Price Gap along the Ugandan Coffee Value Chain

Relation between price transmission and structure of agricultural markets is strongly debated in the literature and no consensus has been reached about symmetry, degree of such transmission and its mechanisms, so that further research is needed. This paper tests whether in markets where infrastructure quality is poor and transport costs are relevant, geographic dispersion of smallholder farmers allows traders to exploit their market power against farmers with a large impact on market structure and reduction of farmers’ welfare. Following the intuition of (Fafchamps et al., 2005), (Sexton, 2013) and (Swinnen and Vandeplas, 2014), the study provides a structural approach based on a set of well-founded behavioural equations to evaluate whether spatial oligopsony power is prevailing in agricultural markets and in case how strong it is. The paper designs also a far-reaching empirical test of the hypotheses through the seemingly unrelated regression technique. Moreover, it provides a strong empirical base to value chain studies, by exploiting the database of the Living Standard Measurement Study. The paper addresses the issue of transportation infrastructure as hindering factor of development in Uganda as outlined in several reports by World Bank, FAO and MAFAP and assesses the costs of such bottleneck, which are larger than transport expenditures. Results confirm that geographic dispersion of smallholder farmers plays a significant role on price margin and that there is room for local oligopsony, because traders overcharge transport and transaction costs to farmers.