The Direction of Causality in Israel's Apple Market: From Retail to Wholesale, or the Reverse?

We studied the direction of causality in the Israeli apple market by studying prices of the Granny Smith variety of apple. The Granny Smith was chosen because its sweet-sour taste makes the price less sensitive than in other apple varieties. We used standard procedures of the Granger causality test to study weekly wholesale and retail price data from the Tel Aviv and Jerusalem markets during June 2001 to March 2008. In contrast to most published studies, not one but four product sizes were examined. In addition, our data enabled us to evaluate the influence of a new product size (75 mm) on the prices of other sizes.For all sizes except 75 mm, co-integration of the price time-series was identified. The direction of causality, from retail to wholesale market and back, was tested for each size and market, and appropriate lags (from 1 to 3 weeks) were fitted. The absence of co-integration in the 75 mm size can probably be explained by retail trade "technology" and consumer perception of this size as a "luxury" item.The short lags confirm our hypothesis that the very close connection between wholesale and retail markets is due to the small geographic distance between the studied markets and the well-developed infrastructure.