Competition in Competing Value Chains

This paper presents a framework addressing how the characteristics of the intermediate sector can influence the outcomes of supply shocks or policy reforms. In the benchmark model, the intermediary sector is imperfectly competitive and supplies an imperfectly competitive retail sector and can exert buyer power vis-à-vis producers from a single source country. This benchmark model is expanded in a number of ways: intermediaries may source from more than one country; intermediaries compete in procurement markets with foreign intermediaries that supply an imperfectly competitive sector in another country; intermediaries are multinational firms than can simultaneously procure from more than one supplier and distribute to more than one country; intermediary multinationals are vertically integrated producers in the supplying countries. We focus on how these alternative characterisations impact on the outcome of price shocks originating in one supplying country and the distribution of the impact on consumers, firms in the value chain (retailers and intermediaries) and producers. We motivate and calibrate the theoretical model to trade in bananas, the 4th most important commodity traded globally and where the intermediate sector has undergone substantive changes in recent years due to the reduced influence of vertically-integrated multinational firms.