Market Structure and Price: An empirical analysis of Irish potato markets in Kenya

Abstract

In many developing countries, Kenya included, food markets are characterised by information asymmetry, inadequate storage and transport infrastructure and weak physical and institutional market organisation. This study seeks to examine recent trends in domestic Irish potato prices in the production markets of Nakuru and Eldoret and the consumption markets of Nairobi and Mombasa, and investigate the relationship between market structure and price of Irish potato in the different markets. Monthly market data from January 1998 to May 2011 is used. The results show that there is a general rise in the price of potatoes. The farm-gate share of wholesale market prices for ware (fresh) potato increased in Nakuru and Eldoret to 52 percent in 2010 from 35 percent in 2009. These percentage shares suggest that there exist large marketing margins that are accrued by middlemen and brokers. Potato markets are oligopolistic in nature; a few market participants in the form of rural brokers, urban brokers and transporters have the market power. There are barriers to entry at the urban market centres where brokers provide the link between wholesalers and retailers. In many cases, brokers and transporters determine the market price for each potato consignment. The markets are integrated and price transmission does occur; however it is incomplete, the results showed that long run price transmission proportions range between 25 and 59 percent, implying that, the spatial arbitrage conditions are wanting in the markets that were examined. Proposed interventions include facilitation and up-scaling of market information sharing; investment in physical infrastructure (including storage and roads) to facilitate trade; and provision of incentives to encourage public-private partnerships in storage, distribution and marketing. From a policy perspective, efforts should be made to facilitate arbitrage through the improvement of storage and physical market infrastructure