Book Description

My dissertation evaluates the general equilibrium effects of agricultural market structures by examining how market power and capacity constraints of downstream intermediaries shape the economy-wide impacts of agricultural program interventions. I construct an integrated general equilibrium model of agricultural market structure and calibrate the model using original household-level survey- and industry-data from the Tanzanian cotton industry to estimate the direct and spillover effects of technological improvements in cotton production when the downstream cotton ginners have market power in purchasing cotton from farmers. Chapter 2 of my dissertation reviews the three strands of economic literature into which this work fits and contributes: demand-side constraints in agricultural markets, in particular, limited capacities and imperfect competition among downstream intermediaries, welfare distribution of downstream market structure in agriculture, and general equilibrium effects of policy interventions in local economies. In Chapter 3, I develop the integrated general equilibrium model of market structure by explicitly allowing for intermediary market power and their capacity constraints, and capturing local-economy general equilibrium effects. Chapter 4 presents the original household-level data from the Western Cotton Growing Area of Tanzanian and the ginners’ industry-level data, and explores the existing coalitions of cotton ginners, their contractual agreements with cotton farmers, spatial and temporal dimensions of cotton purchase, and the costs of producing lint. In Chapter 5, I discuss the empirical strategy of econometric estimations of inputs needed to parameterize the integrated model. Using ginners’ cost data on processing inputs, I non-parametrically estimate their market power to be 0.28 in cotton purchase, which is akin to a scenario as if the ginners are playing a three-four firm Cournot game. Chapter 6 presents the direct and indirect (spillover) effects of ginners’ market power, and estimates the income and production impacts of higher cotton productivity experiment with imperfectly competitive ginners and compares that to the synthetic case of perfect competition. I find that the total real income of the Western Cotton Growing Area reduces by 3.1 percent due to ginners’ market power with heterogeneous welfare impacts for the different cotton and non-cotton producing households. The income (inflation-adjusted) gains in the entire local economy are reduced from 5.9 to 2.4 percent due to ginners’ market power upon the 25 percent cotton productivity increase. The direct income increases of technology improvement for the cotton producers are reduced by 2.2 to 5.6 percentage points, and the indirect income increases for the non-cotton producing households are reduced by 0.5 to 0.8 percentage points. The methodology presented in my dissertation applies to both developed and developing country agricultural settings. The findings from this dissertation have important implications for agricultural program evaluations to consider the negative effects of market power and to assess the impacts through a local economy angle. Evaluations based on a partial equilibrium analysis typically overlook the agricultural spillovers. I also highlight the importance of intermediary capacities in agriculture in determining the welfare of upstream farmers and their local economy. When intermediaries operate at their maximum processing capacities, direct welfare gains and income spillovers of technological improvements in agricultural production are unambiguously negative for the farmers, and all the benefits of innovation are transmitted to the intermediaries. A realistic analysis of policies aimed at raising welfare in rural economies must consider effects of market power and downstream capacity constraints. Taking these effects into account opens up new policy considerations and opportunities, including the benefits of laws limiting or proscribing anticompetitive behavior to prevent formation of mergers and coalitions downstream from farms. Introducing interventions to ensure a more elastic demand for farm products when intermediaries are capacity constrained could complement other welfare-enhancing programs that governments undertake in potent and dynamic – yet easily overlooked – ways.