Market-level Effects of Competition: Prices, Quality and Mechanisms

Low and unreliable product quality is a characteristic feature of markets in developing countries and may help explain why smallholder farmers’ yields are so far below their agronomic potential, especially in sub-Saharan Africa. Information asymmetries and consumer mistrust can prevent firms from profitably supplying high-quality products, hampering firm and industry growth. One reason for the persistence of poor-quality agricultural inputs may be that smallholder farmers in rural SSA typically purchase inputs from small agro-dealers that serve highly localised markets. Agro-input shops’ small effective market sizes may prevent competitive forces from disciplining the market and driving out bad firms. Within this context, this project will measure the impact of market entry by a high-quality retailer allowing the researchers to examine whether entry by a single quality-conscious chain can shock the market into a better equilibrium.

Through the randomised rollout of new stores by an NGO with a reputation for high quality, this project will analyse how this increased competition affects prices, quality, and firm entry and exit at the market level. Additionally, the researchers will implement lab-in-the-field experiments near treatment and control markets to shed light on the mechanisms behind market-level effects - whether changes in the market are due to changes in farmers’ beliefs about the quality on offer in the market or changes in willingness to pay for quality. The project will also collect data allowing the researchers to shed light on the geographic span of the markets in question. The spatial extent of imperfectly integrated markets has important implications for understanding the general equilibrium impacts of policy changes and regional responses to economic shocks. Lastly, the researchers aim to construct and make available a comprehensive panel data set that can be used by other researchers to gain insights into various aspects of markets in rural Kenya.

This project will be useful both for the data it creates as well as for policymaking. On the data side, there is very little reliable information regarding the quality and price of inputs available to farmers across Kenya. Increasing understanding of the baseline situation will be of interest to policymakers and industry. From the policy perspective, this work will provide evidence of whether competition is enough to improve quality provision, or whether other levers will be necessary, such as increased regulation. Further, the data on market size and price- and quality-dispersion across local markets will improve understanding of the benefits of increased market integration. The work will also inform policymakers on how to increase demand for high-quality inputs among farmers, which will in turn increase incentives for stores to provide such inputs.


Maya Duru


Laura Schechter

University of Wisconsin-Madison

Emilia Tjernström

Monash University