In this paper, Webb et al. examine the trading practices of market intermediaries in the Indonesian chili market and how they affect the transmission of chili market information through their effect on prices. The research involves a series of structured interviews with chili traders and wholesalers to investigate five potential impediments to an efficient market: market structure impediments to competition; lack of scale economies; market intermediary value-added functions; post-harvest losses; and price risk premiums. This was followed by an analysis of vertical price transmission using monthly data for farm, wholesale and retail prices in the Kediri district of East Java. Results show a competitive market environment, only small post-harvest losses, and no stockholding at any level of the marketing chain. They also reveal that price margins in East Java are positively and statistically related to farm price levels. The authors propose two policy options to address the price volatility—imports of fresh chillies from other countries or government subsidized investment in cold storage facilities to reduce the amplitude of price fluctuations and give farmers more time to respond to tight market conditions.

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