In this paper we analyse the market integration process of the relative price distribution, develop a model to analyze market integration, and present a formal test of increasing market integration. We distinguish between the economic concepts of price convergence in mean and in variance. When both types of convergence occur, prices are said to converge in distribution. We present concepts and definitions related to the market integration process, link this to price convergence in distribution, argue that the Law of One Price (LOP) is not a sufficient condition for market integration, and present a formal test of price convergence in distribution. In the empirical analysis, we analyze integration of the inland grains market in 19th Century USA.

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Tinbergen Institute
Tinbergen Institute Discussion Paper Series
Discussion paper / Tinbergen Institute
Erasmus School of Economics