Existing literature suggests that businesses in low-income countries are on average less productive than their counterparts in developed countries. In addition, productivity across firms varies more in the developing world. This evidence suggests that the market forces that drive productivity in developed countries do not exert the same pressure in developing countries: low-productivity businesses are not forced out of the market and businesses that increase their productivity do not necessarily gain market shares. What determines why low-productivity firms continue operating and keep their customers, while high-productivity ones fail to attract them through lower price or better quality? In contexts where kinship identity matters and social ties are strong, consumers may have a preference to interact with socially close businesses, or a social obligation to purchase such good/service from businesses whose owners belong to the same social network. This guarantees firms from large social networks access to a large set of loyal customers, and puts them at an advantage relative to equally or more productive competitors.
Data will be collected from both businesses and consumers in 20 Indian villages, with surveys that elicit information on both transactions and social relations. For a given village, the data will include the universe of businesses of a given type and a sample of village households that are potential customers of those businesses. The result will be a matched business-customer dataset in which the information on who shops from whom, with which frequency, at what price etc. can be linked to a measure of social proximity derived from the social relations data. This unique dataset will allow to consider together firms’ pricing behaviour and consumer purchase decisions, and test hypotheses on the interaction among market participants that cannot be tested with existing data.
Policymakers’ attempts to foster price competition have up to now focused on reducing transportation costs, likely because the impact of physical distance on mark-ups is well understood. The impact of social distance on price competition has instead been overlooked. This project illustrates how, in presence of strong social ties, policies that remove transportation barriers may not suffice to address stunted competition. This project will also illustrate how other policies, such as social security, may have important and unexpected implications because of the impact they have on the strength of social ties.