Estimating Market Power of Tea Processing Sector

Abstract

It is generally believed that the food processing sector can exercise market power on raw material producers and final consumers. The objective of this study was to assess the degree of oligopoly and oligopsony power of the tea-processing sector. A partial equilibrium model was developed for the world market for tea, treating India, Kenya and Sri Lanka as raw tea producers and Canada, United Kingdom and the United States of America as tea consumers. An imperfectly competitive tea-processing sector was incorporated in the model allowing conjectural variation elasticity to represent the degree of market power. The model was econometrically estimated using the two-stage least square estimation procedure. Results of the econometric estimation show that all the market power estimates are statistically significant. The conjectural elasticity values in the input market are 0.0516, 0.0015 and 0.1657 for India, Kenya and Sri Lanka respectively. The conjectural variation elasticity in the output market is 0.1273. The elasticity of supply with respect to own prices are 0.0791, 0.2268 and 0.2060 for India, Kenya and Sri Lanka respectively. The elasticity of demand with respect to own prices are-0.4720,-0.1556 and-0.1237 for Canada, United Kingdom and the United States respectively. The resulting Learner Index for Sri Lanka is very small indicating that Sri Lankan tea producers are not significantly exploited by tea processors.