Agricultural Trade Liberalization and Downstream Market Power: The Ad Valorem Case

Abstract

Exports of agricultural commodities to developed countries play a significant role in the economies of many developing countries. The elimination of import tariffs has the potential to benefit producers in the developing countries, but estimates of the extent of the gains from trade liberalization typically assume perfect competition. Significant concentration in the food processing and retailing sectors of the U.S. and the EU undermine the plausibility of this assumption in the case of agricultural trade, however. Sexton, Sheldon, McCorriston, and Wang (2007) develop a model of the effects of trade liberalization that accounts for the vertically-linked and concentrated characteristics of the developed countries' food markets. Their analysis is limited to the case of a constant per unit tariff, however. In this paper, we extend the analysis of the effects of trade liberalization in the presence of downstream market power to the case of an ad valorem tariff, and we find important qualitative differences from the results for the unit tariff case.

Modeling trade policies under alternative market structures

“…For example, we assume that only international traders are in the position to exert market power. However, it is often argued that downstream industries in developed countries, such as ripeners or retailers, may exert oligopsony and/or oligopoly power and, hence, in assessing the impact of a trade policy change it is necessary to take into account the vertical linkages by means of a successive oligopsony/oligopoly framework (Sexton et al, 2007;Hoque and Schroeter, 2010). To include the market power of downstream industries, such as retailers, in the models developed in this paper, information on banana retail prices and quantities in each importing country would be needed, and this information is not available.…”