This paper analyzes transaction costs and spatial market integration of vegetable and fruit markets between major surplus producing zones and the Addis Ababa retail market taking onions, potatoes, and tomatoes from vegetables and root crops and bananas from fruits. Monthly retail price data from the Central Statistical Agency (CSA) from October 2008 to August 2015 was considered for the research. All retail price series from Addis Ababa and 21 zonal retail markets were transformed into natural logarithms in order to mitigate the fluctuation of individual series and to ease interpretation of the coefficients. The presence of long run relationship between two groups of markets is examined using a test for cointegration based on maximum likelihood approach developed by Johansen and Jesulus (1990). The dynamics of short-run price responses are explored using the vector error correction model (VECM). The result indicated that there is strong support for the presence of long run relationship between the surplus producing zonal vegetables and fruit markets and the Addis Ababa market. Although these markets responded positively for the long-run cointegrating relationship, the speed of price adjustment was found to the modest. A shock in Addis Ababa retail market took, on average, between 3 to 7 months to be fully absorbed in the surplus producing zonal markets. To increase the efficiency of vegetable and fruit markets, there is therefore a need to focus on reducing transaction costs related to transport, improving market information flow, removal of any sort of entry barriers, and introducing enhanced processing and storage technologies to extend shelf life and ensure producers to obtain a reasonable share of retail prices.


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