The Export Market For Differentiated Processed Agricultural Products: The Role Of Factor Prices And Fixed Costs

The theories of monopolistic competition and ¡°love for variety¡± contend that the differences in firms¡¯ prices and market shares arise from product differentiation, which is linked to firms¡¯ fixed costs. This paper reviews these theories and their implications for prices and market shares of firms from developing countries seeking to expand their exports of processed agricultural goods. The study proposes a model showing the role of the firms¡¯ costs as a source of product differentiation. Using econometric methods, the model estimates the firms¡¯ residual demand elasticities, which indicate the degree of product differentiation and market power. The model also determines the effects of the firms¡¯ own costs and competitors¡¯ costs on the residual demand and market shares. Case studies for cocoa products and roasted coffee in the U.S. import market are examined. Exporters to the U.S. include developing countries that produce the raw cocoa and coffee. The results show that high prices and large market shares are associated with high levels of product differentiation in these markets. Also, market shares increase with the level of fixed costs, which are measured by proxy as advertising expenditures. The implication for small firms in developing countries is that increasing the degree of product differentiation through increased investment in advertising or research and development could increase their market shares and their export revenues.