Agricultural Trade Liberalization and DownstreamMarket Power: Some Extensions

Exports of agricultural commodities to developed countries play a significant role inthe economies of many developing countries. The elimination of import tariffs has the potentialto benefit producers in the developing countries, but estimates of the effect of trade liberalizationtypically assume perfect competition. Significant concentration in the food processing andretailing sectors of the U.S. and the EU undermine the plausibility of this assumption in the caseof 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 andconcentrated characteristics of the developed countries’ food markets. Their principal qualitativefinding is that an analysis based on the assumption of competitive conduct will overstate theeffects of trade liberalization if food processing and retailing firms exercise market power. Thisresult is sensitive to their choice of functional forms, however, as this paper demonstrates withan analysis in which SSMW’s linearity assumption is replaced by constant elasticityspecifications for supply and demand. We also extend the SSMW analysis by considering advalorem tariffs, a case for which the results exhibit both qualitative and quantitative differencesfrom those for the unit tariff case.[...]