Measuring the degree of integration in the dairy products market in Malawi

Using monthly data for the period 2006-2011, this study analyzed the degree of spatial market integration in Malawi focusing on two dairy products (liquid milk and powdered milk) sold in the four major towns of the country. The analysis of spatial market integration is important to assess whether to re-establish a dairy processing facility in the northern part of the country. The empirical analysis comprised of the following steps: (1) Integration between prices from different regions were tested using Johansen's cointegration procedure, with the results indicating that, in the long run, prices in some areas move in a similar direction. (2) Two spatial equilibrium models were estimated using a three-regime bivariate threshold vector autoregressive model (TVAR) and a three-regime threshold vector error correction model (TVECM). The results showed that transaction costs were not a cause for concern between the areas thus northern Malawi does not need to re-establish a dairy processing facility as surplus areas (mainly Southern Malawi) can supply the region.