This book presents a novel, integrated, multi-market framework of market and policy analysis that explicitly accounts for the empirically relevant heterogeneity in consumer preferences or/and incomes; heterogeneous producers; imperfectly competitive input suppliers, processors or/and retailers; and links and interactions between the agri-food supply channels of interest. The explicit consideration of consumer and producer heterogeneity represents a significant departure from the representative consumer and producer that have been at the center of most of the literature on market and policy analysis, and enables the distributional impacts of changes in market conditions and policies to be fully identified.
Once the general framework of analysis has been developed, it is used to analyze the system-wide market and welfare impacts of a number of changes in market conditions (like changes in consumer preferences, costs and market structure) and policies (like subsidies and taxes) on one of the products in the system. Consistent with a priori expectations, the use of the framework unveils impacts masked by the conventional market and policy analysis.
Overall, the analysis of the system-wide economic effects of the changes in market conditions and policies reveals that: (a) the qualitative nature of the welfare effects on the consumers and producers of the substitute products is case-specific and dependent on the conditions in the market for both the reference/regulated product and the substitute product; (b) the impacts of these changes in market conditions and policies are asymmetric across the different consumers and producers involved; (c) determination of these asymmetric impacts requires a disaggregation of the benefits and costs to the level of the individual agent; and (d) the conventional analysis fails to provide a proper allocation of the costs and benefits of these changes in market conditions and policies to the various consumer and producer groups involved.
In particular, the analysis shows that allocating the costs and benefits according to the demand and supply curves in each market overstates the gains and losses in the markets for the reference/regulated product and its substitute. While these overstated amounts cancel each other out at the aggregate level, they yield incorrect results if they are used to determine the distributional impacts of changes in market conditions and policies.
Thus, in addition to enhancing the empirical relevance of market and policy analysis by allowing the research to account for key elements of the increasingly industrialized agri-food system, the explicit consideration of consumer and producer heterogeneity enables the analysis to disaggregate these interest groups and correctly identify the effects of different market changes and policies on different consumers and producers. This is important as better measures (and understanding) of the economic impacts of changes in market conditions and policies can lead to improved policy design, enhanced efficiency, increased effectiveness, and reduced policy failures.