Monopoly Power and Distribution in Fragmented Markets: The Case of Groundwater

Abstract

This paper examines monopoly power in the market for groundwater (irrigation water extracted by private tubewells), a market characterized by barriers to entry and spatial fragmentation. In Pakistan's Punjab region, groundwater and tenancy contracts are often interlinked, with share‐tenants gaining access to water through the use of their landlord's tubewell. An analysis of groundwater transactions shows that tenants of tubewell owners are charged lower prices than other customers. Tubewell owners and their tenants also use considerably more groundwater on their plots than other farmers. Using detailed price and quantity data, the efficiency and distributional implications of this monopoly power are explored.

Social contracts, markets and efficiency: Groundwater irrigation in North India

“…This is a striking result, standing in sharp contrast with much of the literature, such as Jacoby et al (2004), Meinzen-Dick (1996), and Shah (1993), which has tended to find allocative inefficiency and attributed it to the presence of monopoly power of tubewell owners. (v) However, notwithstanding the social contract, inadequate power extracts a toll.…”

“…Second, despite a uniform village-level water price that has no bearing on the marginal value product of water, we observe that the social contract translates into a spatially-efficient allocation of water. This is a striking result, in contrast to much of the literature that construes the pricing of water at higher than marginal costs to be indicative of inefficiency and monopoly power; see for example Jacoby et al (2004), Meinzen-Dick (1996) and Shah (1993). The policy debate should thus shift away from an almost-exclusive focus on issues related to water allocation within villages to more systemic inefficiencies.…”

“…The proximity (or absence thereof) of tubewells in a village can naturally give rise to models of local monopoly or oligopoly with very different implications for allocative efficiency. See Jacoby et al (2004) for one such formal model. 20 Profit is calculated as revenue minus wage cost, rental costs of tractors and oxen, fertilizer cost and water cost; and cost of power for tubewell owners.…”

“…1 This study contributes to the substantial literature that examines questions of groundwater market structure, water allocation and attending issues related to efficiency and equity in South Asia, which includes, in addition to Jacoby et al (2004), Meinzen-Dick (1996), and Shah (1993) cited above, Aggarwal (2007), Dhawan (1995), Dubash (2002), Foster and Rosenzweig (2008), Foster and Sekhri (2008), Meinzen-Dick (2000), Palmer-Jones (1994), Sengupta (2000), and Somanathan and Ravindranath (2006). 2 These studies span a large and diverse content.…”

Market Power in Water Markets

“…Next to transaction costs, market power has been identified as an important source of friction in water markets (Saleth, Braden, and Eheart 1991;Lovei and Whittington 1993;Rosegrant and Binswanger 1994;Easter, Rosegrant, and Dinar 1999;Bjornlund and McKay 2002;Jacoby, Murgai, and Rehman 2004;Draper 2008;Krause 2009). As Holland (2006) …”