Farmers, Traders, and Processors: Estimating the Welfare Loss from Double Marginalization for the Indonesian Rubber Sector

Reducing buyer market power over agricultural suppliers is a key strategy to improve rural livelihoods in emerging economies. This paper focuses on implications of failure of a supply chain to coordinate vertically for farm incomes, with specific application to the Indonesian rubber industry. In the Jambi province production is mainly in the hands of smallholder farmers, who sell via spot transactions to a network of traders who in turn sell in spot exchanges to rubber processors. Processing is highly concentrated, and, whereas there are large numbers of rubber traders, evidence indicates that both traders and processors exercise oligopsony power, a classic problem of double marginalization. We estimate the extent of buyer market power in farmer-trader and trader-processor interactions and derive the welfare loss from double marginalization. We then explore the nature of this market failure and quantify the extent of welfare loss and redistribution away from farmers. We conclude by asking why the market has not addressed this failure through improved vertical coordination in the supply chain and discussing policy innovations to facilitate better coordination.