Vertical Market Structure, Commodity Exports and Trade Reform

Steve McCorriston, Richard J. Sexton and Ian M. Sheldon

No 331211, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: In the analysis of commodity markets, comparatively little attention is paid to the fact that commodity exports from developing countries are intermediates that form inputs into the food processing and retail sectors in developed countries. This has led many commodity exporting countries to argue that access to developed country markets and the prices they correspondingly receive is determined by market structure characteristics of the downstream food sector. Given the vertical nature of these markets, they are most appropriately characterised by successive oligopoly. Moreover, the problem of successive oligopoly may also coexist with oligopsony power that is an additional determinant of commodity prices in exporting countries. In this paper, we set out a simple framework that explicitly accounts for the vertical structure of commodity markets where oligopoly and/or oligopsony power may characterise any or all stages of the downstream food chain. By characterising commodity markets in a way that explicitly accounts for vertical market structure, we can in turn explore trade policy issues facing developing country commodity exporters. Specifically, we focus on the reduction of tariffs in developed countries, the key point being that the impact of tariff reform on developing country commodity exporters is determined by the market structure characteristics of the downstream sectors. We show that the impact of trade reform is likely to be different compared to the competitive benchmark that is commonly assumed and will likely vary with specific characteristics of the vertical market structure. We highlight the effects of vertical market structure and trade reform with simulated examples. In addition, in a set-up that accounts explicitly for market structure, we show that this may also have an impact on the tariff escalation issue. We also comment on avenues for future research that arise by characterising commodity markets using the framework outlined.

Keywords: International Relations/Trade; International Development (search for similar items in EconPapers)
Pages: 24
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:331211

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