Understanding traders’ regional arbitrage: The case of rice traders in Antananarivo, Madagascar

Discussion Papers

No.505

by Yutaka Arimoto, Hisaki Kono, Tsilavo Ralandison, Takeshi Sakurai, Kazushi Takahashi

March 2015

ABSTRACT

Many studies find that agricultural markets in developing countries are poorly integrated spatially. Traders’ regional arbitrage plays a key role in integrating markets across space. We investigate the performance of regional arbitrage and the associated obstacles for rice traders in Antananarivo, Madagascar. On the basis of a trader-level biweekly survey spanning 2012–2013, we find that traders are not fully exploiting the regional arbitrage opportunities: most of them fail to purchase from the cheapest district and are paying higher prices than those in the cheapest district. One apparent obstacle is obtaining price information from many different regions. To reduce search costs, we provided regional price information via SMS to randomly selected traders, but found that this had a null-effect on improving arbitrage performance. Traders tend to concentrate on trading with a few fixed districts, even if they are informed about cheaper prices in other new districts, because they worry about quality uncertainty and the trustworthiness of new partners. These findings suggest that not only transmission of price information but also issues related to produce quality and matching prevent the performance of arbitrage and market integration.

Keywords: regional arbitrage, market integration, information friction, price information, search
JEL classification:  L81, O13, Q13

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