Hedonic Pricing of Differentiated Commodities and Cointegration Relationships: An Application to Price Dynamics of Soybean Industry in Taiwan
Date Issued
2009
Date
2009
Author(s)
Chuang, Chun-Ting
Abstract
Because the self-sufficiency ratio of soybeans in Taiwan has been lower than 1%, most of the soybean sold in Taiwan comes from international suppliers, among which the United States dominates 87.5% of the market. The special trade relation raises the interest of the current study whether the law of one price holds for the export soybean from the U.S. and the import soybean market in Taiwan. By performing Johansen cointegration, this paper aims to examine the price connection during the period from January 2004 to July 2008. The primary empirical result shows that both export soybean from the U.S. and the import soybean in Taiwan are consistent with the law of one price. This finding also reinstate that there is no evidence to reflect any market maneuver in the soybean industry in Taiwan. Therefore, to make excess profits in the period of high rising soybean price are not possible given that soybean’s import are carefully monitored by the government agency and fully disseminated to the public. Moreover, with overwhelming proportion of imported soybeans is used to be processed by factories, we introduce the hedonic pricing model with dynamics consideration proposed by Chavas and Kim (2005) to find out the long-term price relationship among three differentiated products: soybeans, soybean oil and soybean meal. To confirm our empirical result, we also calculate marketing margin to investigate the degree of soybean price integration among differentiated products. The secondary empirical result reflects that the pricing of Taiwanese soybean industry agrees with the hedonic pricing model, in the long-run at least, given the assumption of fixed composition of the differentiated commodities. Since the cointegrated price vector under hedonic pricing model matches closely to that under Johansen cointegration approach, it points out that the long-term price relationship among soybeans, soybean oil and soybean is consistent with hedonic pricing model.
Subjects
soybean industry
the law of one price
cointegration
hedonic pricing
marketing margin
Type
thesis
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