Market Integration Essay

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2.5 Factors Affecting Spatial Market Integration
There are many factors that can affect market integration. Sexton et al. (1991) noted that imperfect competition, different trade barriers, and prohibitive transaction costs are the three main reasons for the lack of market integration. However, the first two reasons are related to the last one, which can influence trade and information transmission. Thus, transaction cost is the main engine for market integration. Ravallion (1986) described that when there is trade between two distant markets and the price of the commodity in the importing region is equivalent to the addition of the cost of conveying between two regions to the price in the selling point, then there is spatial integration between them. So, in spatial conditions, transaction cost is equal to the price difference between two distinct regions. Transaction cost can be divided into three groups: transportation cost, storage cost, and processing cost. Spiller and Huang (1988) mentioned that transaction cost does not only mean direct shipping costs. Information cost should also be accounted for. Transaction cost has both direct and indirect effects on market integration. For instance, high transaction costs distort the market integration for a particular period, which is one of the direct effects. Transaction cost can be influenced by physical capital, human capital, demand, supply and trade, policies, climatic factors, and other factors.
2.5.1 Physical Capital
The distance between the traded regions and means of transportation mainly influence the transaction cost. The different geographical location of the market is very important in agriculture, as agricultural products are awkwardly large and easily perishable, which is likely to increase the transaction cost. The physical capital is an important factor that affects the transaction cost. The availability of transportation infrastructure, such as roads, railways, and ports, can reduce the transaction cost. The improvement of transportation infrastructure can reduce the transaction cost and increase market integration. For example, the construction of the North-South Expressway in Vietnam has reduced the transportation cost of agricultural products and increased market integration between the North and South regions.

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