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

  • Rakotoarisoa, Manitra A.
  • Henneberry, Shida Rastegari
  • Shapouri, Shahla
  • Trueblood, Michael A.

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.

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File URL: http://purl.umn.edu/21964
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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2003 Annual meeting, July 27-30, Montreal, Canada with number 21964.

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Date of creation: 2003
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Handle: RePEc:ags:aaea03:21964
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  1. Rosenberg, Joel B, 1976. "Research and Market Share: A Reappraisal of the Schumpeter Hypothesis," Journal of Industrial Economics, Wiley Blackwell, vol. 25(2), pages 101-12, December.
  2. Barbara J. Spencer & James A. Brander, 1983. "International R&D Rivalry and Industrial Strategy," NBER Working Papers 1192, National Bureau of Economic Research, Inc.
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  4. Strickland, Allyn D & Weiss, Leonard W, 1976. "Advertising, Concentration, and Price-Cost Margins," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 1109-21, October.
  5. Shepherd, William G, 1972. "The Elements of Market Structure," The Review of Economics and Statistics, MIT Press, vol. 54(1), pages 25-37, February.
  6. Roller, Lars-Hendrik & Sickles, Robin C., 2000. "Capacity and product market competition: measuring market power in a 'puppy-dog' industry," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 845-865, August.
  7. Comanor, William S & Wilson, Thomas A, 1979. "The Effect of Advertising on Competition: A Survey," Journal of Economic Literature, American Economic Association, vol. 17(2), pages 453-76, June.
  8. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  9. Catherine Matraves, 1998. "Market Structure, R&D and Advertising in the Pharmaceutical Industry," CIG Working Papers FS IV 98-17, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  10. A. Michael Spence, 1979. "Investment Strategy and Growth in a New Market," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 1-19, Spring.
  11. Comanor, William S & Wilson, Thomas A, 1969. "Advertising and the Advantages of Size," American Economic Review, American Economic Association, vol. 59(2), pages 87-98, May.
  12. Goldberg, Pinelopi Koujianou & Knetter, Michael M., 1999. "Measuring the intensity of competition in export markets," Journal of International Economics, Elsevier, vol. 47(1), pages 27-60, February.
  13. Ayanian, Robert, 1983. "The Advertising Capital Controversy," The Journal of Business, University of Chicago Press, vol. 56(3), pages 349-64, July.
  14. Comanor, William S & Wilson, Thomas A, 1971. "On Advertising and Profitability," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 408-10, November.
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