The Ethiopian Commodity Exchange and spatial price dispersion

This article investigates the impact of an institutional intervention on market efficiency in Ethiopia. More specifically, it analyzes to what extent the Ethiopian Commodity Exchange (ECX) in combination with regional warehouses have contributed to a reduction in price spreads between regional markets. The hypothesis is that warehouses connected to the ECX reduce the dispersion between export prices and local retail prices in different coffee growing areas, as well as the dispersion between export prices and local retail prices in different coffee growing areas. By doing so, the ECX has the potential to improve the market efficiency. To identify the causal effect,  retail price data is combined with information on the gradual rollout of warehouses connected to the ECX from 2007 to 2012. The results suggest that, when two markets both have access to an operating warehouse, the average price spread is 0.86–1.78 ETB lower than it is for markets where at least one part lacks warehouse access. This is a substantial reduction considering that the average price spread over the full period is 3.33 ETB. The main results are robust to various econometric specifications, and the  analysis thus suggests that local warehouses connected to the ECX have indeed improved market efficiency