Market-level effects of competition: prices, quality, and mechanisms

University Of Wisconsin-Madison, Madison WI

Investigators

Abstract

This research project uses experimental methods to test a fundamental economic theory---the effects of market competition on prices, product quality, exit decisions of existing firms, consumer welfare as well as how these changes affect consumer perception of quality, buying habits, and behavior. The experiments are applied to agricultural input markets. This research project will take advantage of the entry of a large quality conscious agro-input store chain into the agro-input market of a country to examine whether entry by this quality-conscious chain can improve outcomes in this market, especially price, quality, and usage of fertilizer. The researchers will also study how farmers change their views on quality and buying habits as they learn about the differential quality and prices of the new market entrant as well as the reaction of existing forms to these market changes. The results of this research project will not only offer an empirical test of the effects of competitive pressures on product quality, price, and consumer welfare, it also shows one mechanisms through which agricultural productivity can be increased, especially in low income countries. This will increase the productivity and incomes of farmers, thus decreasing poverty. This research project will use lab-in-the field experiments to measure the broader impacts of entry on the market with particular refence on quality, price and changes in preferences. The PIs hypothesize that the effects will take place through the new firms increasing competitive pressures on existing retailers and/or by shifting consumer beliefs. Modern seeds and fertilizers have the potential to boost agricultural yields, but there is a high prevalence of low-quality inputs on the market in low income communities. This can reduce farmers’ propensity to use modern inputs which in turn lowers agricultural productivity and economic growth. This research project proposes a two-pronged research design to study the effects of new market entrant. First, the new entrant is willing to randomize where the new stores will open across a set of pre-identified locations. This will allow the PIs to measure how competition affects prices, quality, and firm entry/exit. Second, experiments with farmers who live near study markets will measure their willingness to pay for inputs of differing provenance and quality levels. These experiments will shed light on the mechanisms behind market-level effects. By studying whether market forces can increase the product quality available to consumers, the findings could have large implications for economic growth in the region and for the welfare of millions of farmers. The results of this research will inform policies to increase the adoption of modern agricultural inputs, hence improve productivity and incomes, leading to poverty reduction. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.