Incorporating Domestic Marketing Margins into the GTAP Model

Transportation, wholesaling, and retailing activities are a significant segment of economic activity in many economies. The magnitude of these activities can vary greatly between products, users, and regions. However, in most applied general equilibrium (AGE) analyses, these marketing activities are not tied to specific commodities. This paper develops a framework for incorporating domestic marketing margins on domestic and imported goods going to final demand or used as intermediate inputs, and margins on exports into the standard GTAP model. Empirical applications that focus on technological change at the farm, processor, and wholesale/retail segment of food marketing chain illustrate three key findings concerning including domestic marketing activities in AGE models. First, the inclusion of domestic margins reduces the degree of producer price changes transmitted to consumers. Therefore, by not explicitly treating domestic margin activities, AGE models will overestimate the welfare gains from technological change, or any policy liberalization. Second, the magnitude of the elasticity of substitution between commodities and the composite marketing activity is a key parameter. Significant model results are obtained depending on whether the domestic marketing margins are assumed to be fixed or are allowed to vary. Finally, when considering technological change at the farm, processing, and wholesale/retail trade levels of food marketing channel, the welfare gains appear to be much greater the closer one gets to consumers.