Effects of the CFA franc devaluation on urban food consumption in West Africa: overview and cross-country comparisons

This article summarizes research and policy questions, and research methods and findings of four case studies of the impacts of the 1994 CFA franc devaluation in West Africa on urban food consumption. The case studies are household surveys from Burkina Faso, Côte d'Ivoire, Mali, and Senegal. The research showed, in general, that, comparing food consumption patterns after the devaluation with those before, that: (1) total cereal intake fell, especially for the poorest; (2) the intake of imported rice held steady; (3) the intake of domestic coarse grains (millet, maize, sorghum) did not rise, except for an increase in maize intake in Burkina Faso; (4) only in Mali was there a significant shift to domestic rice; (5) imported wheat intake dropped; (6) roots, tuber and plantain consumption did not receive a boost; (7) there was an alarming “de-diversification” of the diet, especially for the poorest with reductions in meat, edible oils, and vegetables/fruit, as well as imported milk; there was, however, some increase in domestic oils/butters consumption; (8) there was some “individualization” of consumption patterns with increased importance of the informal restaurant sector. The most striking results in the context of the policy debate are that cereal intake fell, and that the (expected) shift from imported rice to local coarse grains did not occur. The lack of such a shift is explainable in terms of the lackluster supply response of the coarse grain sectors, and the resilience of rice demand based on its convenience of processing and preparation for the urban consumer. These results together imply: (1) the economics and technology of agro-processing of coarse grains need to return to the center of the cereals debate in West Africa; (2) emphasis on the capacity of local coarse grain and domestic rice producers to respond to incentives needs to be increased.     

A model of West African millet prices in rural markets

In this article we specify a model of millet prices in the three West African countries of Burkina Faso, Mali, and Niger. Using data obtained from USAID’s Famine Early Warning Systems Network (FEWS NET) we present a unique regional millet price forecasting model that takes advantage of the panel nature of our data and accounts for the distance of rural markets from capital cities. Another novel aspect of our analysis is our use of the Normalized Difference Vegetation Index (NDVI) to detect and control for variation in conditions for productivity. We find that including NDVI information significantly improves price forecasts.     

Strategic segmentation of a market

When competing firms target information towards specific consumers through direct marketing activities, complete segmentation of markets can result. We analyze a two-stage duopoly where, prior to price competition, each firm targets information to specific consumers and only consumers informed by a firm can buy from it. This has the effect of endogenously determining market segments in a model of ‘sales'. In equilibrium, pure local monopoly emerges; firms target and sell to mutually exclusive market segments. When the cost of marketing approaches zero, market shares reflect relative production efficiency (equal shares when firms are symmetric); this may not be the case when marketing cost is high.     

Price promotions in emerging markets

How should price promotion strategies be modified in an emerging market (e.g., India, China) compared to those employed in developed markets (e.g., USA, Canada)? Specifically, how should the presence of middle-class consumers with limited ability to pay, prevalent in an emerging market, influence the depth and frequency of price promotions offered by competing firms? Lay intuition suggests that firms should promote more frequently and offer deeper discounts in emerging markets, in order to effectively sell to limited income, middle-class consumers. We construct a theoretical model that investigates the effect of the middle-class segment on firms' price promotion strategies. Contrary to lay intuition, our analysis reveals precisely the opposite results. First, price promotions offered in an emerging market (with middle-class consumers) are shallower than those offered in a developed market (without middle-class consumers). Second, relatively deep price promotions occur less frequently in an emerging market, compared to a developed market. These theoretical findings are consistent with the empirical evidence we gathered from the supermarkets in India and in Canada.     

MARKET SEGMENTATION WITH NONLINEAR PRICING*

We study the benefits and drawbacks of allowing firms to offer different price‐quality menus to captive consumers and to consumers more exposed to competition (market segmentation). We show that the effect of market segmentation depends on the relationship between the range of consumer preferences found in captive and competitive markets. When the range of consumer preferences in captive markets is ‘wide,’ segmentation is quality and (aggregate) welfare reducing, while the opposite holds when the range of consumer preferences in captive markets is ‘narrow.’ Segmentation always harms captive consumers, while it always benefits consumers located in competitive markets.     

Asymmetric Price Effects of Competition

When price dispersion is prevalent, a relevant question is what happens to the whole distribution of equilibrium prices when the number of firms changes. Using data from the gasoline market in the Netherlands, we find, first, that markets with N competitors have price distributions that first‐order stochastically dominate the price distributions in markets with N+1 firms. Second, the effect of competition is stronger for the medium to upper percentiles of the price distribution. Finally, consumer gains from competition are larger for relatively well‐informed consumers. To account for these empirical patterns, we extend Varian's [1980] model by allowing for richer heterogeneity in consumer price information.     

Hungary's meat price and trade policies : Conforming to some economic constraints of a socialist country

This paper analyses Hungary's price and trade policies for meat and livestock. Three policy constraints are discussed — the need to control consumer discontent, to provide employment, and to maintain close ties with the Council for Mutual Economic Assistance (CMEA) and the Soviet Union. Of particular interest are Hungary's exports of meat rather than grain, and the impact of policies on large and small producers and on Hungary's dependence on the Soviet market.     

Competition in Turkish mobile telecommunications markets: Price elasticities and network substitution

This paper estimates demand elasticities for Turkish mobile telecommunications markets. In contrast to most other studies, firm-level data is used to estimate dynamic panel data models including instrumental variable techniques. Both short- and long-run elasticities are calculated, yielding a long-run price elasticity of −0.72 for the post-paid market and of −0.33 for the pre-paid market. The short-run price elasticity is estimated to be −0.36 for the post-paid market and −0.20 for the pre-paid market. In addition, there is evidence of fixed-to-mobile traffic substitution for consumers who use pre-paid cards.     

House Prices and Regional Real Estate Cycles: Market Adjustments in Houston

Real estate cycles often generate sharp swings in real housing prices, price changes that cannot be adequately described by a single statistic such as median home values. Instead, the entire structure of prices across all quality levels must be examined. This paper analyzes the price impact of the Houston, Texas, real estate bust. It shows that the average price of housing fell, and that the structure of the housing price function itself changed. Changes in the marginal price of housing were probably more significant to the market equilibrating process than the decline in average price alone.     

INEFFICIENCIES AND MARKET POWER IN FINANCIAL ARBITRAGE: A STUDY OF CALIFORNIA'S ELECTRICITY MARKETS*

For two years prior to the collapse of California's restructured electricity market, power traded in both a forward and a spot market for delivery at the same times and locations. Nonetheless, prices in the two markets often differed in significant and predictable ways. This apparent inefficiency persisted, we argue, because most firms believed that trading on inter‐market price differences would yield regulatory penalties. For the few firms that did make such trades, it was not profit‐maximizing to eliminate the price differences entirely. Skyrocketing prices in 2000 changed the major buyers' (utilities') incentives and exacerbated the price differentials between the markets.     

Alcohol Prohibition and Pricing at the Pump*

Firms often sell a transparent base product and a valuable add-on. If only some consumers are aware of the latter, the add-on's effect on the base product's price will be ambiguous. Cross-subsidization between products to bait uninformed consumers might lower, intrinsic utility from the add-on for informed consumers might raise the price. We study this trade-off in the gasoline market by exploiting an alcohol sales prohibition at stations as an exogenous shifter of add-on availability. Gasoline margins drop by 5% during the prohibition. The effect is mediated by shop variety and competition. Using traffic data, we unveil sizeable consumer-side reactions.     

Price asymmetries and the path dependence of market power: Evidence from the U.S. airline industry

This paper uncovers price asymmetries across oligopolistic and monopolistic markets that are seemingly identical in structure but different in competitive history. This is done by identifying “quiet life” markets that have not (yet) experienced a change in structure, and “non-quiet life” markets that have been disrupted by firm entry and/or exit. Using a long panel dataset from the U.S. airline industry, we find that quiet life duopolies price significantly higher than duopolies that come about by entry in monopoly, and that quiet life monopolies price significantly lower than monopolies that come about by exit in duopoly. We show that the path towards a particular market structure matters for the determination of prices and explore several mechanisms that likely explain the price asymmetries, including engagement in anticompetitive behaviour, adjustment behaviour to market structure changes, and the cost heterogeneity of competing firms.     

Consumer behavior towards on-net/off-net price differentiation

This paper explores how consumers react towards price differentiation between on-net and off-net calls in mobile telecommunications - a pricing policy that is common in many mobile telecommunications markets. Based on a survey of 1044 students it is demonstrated that some consumers may suffer from a "price differentiation bias", i.e., a fair number of consumers may overestimate the savings that result from reduced on-net and/or off-net charges, as they do not appear to weigh the prices with the probabilities of placing off-net and on-net calls. This may help to explain why it have been the smaller operators in various countries who have introduced on-net/off-net price differentiation. The paper also discusses the implications that such a consumer bias may have for market competition.     

Quality differentiation and firms’ choices between online and physical markets

We study firms’ choices between online and physical markets with respect to product quality and competition, and examine consequences of transparency policies on price competition and market structure. We investigate two contrasting forces. First, since consumers cannot fully inspect an online product’s quality prior to purchase, conventional wisdom and some of the literature suggest that this attracts low-quality products to the online market (a pooling effect). On the other hand, the literature on vertical product differentiation indicates that a firm with a lower-quality product may prefer to reveal its product quality in the physical market because quality differentiation helps alleviate price competition (a differentiation effect). We show that an entrant firm with product quality lower than that of the offline incumbent may choose the physical market, whereas the entrant with a quality higher than the incumbent’s may sell online. More generally the two contrasting forces can give rise to a wide range of product quality—from low-end to high-end—in both markets.     

Quantifying the Effects of Price Discrimination Under Imperfect Competition*

This article analyzes the effects of broadband carriers switching from price discrimination to uniform pricing. Broadband carriers often use third-degree price discrimination. In Colombia, broadband carriers rely on government-issued socio-economic information to segment markets. I use demand and marginal cost estimates to quantify the effects of switching from price discrimination to uniform pricing in an environment of high income disparity. The results provide direct evidence of large consumer surplus transfers from poorer to wealthier households. Poorer households respond by subscribing to slower Internet plans, which may undermine prior efforts to increase download speeds in this demographic.     

Local impacts of a global crisis: Food price transmission,consumer welfare and poverty in Ghana

This paper takes a local perspective on global food price shocks by analyzing food price transmission between regional markets in Ghana. It also assesses the impacts of food price increases on various household groups. Taking the 2007–2008 global food crisis as an example, we show that prices for domestic grain products are highly correlated with world market prices. This is true both for products for which Ghana is highly import-dependent (e.g., rice) and the products for which Ghana is self-sufficient (e.g., maize). The econometric results also show that price transmission is high between regional producer markets and markets located in the country’s largest cities, and the distance between producer and consumer markets and the size of consumer markets matter in explaining the price transmission. The welfare analysis for households as consumers shows that the effect of world food prices appears relatively modest for the country as a whole due to relatively diverse consumption patterns within country. However, the national average hides important regional differences, both between regions and within different income groups. We find that the poorest of the poor—particularly those living in the urban areas—are hardest hit by high food prices. The negative effect of the food crisis is particularly strong in northern Ghana. The main explanations for this regional variation in the price effect is the different consumption patterns and much lower per capita income levels in the North of Ghana compared to other regions in the country.     

INPUT PRICE DISCRIMINATION WHEN BUYERS OPERATE IN MULTIPLE MARKETS*

This paper revisits third‐degree price discrimination when input buyers serve multiple product markets. Such circumstances are prevalent since buyers often use the same input to produce different outputs, and even homogenous outputs are routinely sold through different locations. The typical view is that price discrimination stifles efficiency (and welfare) by resulting in price concessions to less efficient firms. When buyers serve multiple markets, price discrimination leads to price breaks for firms in markets with lower demand. When lower demand markets also have less competition, price discrimination can provide welfare gains by shifting output to less competitive markets.     

Endogenous Mergers of Complements with Mixed Bundling

This paper studies endogenous mergers of complements with mixed bundling, by allowing both for joint and separate consumption. After merger, partner firms decrease the price of the bundled system. In addition, when markets for individual components are sufficiently important, partner firms find it strategically advantageous to raise the prices of stand-alone products, thus making substitute ‘mix-and-match’ composite products less attractive to consumers. Even though these effects favor the profitability of mergers, merging is not always an equilibrium outcome. The reason is that outsiders respond by cutting their prices to retain their market share, and mergers can be unprofitable when competition is intense. From a welfare analysis, we observe that the number of mergers that are observed in equilibrium may be either excessive (when markets for individual components are important) or suboptimal (when markets for individual components are less important).     

Search Costs, Lags and Prices at the Pump

Evidence is mounting that long lags and asymmetric price responses to changes in wholesale prices are characteristic of many retail markets. Although long lags are often attributed to search costs, little empirical evidence exists to support this claim. The analysis offered in this paper compares price responses in gasoline and diesel markets in 15 U.S. cities. Search costs vary across these two markets, and the evidence indicates a much faster response in the diesel market where search costs are lower. Asymmetric responses, where prices rise faster than they fall, are also evident in the data. While asymmetric responses have been attributed to oligopolistic behavior, the arguments presented in this paper point to search theory as an alternative explanation.     

COLLUSION AND FIGHTS IN AN EXPERIMENT WITH PRICE‐SETTING FIRMS AND ADVANCE PRODUCTION*

We present results from 50‐round duopoly and triopoly experiments. Firms decide repeatedly both on price and quantity of a perishable good. Each firm has capacity to serve the whole market. The stage game does not have an equilibrium in pure strategies. Most markets evolve either to monopolies as a consequence of bankruptcies or to collusion at the monopolistic price. Evolution is faster in markets with two than in those with three firms. Therefore, over time average price is lower with three than with two. Consumer surplus is higher with three firms, but efficiency is lower in markets with three firms.