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Market Power and Spatial Competition in Rural India

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  • Shoumitro Chatterjee

Abstract

Market power of intermediaries contributes to the low incomes of farmers in India. I study the role of spatial competition between intermediaries in determining the prices that farmers receive in India by focusing on a law that restricts farmers to selling their goods to intermediaries in their own state. I show that the discontinuities in market power generated by the law translate into discontinuities in prices. Increasing spatial competition by one standard deviation causes prices received by farmers to increase by 6.4%. I propose and estimate a quantitative spatial model of bargaining and trade to shed light on spatial and aggregate implications. Estimates from the structural model suggest that removing the interstate trade restriction in India would increase competition between intermediaries. Thereby average farmer prices and their output would increase by at least 11% and 7%, respectively. The value of the national crop output would increase by at least 18%. However, there are distributional consequences as well, as some farmers stand to lose due to increased local production.

Suggested Citation

  • Shoumitro Chatterjee, 2023. "Market Power and Spatial Competition in Rural India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 138(3), pages 1649-1711.
    • Handle: RePEc:oup:qjecon:v:138:y:2023:i:3:p:1649-1711.
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    File URL: http://hdl.handle.net/10.1093/qje/qjad004
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    Cited by:

    1. Pierre Marion & Etienne Lwamba & Andrea Floridi & Suvarna Pande & Megha Bhattacharyya & Sarah Young & Paul Fenton Villar & Shannon Shisler, 2024. "The effects of agricultural output market access interventions on agricultural, socio‐economic, food security, and nutrition outcomes in low‐ and middle‐income countries: A systematic review," Campbell Systematic Reviews, John Wiley & Sons, vol. 20(2), June.
    2. Shilpa Aggarwal & Brian Giera & Dahyeon Jeong & Jonathan Robinson & Alan Spearot, 2024. "Market Access, Trade Costs, and Technology Adoption: Evidence from Northern Tanzania," The Review of Economics and Statistics, MIT Press, vol. 106(6), pages 1511-1528, November.
    3. Nicholas Li, 2021. "In-kind transfers, marketization costs and household specialization: Evidence from Indian farmers," Working Papers tecipa-700, University of Toronto, Department of Economics.
    4. Merfeld, Joshua D., 2020. "Smallholders, Market Failures, and Agricultural Production: Evidence from India," IZA Discussion Papers 13682, Institute of Labor Economics (IZA).
    5. Dhingra, Swati & Tenreyro, Silvana, 2020. "The Rise of Agribusiness and the Distributional Consequences of Policies on Intermediated Trade," CEPR Discussion Papers 14384, C.E.P.R. Discussion Papers.
    6. Kanika Mahajan & Shekhar Tomar, 2021. "COVID‐19 and Supply Chain Disruption: Evidence from Food Markets in India†," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(1), pages 35-52, January.
    7. Dhingra, Swati & Tenreyro, Silvana, 2021. "The Rise of Agribusinesses and its Distributional Consequences," CEPR Discussion Papers 15942, C.E.P.R. Discussion Papers.
    8. Ambler, Kate & de Brauw, Alan & Herskowitz, Sylvan & Pulido, Cristhian, 2023. "Viewpoint: Finance needs of the agricultural midstream," Food Policy, Elsevier, vol. 121(C).
    9. Lyu, Wenyi & Yang, Jian & Yu, Leng, 2025. "Place-based policies, pro-competitive effects, and allocative efficiency: Evidence from China’s economic zones," World Development, Elsevier, vol. 191(C).
    10. Kanika Mahajan & Shekhar Tomar, 2020. "Here Today, Gone Tomorrow: COVID-19 and Supply Chain Disruptions," Working Papers 28, Ashoka University, Department of Economics.
    11. Joshua D. Merfeld, 2023. "Labor elasticities, market failures, and misallocation: Evidence from Indian agriculture," Agricultural Economics, International Association of Agricultural Economists, vol. 54(5), pages 623-637, September.
    12. Baruah, Prerona, 2021. "Seasonality in Commodity Prices across India:Extent and Implications," 2021 Conference, August 17-31, 2021, Virtual 315338, International Association of Agricultural Economists.
    13. Li, Nicholas, 2023. "In-kind transfers, marketization costs and household specialization: Evidence from Indian farmers," Journal of Development Economics, Elsevier, vol. 164(C).
    14. Bunyada Laoprapassorn, 2022. "Entry and Spatial Competition of Intermediaries: Evidence from Thailand's Rice Market," PIER Discussion Papers 170, Puey Ungphakorn Institute for Economic Research.
    15. Paul Fenton Villar & Tomasz Kozakiewicz & Vinitha Bachina & Sarah Young & Shannon Shisler, 2023. "PROTOCOL: The effects of agricultural output market access interventions on agricultural, socio‐economic and food and nutrition security outcomes in low‐ and middle‐income countries: A systematic revi," Campbell Systematic Reviews, John Wiley & Sons, vol. 19(3), September.
    16. Andrew L. Dabalen & Aparajita Goyal & Ruozi Song, 2024. "Regenerative Agriculture in Practice : A Review," Policy Research Working Paper Series 10919, The World Bank.
    17. Baruah, Prerona, 2022. "Investigating Commodity Price Relations across Wholesale Markets: The Case of Paddy in Chhattisgarh, India," Indian Journal of Agricultural Economics, Indian Society of Agricultural Economics, vol. 0(Number 01), March.
    18. Laura Boudreau & Julia Cajal-Grossi & Rocco Macchiavello, 2023. "Global Value Chains in Developing Countries: A Relational Perspective from Coffee and Garments," Journal of Economic Perspectives, American Economic Association, vol. 37(3), pages 59-86, Summer.
    19. de Brauw, Alan & Maruyama, Eduardo & Wagner, Julia, 2024. "Is it a myth? Market power among intermediaries in agri-food value chains," CGIAR Initative Publications 168165, International Food Policy Research Institute (IFPRI).
    20. Merfeld, Joshua, 2021. "Misallocation and Agricultural Production: Evidence from India," 2021 Conference, August 17-31, 2021, Virtual 315914, International Association of Agricultural Economists.
    21. Boutin, Delphine & Jouvin, Marine & Olié, Louis, 2024. "Assessing Dishonesty in Cocoa Value Chains: Lab-in-the-Field Evidence from Middlemen in Côte D'Ivoire," IZA Discussion Papers 17078, Institute of Labor Economics (IZA).
    22. Merfeld, Joshua D., 2022. "Labor Elasticities, Market Failures, and Misallocation: Evidence from Indian Agriculture," 96th Annual Conference, April 4-6, 2022, K U Leuven, Belgium 321214, Agricultural Economics Society - AES.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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