Investigating the Market’s Behavior of Curly Red Chili in Bengkulu Indonesia Using Price Formation and Transmission Elasticity Model

Abstract

Curly red chili is one of the strategic agricultural products in Indonesia, especially in Bengkulu, and its distribution process is an essential aspect. This process consists of market participants' behavior and price formation. This research aims to investigate the curly red chili market behavior and to analyze the price formation and price transmission elasticity in Bengkulu Province. Panel data were obtained from retailers and farmers during a month. Data were analyzed using qualitative descriptive analysis for market behavior, while linear regression was used for the factors affecting price formation and price transmission elasticity. The result of market behavior analysis indicates that collecting traders buy the chili from farmers, then sell it to the next level sellers without any treatment. If the farmers have no debt and price agreement, they negotiate the price with the traders. On the other hand, if the farmers have a loan and there is a price agreement, the price is determined by the moneylender. Furthermore, the chili price at retailers is formed by following the price change on the previous day, and it is also influenced by the price at previous traders. It can be concluded that the marketing system has a vertical effect and backward linkage between its elements. The chili price transmission elasticity is 0.675. This empirical result concluded that the rate of price change by 1 per cent at the consumer level would cause a price change of only 0.675 per cent in the trader stage. Thus, the market system is inefficient, and it is competing imperfectly.