A market area is customarily defined as a geographic trading territory in which prices are interrelated (Kohls). The size of the trading area is influenced by characteristics of the product, the competitiveness of the market participants, and the absence of shipping constraints. The importance of the geographic scope of these price relationships is, of course, that they define a trading arena in which none of the participants-producers, processors, retailers, consumers-can disregard the actions of their competitors.
Improvements over the years in the technology of transportation and communication have tended strongly to increase the size of geographic market areas and intensify price competition for agricultural products. Grain farmers, for example, have learned a sensitivity to developments in other hemispheres because they affect prices for their own locally-grown contribution to a supply and demand equation that now is global.
A half century ago, most fresh fruits and vegetables displayed local and seasonal availabilities. Prices in semi-isolated and widely separated trading centers influenced each other very little. But today most fresh fruits and vegetables move long distances and enjoy widespread retail availability throughout the year. Prices, once a barometer of local conditions, are now interrelated over geographic areas that are regional at least and often global. U.S. apple producers, once attuned almost exclusively to local markets and local weather, have learned their own sensitivities to broader market forces-for example, the monthly shipment/storage actions of Washington marketers, or the product specifications enforced (with prices) by distant and impersonal produce wholesalers (who are, in turn, impelled by market forces equally impersonal to them).
U.S. apple production occurs in regions that are widely separated (Figure l), and which annually experience patterns of weather and yield that are locally distinctive. Yet, apple prices in these scattered areas display relationships to each other that reflect the influence of economic forces encompassing more than local market conditions (Figure 3).
These relationships are illustrated with correlation matrices of retail prices for Red Delicious apples at four major U.S. trading centers (Table ll), and with matrices for FOB prices from five separate producing regions (Table 12). Red Delicious was used because of its prevalence (Table 3) and the availability of data for that cultivar. The basic price data appears in Appendix Tables l and 2.
Retail price levels at the four major trading centers corresponded quite closely during the 1980-1987 period (Figure 3 and Table 11). Obviously, these prices are highly correlated; they exhibit similar patterns of variability, tending strongly to move in the same direction in the same amount at the same time. Note that lower correlation coefficients for Baltimore in Table 11 correspond to the more divergent pattern of Baltimore prices shown in Figure 3.
These correlations in price levels are an indicator of competitive market relationships. But the magnitude of change in the price level is substantial. For example, price levels ranged from $16.65 in October 1981, to $43.14 in June 1987 (see Appendix Table 1). Hence, competitive intensity might have been made to appear stronger than it really was because of the extent ($26.49) of this change in price levels during the 7-year period encompassed in these coefficients.
In fact, by squaring the coefficients shown in these correlation matrices, it is possible to estimate the extent to which variation in price at any one point can be explained by price variation at any other point. Consider the Chicago coefficient in the New York City column of Table ll, for example, .927. By squaring this coefficient (.9272=.859) it is possible to say that 85.9 percent of the variation in Chicago price levels can be explained by variation in New York City price levels.
The divergent price pattern for Baltimore suggests not that there
are anomalies in the national market area but in the pacing
characteristics of the Baltimore trading center itself.
| Table 11: Retail Price Relationships, Red Delicious Apples Correlation Between Monthly Average Prices at New York City and at Selected Pricing Points, All Marketing Years 1980/81 to 1986/87*. (correlation coefficients) | ||||
|---|---|---|---|---|
| Pricing Point | New York City | Chicago | Los Angeles | Baltimore |
| Retail Price Levels** | ||||
| New York City | 1.000 | - | - | - |
| Chicago | .927 | 1.000 | - | - |
| Los Angeles | .921 | .877 | 1.000 | - |
| Baltimore | .799 | .772 | .736 | 1.000 |
| Retail Price Changes*** | ||||
| New York City | 1.000 | - | - | - |
| Chicago | .563 | 1.000 | - | - |
| Los Angeles | .472 | .447 | 1.000 | - |
| Baltimore | .294 | .232 | .161 | 1.000 |
|
*Baltimore price series discontinued in January 1988.
**Correlation between monthly price levels, e.g., $24.31 in NYC and $24.55 in Chicago December 1987 (Appendix Table 1). ***Correlation between monthly price changes (disregarding price levels) e.g.,+$1.98 in NYC and +$1.90 in Chicago from December 1987 to january 1988 (Appendix Table 1). Source: Measurements derived from data in Appendix Table 1. | ||||
Therefore, Table 11 also records relationships for retail price changes (see table footnotes), say 50 to 60 cents from one month to the next at these four locations. By examining only price changes, the influence of price levels is removed. Indeed, resulting relationships in price changes at these four locations are lower than the relationships shown between levels in the top half of the table. The relationships that remain are quite strong in view of (a) the geographic separation of these locations, (b) the presence of widely varying local market circumstances at each one, and (c) the absence of the effect of varying price Ievels. To be able to say that half or more of the variation in price changes at New York, Chicago, or Los Angeles during this period could be similar to price changes outside the scope of any of these trading centers is to acknowledge the existence of strong external forces that affect trading (and pricing) that occur within each trading center.
Hence, measurable relationships of both price levels and price changes indicated a competitive market area for Red Delicious apples that appeared to be national in scope, and suggested that individual circumstances anywhere in the area could be affected (at least at retail) by circumstances that developed anywhere else in the area.
Table 12 makes an identical examination of FOB price levels and price changes for Red Delicious apples in five major U.S. producing regions. Notice that FOB price levels and changes are less closely related, reflecting probably the effect of regional production on producer prices, but perhaps also generating an illusion of local isolation and pricing independence that is misleading (given the evidence of Table 11). Notice also that price levels indicate one set of relationships between Michigan and the two New York regions, and another between the Washington and Appalachian regions. But price changes do not confirm these apparent patterns. Here again, the price change matrix probably is the more reliable one since the apparent price level relationships coincide with price quotes (see Appendix Table 2) based on two different pricing units (tray packs versus film bags). Price changes in the Yakima Valley appear to have more effect on other regions than price changes in those regions have on each other. But this analysis is based only on Red Delicious, which is not the dominant variety in states like New York or Michigan, where production is focused primarily on processing markets (Table 7). So these price change measurements may underestimate the intensity of competitive relationships in the pricing of other cultivars.
Appendix Tables 3 through 8 explore these same price relationships on a year- by year and on a month-by-month basis. Although relationships among trading centers based on retail price levels vary somewhat from year to year, and occasionally even are negative, the overall pattern is notable more for its consistency than for its diversity (Appendix Table 3). But again, this may be more a measure of varying price levels than of competitive intensity. Patterns of retail price change show more diversity, changing from year to year, and being more frequently inverse (Appendix Table 4). Still, the effect of competitive influences is apparent, although it is not clear that the influence strengthened or weakened during the 1980- 1988 period. Retail price changes appear to be somewhat more closely related at principal trading centers at the beginning and end of crop seasons than during midseason (Appendix Table 5).
On a crop year basis, FOB price levels were rather consistently
positive and strong in each of the years examined (Appendix Table 6).
FOB price changes were more closely related on a year-to-year basis
(Appendix Table 7) than they appeared to be for the whole period
overall (Table 12). FOB price change relationships on a
month-to-month basis were quite diverse and displayed the strongest
positive relationship at the end of the crop year (Appendix Table 8).
| Table 12: FOB Shipping Point Relationships, Red Delicious Apples: Correlation Between Monthly Average FOB Prices in the Yakima Valley, Washington, and at Selected US. Production Areas, 7-Month Seasons, All Marketing Years, 1983/84- 1988/ 89.* | |||||
|---|---|---|---|---|---|
| (correlation coefficients) | |||||
| Producing Area | Yakima Valley | MD, PA, VA, WV | Hudson Valley | Central Western New York | Michigan |
| FOB Price Levels** | |||||
| Yakima Valley | 1.000 | - | - | - | - |
| MD, PA, VA, WV | .656 | 1.000 | - | - | - |
| Hudson Valley | .134 | .226 | 1.000 | - | - |
| Central/Western NY | .137 | .101 | .885 | 1.000 | - |
| Michigan | .399 | .378 | .759 | .800 | 1.000 |
| FOB Price Changes*** | |||||
| Yakima Valley | 1.000 | - | - | - | - |
| MD, PA, VA, WV | .581 | 1.000 | - | - | - |
| Hudson Valley | .383 | .402 | 1.000 | - | - |
| Central/Western NY | .565 | .387 | .208 | 1.000 | - |
| Michigan | .124 | .219 | .185 | .357 | 1.000 |
|
*Only the seven months October-April are quoted for all five of these
regions. **Correlation between monthly price levels, e.g., $8.06 in the Hudson Valley and $10.00 in Central/Western New York for March, 1989 (Appendix Table 2). ***Correlation between monthly price changes (disregarding price levels), e.g. -40 cents in the Hudson Valley and 1.12 in Central/Western New York for March- April 1989 (Appendix Table 2). Source: Measurements derived from data in Appendix Table 2. | |||||