How retail food markets responded to price liberalization in Russia after January 1992

Under administered prices through the fall of 1991, Russia's food distribution system broke down, and it was feared that the food supply would be inadequate in the winter of 1992 and thereafter. In January and March 1992, price ceilings were removed on most items sold in state-owned Russian stores. Price liberalization was intended to return food to shelves and to improve the flow of food among regions through responses to price differentials. Privatization of the distribution system did not begin until October 1992. At the time of price liberalization the environment was still dominated by unrestructured state enterprises. Retail prices immediately rose sharply and fluctuated. Because food prices did not stabilize after the initial jump, many people questioned whether price liberalization accomplished anything positive. The authors examine data on movements in food prices and volumes between December 1991 and August 1992 to examine how retail food markets responded to liberalization. They address the following questions. Is there any evidence that after liberalization food returned to retail outlets that were essentially bare in December 1991? Is there evidence that transactions took place in response to price differentials (did markets begin to emerge despite the lack of privatization and demonopolization)? Did city-to-city price differentials evolve to reflect a price surface explainable by transportation costs and other economic variables? If not, why not? The authors conclude that progress was made toward market integration in the seven months after price liberalization. The volume of food sold in monitored shops increased substantially. The geographic dispersion of prices declined over time. But large price differences between cities persisted that cannot be explained in terms of available economic variables. Large economic gains could be achieved by futher market integration.