Fading choice: Market development and the range of goods available across space

Project Active from to Firms

A simple measure of market development is the range of products available across space. Current studies of market development focus exclusively on one particular aspect of development: the spatial integration of markets measured by the spatial variation in prices. In contrast, we aim to study the spatial variation in products. This idea derives from an analysis of consumer behaviour under rationing. We visualise remoteness from market centres as a type of rationing with similar implications.

The examination of spatial price gaps and their extension to costs of trade between locations (that includes measures of mark up by traders) rely, not on a set of products that represent the typical consumer basket, but on typical imported goods traded between locations. We focus on the “product wedge” rather than the price wedge: we examine the variation in the range of products across space to understand to what extent market penetration in products is limited. Market development and the availability of the full consumer basket might be limited for many reasons. Apart from infrastructure and transportation costs, other reasons include poor information, weak distribution networks, and low effective demand. To foster market development, middlemen require effective information and infrastructure, linking rural markets to urban centres. Low supply response, including low take up of new productive technologies, might be a response to spatial costs and other wedges that reflect the availability of goods in local markets and drive consumer rationing.

To examine this problem, we rely on a purpose-designed survey of remote rural outlets and markets in the nearest market centre and will test the relative importance of income, price and distance on variety. We have constructed a model of trade and transport and will use it to investigate how consumers are affected by transport costs, not only through changes in prices, but also in changes to the set of goods they can buy. In this model, a reduction in transport costs increases consumer welfare in three ways: first, it increases the value of income; second, it lowers the price of consumer goods; and third, it increases the distances at which the switches occur so that the number of goods available at a consumer’s location may increase. We refer to these as the income effect, price effect and variety effect, respectively. The aim is to apply the model to data and identify the impact of transport costs along these dimensions and ask to what extent such wedges affect product variety and availability. We will also calibrate the impact of alternative wedges, including the costs of storage, distribution, and information.

We rely on two sources of data to examine the impact of remoteness on product choice. First, a small re-survey of households, previously surveyed to examine impact of remoteness on input use and production and second (to be completed in July 2015) a survey of village shops and outlets where relatively remote villages are chosen on purpose, typically possessing only a single road or track leading to the closest market centre.  The second survey is also representative of the main regions of Ethiopia and will offer data on prices and the range of goods available in the nearest market town, village local market, and outlet.

In sum, the aim of the project is to identify potential constraints on market development.  The main policy concern currently is the potential market power of traders which may invite regulation, but there are likely other important constraints that may well be amenable to better policy.