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Assessing the Market Power of Millers and Wholesalers in the Bangladesh Rice Sector

Mohammad Chhiddikur Rahman,
Agri-food Policy Platform, International Rice Research Institute, Manila, Philippines

Valerien Pede
Agri-food Policy Platform, International Rice Research Institute, Manila, Philippines

Jean Balie
Agri-food Policy Platform, International Rice Research Institute, Manila, Philippines

Isabelita M. Pabuayon
Department of Agricultural and Applied Economics, University of the Philippines Los Banos, Laguna, Philippines, and

Jose M. Yorobe
Department of Agricultural and Applied Economics, University of the Philippines Los Banos, Laguna, Philippines, and

Samarendu Mohanty
International Potato Centre, Hanoi, Viet Nam

Abstract/ Executive Summary:

Purpose – Because of the increasing differential between farm and retail prices, the study proposes to investigate the extent of market power in the rice value chain of Bangladesh using advanced econometric techniques. Design/methodology/approach – Using a Stochastic Frontier Estimation approach on cross-sectional data, the study examines the price spread along the rice value chain to determine whether millers and wholesalers exercise market power. Findings – Empirical results reveal that, on average, rice millers and wholesalers charge 33 and 29% above the marginal cost, respectively. This study confirms the non-competitive behavior of the rice market with wholesalers and millers wielding substantial market power Research limitations/implications – A limitation of the study is that it does not include the retailers who also play a major role in the Bangladesh rice value chain. This is left for future study. Originality/value – This study combines primary and secondary data collected on the Bangladesh rice sector to examine the market power of two major players along the value chain, millers and wholesalers, using an advanced econometrics approach.

Keywords: Rice, Price spread, Value chain, Stochastic frontier analysis, Mark-ups

Location:

Start Date:

End Date:

Program Area: Socio-economic and Policy

Non-commodity: Performance

Objectives:

Although there have been several attempts to examine market power in the rice sector of Bangladesh, the techniques previously applied did not make use of the most recent econometric methods, such as the SF analysis, although it has proved to more accurately estimate market power (see Kumbhakar et al., 2012). To our knowledge, there is no other study that has used the SF approach (despite its advantage over the more commonly used methods) to estimate market power along the rice value chain in Bangladesh.

Methodology:

To assess the market power in the Bangladesh rice value chain, we used the Stochastic Frontier Analysis (SFA) approach proposed by Kumbhakar et al. (2012). The SFA approach starts from the basic set-up of an industry exposing oligopoly at the point where output price outstrips the marginal cost of production (Lopez et al., 2015). The research question can be addressed by estimating a mark-up model and employing the stochastic frontier methodology. The mark-up model is derived from the standard profit maximization problem. The solution of the optimization problem results in the price of the product; price is equal to the total marginal cost for a competitive market, and price exceeds the marginal cost for a non-competitive market. 5. Survey design and data collection The data used for this empirical analysis are collected from millers and wholesalers of rice markets in Bangladesh. Data were collected through structured interviews conducted from June to August 2017. In this survey, 160 mills and 240 wholesalers were selected from 32 districts in eight divisions (Figure 3). From each district, five mills and seven or eight wholesalers were selected. The output (Y) for the millers and wholesalers is milled rice. The amount of rice sold is measured in metric tons (thousand kilograms). The inputs in rice processing include paddy, labor, capital, energy, transportation, and other materials. Price and quantity data on these inputs were collected during face-to-face interviews. The price of raw materials (wM) is the amount of money spent per ton of paddy and rice purchased by millers and wholesalers, respectively. The price of labor (wL) is the daily wage of labor [6]. The price of energy (wE) is the cost of electricity per day. The cost of other materials (wO) is recorded weekly during interviews but was transformed into per-day basis [7]. The price of capital (wK) is the bank interest rate. The price of transportation (wTr) was collected weekly as well but also transformed into per-day basis. Millers bear the transportation cost, and as such, wholesalers do not have to pay for it. The revenue share is quite similar for millers and wholesalers, but differences exist on the price of inputs. As expected, millers exhibit higher capacity in terms of output per day. The prices of raw materials and labor are higher for wholesalers who also enjoy lower interest rates on capital, whereas millers spend more on electricity and other materials.

Source of Information: Journal of Agribusiness in Developing and Emerging Economies

Article Link (Online Journal): DOI 10.1108/JADEE-04-2018-0053

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

The purpose of this study was to estimate the degree of market power millers and wholesalers have in the Bangladesh rice value chain using the Stochastic Frontier (SF) approach. Estimates from the SF approach reveal the oligopolistic power used by rice millers and wholesalers. Results show that both rice millers and wholesalers have a high degree of market power. On average, the rice millers charge 33% beyond the marginal cost, whereas wholesalers capture margins that are 29% above the marginal cost. The Lerner Index for the millers and wholesalers are both significantly greater than zero, which means that the rice market is not competitive. This also indicates a market influence dominated by millers and wholesalers. Therefore, a large proportion of the farm-to-retail price spread in the rice value chain is attributed to market power, and wholesalers with millers are the key actors with high market power. Government policies to incentivize increased competition among the rice value chain actors, as well as the due implementation of antitrust laws, are reasonable solutions to mitigate market power in the rice value chain of Bangladesh. Moreover, the underlying factors contributing to the high market power of only a few dominant operators in the middle of the value chain deserve to be studied. Although we believe that the environment set by the dominant millers and wholesalers in the value chain (strong association, better organization, tight control at forward and backward levels, etc.) might be conducive to such high market power, we suggest that it be further investigated in future studies. This study used a rigorous econometric approach to investigate and ascertain market power in the Bangladesh rice value chain. Given this result, targeted policy interventions are deemed necessary to address such a market failure. Among the options to be considered by the government of Bangladesh is the procurement mechanism and its requirements that need to be revisited to offer a viable and credible alternative for farmers. Likewise, measures to increase competition in the middle of the value chain should be prioritized and fully explored to encourage the emergence and development of agribusiness.

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