The degree to which intermediaries compete is a long-standing object of interest in studies of agricultural markets in developing countries. Competition shapes how price signals propagate along supply chains, and the welfare implications of taxes and subsidies for producers and consumers. However, the evidence is remarkably thin. In the limited cases where conclusions can be drawn, the researchers see a high degree of competition. On the other hand, governments and international institutions often emphasize the monopsonistic power of traders. Previous studies of competition in these markets have primarily relied on observational data, analyzing trader price-cost margins, price dispersion across space, or the pass-through of international prices along the supply chain. In contrast, we propose an experimental approach for estimating the degree of competition.
Shedding light on market structure
Our experiment is based on the randomization of unit subsidies to competing traders for their purchases from farmers. By comparing prices that subsidized and unsubsidized traders pay to farmers, we can recover the rate of differentiation between traders, the key market structure parameter in a standard model of oligopsonistic competition. By combining the experimental results with quasi-experimental estimates of the pass-through rate, we also estimate market size, or the effective number of traders competing for farmers’ supply.
In the context of the Sierra Leone cocoa industry, our results point to a competitive agricultural trading sector and suggest that the market size is substantially larger than the village. The methodology developed in this study uses purely individual-level treatment to shed light on market structure. This approach may be useful for the many cases where market-level randomization is not feasible.