Intermediaries, transport costs and interlinked transactions

Farmers in developing countries often encounter difficulties selling their products on local markets. Inadequate transport infrastructure and large distances between areas of production and consumption mean that farmers find it costly to bring their produce to the market and this very often results in small net margins and poverty amongst farmers who are geographically isolated. Agriculture in developing countries is characterized by the presence of intermediaries that have a transport cost advantage over farmers. Because of their market power, these intermediaries are able to impose interlinked contracts and are free to choose a spatial pricing policy. In this paper, we develop a model of input-output interlinked contracts between a trader and geographically dispersed farmers. We analyze what the welfare implications are as well as the effect on the trader's profit of imposing the use by the trader of either uniform or mill pricing policies, as opposed to spatial discriminatory pricing. We establish under what conditions public authorities can increase farmers' income and reduce poverty in rural areas by restricting the spatial pricing policies that intermediaries can use.