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Farmers, Traders, and Processors: Buyer Market Power and Double Marginalization in Indonesia

Thomas Kopp and Richard J. Sexton

American Journal of Agricultural Economics, 2021, vol. 103, issue 2, 543-568

Abstract: Buyer market power can significantly reduce farm prices and incomes, making curtailment of such power a key strategy to improve rural livelihoods in emerging economies. A “double marginalization problem” occurs when market power is exercised at multiple stages in a supply chain. Although double marginalization has been studied extensively from a seller‐power perspective, the corresponding problem on the buyer‐power side has received scant attention. This paper addresses that lacuna through developing a vertical market model that allows buyer power to be exercised in local farmer–trader markets and also downstream at the trader–processor stage. We derive equilibrium results for output, prices, and economic welfare under alternative competition scenarios. The model is applied to the Indonesian rubber value chain by estimating the magnitude of buyer market power in farmer–trader and trader–processor interactions and quantifying the extent of welfare loss and redistribution of income among market participants due to double marginalization. Standard theory for seller double marginalization posits that it should be eliminated through vertical coordination within the supply chain. We conclude by discussing why such coordination may not occur within emerging‐economy supply chains and considering policy innovations to facilitate better coordination.

Date: 2021
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Handle: RePEc:wly:ajagec:v:103:y:2021:i:2:p:543-568