A simultaneous equations approach to modeling supply and demand in the chili agribusiness sector

Abstract

The supply and demand of various fresh chili types are interconnected, as they can serve as either complementary or substitute goods. This study aims to analyze the supply and demand dynamics of red chili and cayenne peppers simultaneously to inform the development of an innovative chili enterprise system. Employing a panel data approach with a simultaneous equation system, the analysis uses time-series data from 2010 to 2020 and provincial-level cross-sectional data, enhanced by data mining techniques. The two-stage least squares (2SLS) method was applied for both model estimation and simulation. The resulting framework includes three identity equations and ten structural equations, all of which demonstrate statistical robustness, albeit with some limitations due to constraints in micro-level data availability. Simulation results indicate that variables such as labor wages, prices, demand, and production of red chili and cayenne peppers influence each other within the system. The study concludes that the proposed supply and demand models can facilitate the development of an innovative chili enterprise system, provided there is active collaboration among stakeholders. Furthermore, the modeling approach shows potential for adaptation to other horticultural commodities.