Transportation Cost and Market Power of Middlemen: A Spatial Analysis of Agricultural Commodity Markets in Developing Countries

45 Pages Posted: 11 Nov 2006

See all articles by Pierre R. Mérel

Pierre R. Mérel

University of California, Davis - Department of Agricultural and Resource Economics

Richard J. Sexton

University of California, Davis - Department of Agricultural and Resource Economics

Aya Suzuki

University of Tokyo

Date Written: October 2006

Abstract

While high transportation cost and market power are long-recognized sources of market inefficiency, their interaction is less well understood, and has not been explored in a developing-country context. In this paper, we analyze the mechanisms by which lower transportation costs increase farm prices and profits by (i) reducing marketing costs and (ii) diminishing marketing firms' exercise of oligopsony power. Although the marketing-cost effect is well understood, we demonstrate that the effect on competition may quantitatively be much larger. We utilize a two-stage modeling framework to demonstrate use of an endogenous financing mechanism to generate funds to improve transportation infrastructure and derive the optimal rate of taxation to maximize producer welfare.

Keywords: Agricultural markets, Endogenous assessment, Oligopsony, Transportation, Two-stage model

JEL Classification: O12, L13, Q13

Suggested Citation

Mérel, Pierre R. and Sexton, Richard J. and Suzuki, Aya, Transportation Cost and Market Power of Middlemen: A Spatial Analysis of Agricultural Commodity Markets in Developing Countries (October 2006). Available at SSRN: https://ssrn.com/abstract=944167 or http://dx.doi.org/10.2139/ssrn.944167

Pierre R. Mérel

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
Davis, CA 95616
United States

Richard J. Sexton (Contact Author)

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
327 Voorhies
Davis, CA 95616
United States
530-752-2219 (Phone)

Aya Suzuki

University of Tokyo ( email )

Yayoi 1-1-1
Bunkyo-ku
Tokyo, Tokyo 113-8657
Japan

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