Agricultural Trade Liberalization and Downstream Market Power: Some Extensions

Hoque, Mainul Mohammad; Schroeter, John R.

WP #10005, March 2010

 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 effect of 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 (SSMW, 2007) developed a model of the effects of trade liberalization that accounts for the vertically-linked and concentrated characteristics of the developed countries’ food markets.  Their principal qualitative finding is that an analysis based on the assumption of competitive conduct will overstate the effects of trade liberalization if food processing and retailing firms exercise market power.  This result is sensitive to their choice of functional forms, however, as this paper demonstrates with an analysis in which SSMW’s linearity assumption is replaced by constant elasticity specifications for supply and demand.  We also extend the SSMW analysis by considering ad valorem tariffs, a case for which the results exhibit both qualitative and quantitative differences from those for the unit tariff case.

JEL Classification: F12, L13

Keywords: oligopoly, oligopsony, trade liberalization, vertical market structure