Market Power and Spatial Competition in Rural India (Joint with Macro)

• Development Workshop

Date and Location

Wednesday, December 5, 2018, 4:10 PM - 5:30 PM
Blue Room, 1113 Social Sciences and Humanities

Abstract

In this paper, I argue that market power of intermediaries plays an important role in contributing
to low incomes of farmers in India. I study the role of spatial competition between
intermediaries in determining the prices that farmers receive in India by focusing on a law that
restricts farmers to selling their goods to intermediaries in their own state. I show that the discontinuities
in market power generated by the law translate into discontinuities in prices. Increasing
spatial competition by one standard deviation causes prices received by farmers to increase by
6.4%. To shed light on spatial and aggregate implications, I propose and estimate a quantitative
spatial model of bargaining and trade. Using this structural model, I estimate that the removal
of the interstate trade restriction in India would increase competition between intermediaries
substantially, thereby increasing the prices farmers receive and their output. Estimates suggest
that average farmer prices and output would increase by at least 11% and 7% respectively. The
value of the national crop output would therefore increase by at least 18%.