Analysis of a supply‐control program under uncertainty and imperfect competition: Chinese cabbage in Taiwan

Abstract

Researchers have often attributed the farm-wholesale price spread, after adjusting for marketing costs, as compensation for marketing firms' risk bearing. However, price spreads in excess of marketing costs can also be due to marketing firms' exercise of market power. In settings where both imperfect competition and marketer risk aversion are plausible, a modeling framework must be sufficiently general to accommodate both types of behavior. This article develops and estimates such a model in the context of fresh produce marketing and develops the implications for analysis of supply-control programs. The model is applied to the production and marketing of Chinese cabbage in Taiwan and specifically to the analysis of supply-control programs implemented in this industry by the Taiwanese government. The empirical results provide little support for the hypothesis that marketing firms exhibit risk averse behavior, but they do show that marketing firms exercise oligopsony power in procurement of the product from farmers, and that this power is positively related to the quantity supplied in each market period. This provides a heretofore unexplored impetus for supply controls intended to raise producer incomes. However, such controls are also rendered less effective by imperfect competition because marketing firms capture part of the benefits from supply reduction. Copyright 2006 International Association of Agricultural Economics.

Factors Driving Farm Gate Price of Tomatoes in Ghana: An Application of Hedonic Model

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Institutional Market Power in Comté: Insights from a ‘Double Marginalisation’ Model

“…This model has been used extensively in the agricultural economics literature to assess the welfare effects of imperfect competition in various food industries due to concentration at the processing/retailing stage (Huang and Sexton, 1996; Alston et al. , 1997; Sexton, 2000; Sexton and Zhang, 2001; Zhang and Sexton, 2002; Huang et al. , 2006).…”

“…We borrow the simple model of industry equilibrium described in Huang and Sexton (1996). This model has been used extensively in the agricultural economics literature to assess the welfare effects of imperfect competition in various food industries due to concentration at the processing/retailing stage (Huang and Sexton, 1996;Alston et al, 1997;Sexton, 2000;Sexton and Zhang, 2001;Zhang and Sexton, 2002;Huang et al, 2006). The model focuses on market-level interactions between competitive suppliers and imperfectly competitive processors/retailers that may also exert market power towards buyers of the processed product.…”

Does oligopsony power matter in price support policy design? Empirical evidence from the Thai Jasmine rice market

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