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Indian farmers are purchasing a record number of tractors, and adopting improved methods like drip and sprinklers for irrigating their fields, Modi said. Photo: HT
Indian farmers are purchasing a record number of tractors, and adopting improved methods like drip and sprinklers for irrigating their fields, Modi said. Photo: HT

Benefits of agri market reforms uncertain

  • Opening agricultural markets led to collusion among traders who did not pass on benefits of low costs to consumers, a study from Kenya shows

Reforms in agricultural markets are often seen as the way forward to increase competition and pass on benefits of price movements to farmers or consumers. But a recent study from Kenya shows that market reforms had limited impact on consumer welfare. Kenya had a wave of liberalization across its agriculture markets in the 1980s and 1990s.

The study, by Lauren Falcao Bergquist from University of Michigan and Michael Dinerstein from University of Chicago, provides evidence of collusion among traders, who enjoy a high degree of market power.

The two economists designed three experiments to understand the market structure. The experiments examined whether traders pass on lower cost benefits to consumers, the nature of demand and competition, and the effects of new entrants on market prices.

In the first trial, traders were provided a substantial, month-long subsidy for maize that they sell. The study finds that traders passed only 22% of this reduction in costs to consumers. This could also happen due to low variation in demand with price in case of imperfect competition among traders.

In their second trial, the researchers find a highly flexible demand behaviour among consumers, but a single profit-maximizing monopolist regime among traders. On an average, traders make 25% of their revenue as profit. But there is a great degree of variation, with some traders selling very large quantities, earning higher profits.

The third trial finds a small effect of the entry of new traders on prices. The new entrants who have prior connection with existing traders tend to collude with them, effectively leading to no increase in competition. And traders who are not networked are less willing to enter a new market.

Hence, increasing market competition remains an unsolved problem. In such a scenario, technologies such as mobile marketplaces, where coordination among anonymous traders on pricing is difficult, hold some potential.

Also read: Competition and Entry in Agricultural Markets: Experimental Evidence from Kenya

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