March 17, 2008 Buyer Concentration in Markets for Developing.pdfVIP

March 17, 2008 Buyer Concentration in Markets for Developing Country Exports Alan V. Deardorff* Indira Rajaraman** Abstract: This paper explores the implications of buyer concentration in markets for primary commodity exports of developing countries. Simple partial equilibrium models of monopsony and oligopsony show that the best available policy for the exporting country may be to tax exports so as to extract some of the profits of the monopsonist, even though doing so will actually worsen the distortion caused by the buyer’s market power. The paper also explores the general equilibrium implications of these results for factor markets and for patterns of trade. JEL Numbers: F12, F13, H21 Keywords: developing country exports, buyer concentration, optimal export tax ______________________ *University of Michigan, Ann Arbor, MI, USA. **National Institute of Public Finance and Policy, New Delhi 110067, India. Corresponding author: alandear@umich.edu (tel: 1-734-764-6817; fax 1-734-763-9181). An earlier version is posted with the title “Can Export Taxation Counter Monopsony Power?” as Discussion Paper 541, Research Seminar in International Economics, University of Michigan School of Public Policy, 2005. I. Introduction This paper explores the implications of buyer concentration in markets for primary commodity exports of developing countries. This was prevalent in colonial times for countries whose trade was delegated by a foreign colonial power to a single trading company like the British East India Company. It has become relevant again today with the markets for primary-product exports of developing countries increasingly dominated by small numbers of multinational buyers. Section II presents evidence of the trend towards small numbers of dominant buyers for two prim