Published in the The Journal of Law & Economics in 1985, George J. Stigler and Robert A. Sherwin’s “The Extent of the Market” focuses on using the movements of prices in separate markets to determine if it is only one market. Stigler and Sherwin use examples from the silver, flour, oil, and labor markets to present their method for determining similarity of price movements. To determine if markets are integrated, Stigler and Sherwin propose a test based on the movement of prices; this parallel price movement test is equally applicable to competitive and monopolistic markets and reveals the separateness of markets. George J. Stigler graduated from the University of Washington before receiving his Ph.D from the University of Chicago in 1938.
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This test, which reveals the separateness of two markets, suggests the more correlated the price movements, the more closely integrated the parts of the markets. However, Stigler and Sherwin state “the relationship between two prices will not be constant over time, nor will the relationship be a constant proportion of one price” (558). There are also many sources of error in price recording, and many factors can lead to price differentials. In the market, differences in the quality of a good can create price differentials, and the lot size of the good may cause the price to change. Additionally, prices not pertaining to the same time are likely to be different. Stigler and Sherwin propose that “two products are in the same market when their relative prices maintain a stable ratio” …show more content…
By analyzing different markets, they determine the way to test for similarity or dissimilarity is to look at the movement of prices. Stigler and Sherwin’s paper has become important analysis in this field of economics. Among the more than 600 other papers that cite Stigler and Sherwin’s work, many apply the first differences test to a specific area, such as an application to celery in the United States and the maize market in Ghana. They also left many questions to be answered by fellow researchers, such as how is convergence of markets achieved and what types of factors delay convergence for substantial periods. This question will be essential for my research, as it appears some countries in Africa are in separate markets. Using the first difference test for prices in countries in Africa will provide some information into the current levels of integration in Africa. Additionally, finding factors that may delay market integration will be crucial when studying the
This test, which reveals the separateness of two markets, suggests the more correlated the price movements, the more closely integrated the parts of the markets. However, Stigler and Sherwin state “the relationship between two prices will not be constant over time, nor will the relationship be a constant proportion of one price” (558). There are also many sources of error in price recording, and many factors can lead to price differentials. In the market, differences in the quality of a good can create price differentials, and the lot size of the good may cause the price to change. Additionally, prices not pertaining to the same time are likely to be different. Stigler and Sherwin propose that “two products are in the same market when their relative prices maintain a stable ratio” …show more content…
By analyzing different markets, they determine the way to test for similarity or dissimilarity is to look at the movement of prices. Stigler and Sherwin’s paper has become important analysis in this field of economics. Among the more than 600 other papers that cite Stigler and Sherwin’s work, many apply the first differences test to a specific area, such as an application to celery in the United States and the maize market in Ghana. They also left many questions to be answered by fellow researchers, such as how is convergence of markets achieved and what types of factors delay convergence for substantial periods. This question will be essential for my research, as it appears some countries in Africa are in separate markets. Using the first difference test for prices in countries in Africa will provide some information into the current levels of integration in Africa. Additionally, finding factors that may delay market integration will be crucial when studying the