Pass-through, Competition, and Entry in Agricultural Markets: Experimental Evidence from Kenya

Controlled trials study market competition in order to estimate key parameters governing the competitive environment

Abstract

African agricultural markets are characterized by low revenues for smallholder farmers and high food prices for consumers. There has long been concern that this price wedge between farmers and consumers – and the resulting loss in producer and consumer welfare – are driven in part by imperfect competition among the intermediaries that connect them.

In this paper Falcao Bergquist (2016) implements three randomized control trials that are tightly linked to a model of market competition in order to estimate key parameters governing the competitive environment of Kenyan agricultural markets.

First, the author reduces the marginal costs of traders in randomly selected markets, and finds that only 22% of this cost reduction is passed through to consumers. Second, to elicit the shape of consumer demand that these traders face, she randomizes price discounts and measure the quantities that customers purchase at these prices. Taken together, these estimates reveal a high degree of collusion among intermediaries, with large implied losses to consumer welfare and overall market efficiency. Third, given that a natural policy response to limited competition is to encourage greater firm entry, she randomly incentivizes the entry of new traders into markets. By capturing the resulting effect on local market prices, the author identifies the implied change in the competitive environment due to entry. She finds that the estimates are consistent with a model in which entrants are able to easily join collusive agreements with incumbents.

Taken together, the results suggest that agricultural traders in Kenya have considerable market power, and that marginal changes in market entry are unlikely to induce significant changes in competition. These findings have implications for the incidence of technological and infrastructure changes in African agriculture and for the policy responses aimed at improving the market environment.

This research was funded under the Private Enterprise Development in Low-income Countries (PEDL) Programme

Citation

Falcao, L. (2016) Pass-through, Competition, and Entry in Agricultural Markets: Experimental Evidence from Kenya, Job Market Paper

Pass-through, Competition, and Entry in Agricultural Markets: Experimental Evidence from Kenya

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