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Efficiency, Competition, and Welfare in African Agricultural Markets

  • Author(s): Bergquist, Lauren Falcao
  • Advisor(s): Miguel, Edward
  • et al.
Abstract

African agricultural markets are characterized by large variation in prices across regions and over the course of the season, suggesting poor market integration. This thesis explores the barriers that prevent various market actors from engaging in ecient arbitrage. Using exper- imental evidence and original survey data, I test for the existence of market failures that may limit integration and measure the ecacy of potential remedies to these market failures. In the first chapter, I quantify the degree of competition among the intermediates responsible for agricultural trade. In the second chapter, I explore whether entry by new intermediaries can enhance market competition. In the final chapter, Marshall Burke, Edward Miguel, and I test whether missing credit markets contribute to farmers’ inability to arbitrage sea- sonal price fluctuations. Together, these three essays contribute to our understanding of agricultural market eciency, competition, and barriers to arbitrage.

Each chapter employs experimental tests motivated by – and designed to speak directly to – economic theory. The first two chapters use randomized controlled trials to identify model parameters, while the third uses these trials to quantify general equilibrium effects and measure how such effects can shape the individual-level impacts of interventions. Methodologically, these essays exploit the clean causal identification generated by randomized controlled trials in new ways, in an attempt to shed light on the underlying organization of market institutions.

The first chapter of this thesis estimates the level of competition among intermediaries in Kenyan agricultural markets. There has long been concern that the wedge between the low price farmers receive for their produce and the high price consumers pay for their food – and the resulting loss in producer and consumer welfare – are driven in part by imperfect competition among the intermediaries that connect them. However, there has been little definitive evidence on the market structure in which these intermediates are acting. A lack of record-keeping on the part of traders precludes accounting assessments of profits. Further, identifying clean cost shocks and tracing pass-through is made dicult by the ubiquitous nature of production and consumption of agricultural commodities, which drives co-movement in supply and demand.

The first chapter overcomes these challenges by providing experimental estimates of pass- through and demand, key parameters governing the competitive environment of these markets. I identify these parameters using two randomized control trials that are tightly linked to a model of market competition. In the first experiment, I reduce the marginal costs of traders in randomly selected markets by offering to traders a subsidy per bag sold. I find that only 22% of this cost reduction is passed through to consumers. A second experiment offers randomized price discounts to consumers and measures corresponding quantities purchased in order to elicit the curvature of demand that traders face. I employ these estimates in a structural model of competition and optimal pricing to identify the level of competition among intermediaries. This exercise reveals a high degree of collusion among intermediaries, with large implied losses to consumer welfare and overall market efficiency.

The second chapter explores the impact of one natural policy response to this low level of competition: greater firm entry. In order to identify the impact of firm entry on competition, I randomly incentivize the entry of new traders into markets. I find limited benefit for consumers, as prices decrease only 1% in response to entry by one new trader. By capturing the resulting effect on local market prices, I identify the implied change in the competitive environment due to entry. This is most consistent with a model in which entrants are able to readily enter into collusive agreements with incumbents, suggesting that market power is robust to entry in this context.

The third chapter explores the barriers that limit arbitrage by farmers. Large and regular seasonal price fluctuations in local grain markets appear to offer African farmers substantial inter-temporal arbitrage opportunities, but these opportunities remain largely unexploited: small-scale farmers are commonly observed to “sell low and buy high” rather than the reverse. In a field experiment in Kenya, Marshall Burke, Edward Miguel, and I show that credit market imperfections limit farmers’ abilities to move grain intertemporally, and that providing timely access to credit allows farmers to purchase at lower prices and sell at higher prices, increasing farm profits. To understand general equilibrium effects of these changes in behavior, we vary the density of loan offers across locations. We document significant effects of the credit intervention on seasonal price dispersion in local grain markets, and show that these general equilibrium effects strongly affect our individual level profitability estimates. In contrast to existing experimental work, our results indicate a setting in which microcredit can improve firm profitability, and suggest that general equilibrium effects can substantially shape estimates of microcredit’s effectiveness.

Taken together, these results suggest that considerable ineciencies exist in African agricultural markets. I find that agricultural traders in Kenya have considerable market power, and that marginal changes in market entry are unlikely to induce significant changes in competition. We further find that incomplete credit markets limit farmers’ ability to arbitrage seasonal price fluctuations, and that the isolation of local markets reduces the sustainability of the financial products that may be necessary to encourage such arbitrage. These results have implications for the incidence of technological and infrastructure changes in African agriculture and for the policy responses aimed at improving the market environment.

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