Authors: Dimitris Pachis

Title: Potential Competition and Contracting in Agricultural Markets

Abstract

The price transmission mechanism in agricultural marketσ is studied on the basis of derived demand. The marginal revenue of the derived demand is equated to the marginal cost. The area between the two curves is the price margin (profit) of market’s stakeholders (producer, processor, retailer). This model is based on the pricing solution of monopoly thus implying that market power is inevitable in agricultural markets.  However, the way agricultural production is organized leaves room for inconsistencies of the usual practice in explaining the real world. In this study, the analysis follows two concepts:

A) In the case of zero transaction costs, competition in agricultural markets takes the form of potential competition, explaining the forms of contractual arrangements.

B) Non-capturability of return of market power is due to the effects of potential competition because market power cannot be enforced without cost.

The potential competition is based on prior contracting which does not need to be explicit and in the usual formal way of written contracts. Moreover, the sequential nature of market power reveals the difficulty in capturing return from it. It is discussed whether market power law is effective. A possible solution proposed is additional private contracting.