in price wedges between wholesale and retail.

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