Asymmetric Transmission of International Price of Edible Oil in Bangladesh

Market supplies of many essential commodities in Bangladesh, such as edible oil, consist of mostly imports since domestic production is small. An observed peculiarity of the pattern of price variations of these commodities is that when the international prices go up, domestic prices respond positively almost immediately, but domestic prices do not show the same fluidity when the world prices go down. It is frequently alleged that collusion among the business people prevents price flexibility in the downward direction. Using time series technique this paper finds evidence that although domestic price and international price move together in the long run, the speed of adjustment towards equilibrium is not symmetric: positive shocks are transmitted at a faster rate compared with the negative ones. This paper investigates the soybean oil market in depth and finds that this is not necessarily the result of collusion among the traders; the behaviour of the soybean oil price can be explained by the interplay of competitive market forces in the specific context of edible oil industry in Bangladesh. The level of stocks, price and supply expectations and the particular structure of the domestic edible oil market all contribute to the evolution of soybean oil prices.