Competition is considered to be one of the main drivers of productivity and economic growth, driving inefficient businesses out of the market, fostering innovation and lowering prices. Markets in developing countries are frequently portrayed as dysfunctional, with low levels of competition and large numbers of unproductive firms. Research shows evidence of significant profits for marketplace microenterprises in developing countries (see, e.g. Bergquist & Dinerstein, 2020, and Banerjee et al., 2023), despite the fact that there should be stiff competition from the mass clustering of microenterprises operating side by side. This project seeks to reconcile these seemingly contradictory facts by studying the nature of competition among fruit and vegetable vendors in Lusaka, and the role that non-monetary aspects (such as friendships) can play in sustaining collusive behaviour.
In this project, the author will survey approximately 870 fruit and vegetable vendors in Lusaka, Zambia and systematically document competition patterns, pricing decisions and the role of social ties in these decisions. The project relates broadly to two literatures, one studying relational contracts and the other studying questions of agglomeration and competition in SSA countries. For example, Macchiavello & Morjaria (2019) which studies the interplay between relational contracts and increased competition among farmers (upstream) and mills (downstream) in Rwanda, and Bassi et al. (2022) who use a general equilibrium model of firm behaviour to study the role of rental market interactions among small firms in Kampala. This study differs from the former in that it will explore these issues in the context of horizontal competitors and non-monetary relational aspects, and differs from the latter where it considers social connections among vendors and studies competition and price collusion issues. This paper will motivate future work by the researcher, possibly involving a larger data collection effort and the use of an RCT to estimate a structural model of competition and social norms. Such a model would help analyse the effect of different counterfactual policies attempting to address market failures caused by inefficient competition.
This study will shed light on the role that social bonds play in sustaining collusive behaviour among microenterprises in developing countries where contract enforcement and competition authorities are weak. The results will be of crucial importance to policymakers aiming to tackle such behaviour, seeing as collusion discourages firm entry, negatively affects customers, keeps vendors inefficiently small, and leads to low levels of innovation.
