Law of One Price and Nonlinear Adjustment of Prices for Broiler Market in North West Provinces of Iran

Due to the importance of market integration and the law of one price in the literature and significant contribution of chicken in households food basket, is there any spatial market integration in the northwestern provinces? In this context, in present study validity of Law of One Price (LOP) was tested in the broiler market using daily retail price from 2006 to 2014 among North West provinces of Iran. Recently, in many empirical studies of economic time series there exist strong evidence that many time series display nonlinear features. Noticing that spatial price relationships are likely to be nonlinear due to transaction costs, so in this study, at first, for being sure that series follow nonlinear behavior, Luukkonen et al. (1988) and BDS nonlinearity tests were used. The results of both tests confirmed the existence of nonlinear behavior in series. So for testing Law of One price (LOP) in broiler markets and for the considered provinces, the proposed approach by Emmanouilides and Fousekis (2012), which is an auxiliary regression for ESTAR model, was used. The results showe that these markets are well integrated and LOP holds in all market pairs. For Tehran-West Azerbaijan, Tehran-Ardebil, Tehran-Zanjan, West Azerbaijan-Ardebil, West Azerbaijan-Zanjan strong version of LOP holds and weak version of LOP holds for Tehran- East Azerbaijan and West Azerbaijan-East Azerbaija. So government can stabilize the price of broiler in one key market and rely on commercialization to produce a similar outcome in other markets. This reduces the cost of stabilization of prices in broiler markets considerably.