Agricultural trade liberalization and economic development: the role of downstream market power

Abstract

A model is developed to characterize the vertically linked and concentrated nature of developed-country food markets. This model is then parameterized and used to simulate the effects of varying food market structures on the benefits to developing-country exporters of agricultural commodities from trade liberalization by developed countries. Results demonstrate that even relatively modest departures from perfect competition can cause much of the benefits from trade liberalization to flow to marketing firms instead of producers in the developing country. The distributional effects under downstream market power differ significantly from the perfectly competitive case and may result, somewhat paradoxically, in developing countries receiving a lower share of the total value added within the food chain as trade reform occurs. Copyright 2007 International Association of Agricultural Economists.

Trade Intermediaries and the Tariff Pass-through

“…However, they concentrate only on what happens on the domestic market of a closed economy, neglecting the implications of trade liberalization. More recently, Sexton et al (2007) study how market structure in agricultural distribution may influence the outcomes of trade reforms. They develop a two-country partial equilibrium model where perfectly competitive upstream agricultural firms, operating in developing countries, sell their goods to independent processing and retailing firms located in developed countries.…”

Agricultural Trade Liberalization and Downstream Market Power: The Ad Valorem Case

“…Food processors and retailers in the developed country may engage in oligopoly/oligopsony conduct. Sexton et al (2007) show that an analysis based on the assumption of competitive conduct will overstate the price 1 For example, McMillan et al (2003) and Wilcox and Abbott (2004) discuss examples from the Mozambique cashew nut sector and the Ivory Coast cocoa market, respectively, in which the gains from liberalization appear to have largely been captured by market-power-wielding processors and exporters -in these cases, in the developing countries themselves -rather than by farmers. and quantity effects of the removal of a tariff if firms exercise market power.…”

“…1 An increasing pace of consolidations and rising market concentration in developed countries' food processing and retailing sectors raises the prospect of non-competitive conduct by firms in these sectors. 2 Although most agricultural trade policy analyses in the literature rely on the competitive market paradigm, Sexton et al (2007) have incorporated the vertically-linked and concentrated characteristics of developed countries' food markets in their analysis of the impact of agricultural trade liberalization on developing countries' economic development. 3 The Sexton et al (2007) model assumes price-taking conduct by producers in the developing country and consumers in the developed country, with the behavior of these agents summarized by linear farm supply and retail demand functions.…”

Econometric issues related to identification of the market power parameter

“…Sexton et al (2007) provide a comprehensive review of studies related to market power estimation.4574S. Devadoss et alDownloaded by [Monash University Library] at 01:09 15 December 2014…”