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Assessing the market power of millers and wholesalers in the Bangladesh rice
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DOI: 10.1108/JADEE-04-2018-0053

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Assessing the market power of Market power

of millers and
millers and wholesalers in the wholesalers

Bangladesh rice sector

Mohammad Chhiddikur Rahman, Valerien Pede and Jean Balie
Agri-food Policy Platform, International Rice Research Institute, Manila, Philippines
Received 18 April 2018
Isabelita M. Pabuayon and Jose M. Yorobe Revised 30 September 2018
Department of Agricultural and Applied Economics, 2 December 2019
8 April 2020
University of the Philippines Los Banos, Laguna, Philippines, and Accepted 8 April 2020
Samarendu Mohanty
International Potato Centre, Hanoi, Viet Nam

Abstract
Purpose – Because of the increasing differential between farm and retail prices, the study proposes to
investigate the extent of market power in the rice value chain of Bangladesh using advanced econometric
techniques.
Design/methodology/approach – Using a Stochastic Frontier Estimation approach on cross-sectional data,
the study examines the price spread along the rice value chain to determine whether millers and wholesalers
exercise market power.
Findings – Empirical results reveal that, on average, rice millers and wholesalers charge 33 and 29% above
the marginal cost, respectively. This study confirms the non-competitive behavior of the rice market with
wholesalers and millers wielding substantial market power
Research limitations/implications – A limitation of the study is that it does not include the retailers who
also play a major role in the Bangladesh rice value chain. This is left for future study.
Originality/value – This study combines primary and secondary data collected on the Bangladesh rice sector
to examine the market power of two major players along the value chain, millers and wholesalers, using an
advanced econometrics approach.
Keywords Rice, Price spread, Value chain, Stochastic frontier analysis, Mark-ups
Paper type Research paper

1. Introduction
Rice is a staple food for about 160 million people in Bangladesh and plays a crucial role in
their livelihood (Siddique et al., 2017). Rice production is key to the political and agricultural
economy of Bangladesh, that is, the price of rice is a significant factor for GDP growth rate,
inflation, wages, employment, food security, and poverty (Murshid and Yunus, 2016). The
rice sub-sector absorbs about 48% of rural employment, delivers about two-thirds of total
calories, and represents one-half of the total protein intake of each person (Bangladesh
Bureau of Statistics, 2015). About one-half of the agricultural GDP and one-sixth of the
national income comes from the rice sub-sector. Nearly all farming households in Bangladesh
cultivate rice. It is produced on about 10.5 million hectares of land, which occupies about 75
and 80% of the total cropped and irrigated areas, respectively (Bangladesh Economic
Review, 2015).
The efficient functioning of the rice market is important for the welfare of producers and
consumers. Conversely, if markets are affected by issues—such as imperfect market Journal of Agribusiness in
information, lack of credit to finance short-run stocks, inadequate transportation, lack of Developing and Emerging
Economies
quality control, and market power—the potential welfare benefits that are expected from a © Emerald Publishing Limited
2044-0839
well-functioning market system cannot be attained. DOI 10.1108/JADEE-04-2018-0053
JADEE In Bangladesh, the government has a limited role in the procurement and distribution of
rice. Only 5–7% of the domestically produced rice is procured by the government. Such a
limited volume of intervention has a negligible impact on the pricing and distribution of
nearly 95% of domestically produced rice (Food Policy and Monitoring Unit, 2017). The
Bangladesh rice sector is primarily market-driven. However, millers and private traders
manage all levels of the rice value chain. These private traders, millers, and wholesalers
procure and sell domestically produced rice (Alam et al., 2016), which results in the large price
spread of farm and retail rice (Figure 1). In recent years, the potential market power of millers
and private traders has raised concerns. For getting closer to a situation where rice markets in
Bangladesh are competitive, researchers and policymakers may want to explore policy
options, including measures, to correct market failure. This study investigates the extent of
market power exercised by millers and wholesalers in the rice value chain of Bangladesh
using advanced econometric techniques.

2. Literature review
Market power represents the influence that an entity (e.g. a company) has on market price,
production, or the supply and demand of products and services (Bilkis and Halder, 2013). The
Bangladesh rice sector is controlled by a few well-organized sellers (millers and wholesalers),
creating an imperfectly competitive market structure. According to Sexton and Zhang (2001),

45
Farm Wholesale Retail

40

35
Price of rice (Tk./kg)

30

25

20

15

10
2012M1
2012M3
2012M5
2012M7
2012M9
2012M11
2013M1
2013M3
2013M5
2013M7
2013M9
2013M11
2014M1
2014M3
2014M5
2014M7
2014M9
2014M11
2015M1
2015M3
2015M5
2015M7
2015M9
2015M11
2016M1
2016M3
2016M5
2016M7
2016M9
2016M11
2017M1
2017M3
2017M5

Time
Figure 1. Particulars Farm Wholesale Retail
Trends and descriptive
statistics of farm, Mean (Tk./kg) 27.03 28.23 30.46
wholesale, and retail Standard Deviation 3.41 3.92 4.15
rice price series in Minimum 21.48 22.25 23.92
Bangladesh. Data
Maximum 33.50 40.50 43.33
source: Department of
Agricultural Count 66
Marketing, Period: Months January 2012 - June 2017
Bangladesh
Source(s): Department of Agricultural Marketing, Bangladesh
the exercise of such market power at any level of the market chain may reduce consumer Market power
welfare. Millers in the Bangladesh rice market are strongly associated and organized in what of millers and
resembles an oligopoly, and they can effectively control the price and supply of rice. Rice
wholesalers work with millers to capture the pricing power they exercise in the market.
wholesalers
Consequently, producers are bound to sell paddy at a price lower than the competitive market
price, whereas consumers face high buying prices (Abdullah and Hossain, 2013).
Several studies have assessed market power in food value chains. The New Empirical
Industrial Organization (NEIO) with General Identification Method (GIM) and the
Production-Theoretical Approach (PTA) have dominated such literature over the past
years (Perekhozhuk et al., 2017; Panagitou and Stavrakoudis, 2016). Many empirical studies
used the NEIO approach and found the presence of market power across value chains and
countries. In the food crops sector, market power was also examined in various areas. Bhuyan
and Lopez (1998) examined the US food industries and found that oligopoly caused a 5%
welfare loss. Kalantzi (2013) noticed the existence of market power in the Greek food market
and showed that mark-ups are negatively related to the number of firms. In the Australian
grains and oilseeds sectors, O’Donnell et al. (2007) found that processors exercise monopoly
and oligopsony toward consumers and producers. The study of Birthal et al. (2019) concluded
that the downstream market power of onion production is one of the major factors causing
high price volatility in the onion market in India.Yusuf and Trondsen (2014), on the other
hand, revealed that market power, in forms of access barriers, weakened competition in the
Indonesian crab industry.
The literature on methods for investigating market power has also evolved over time. The
traditional approaches assess market power based on market share and other characteristics
such as barriers to entry and closeness of competition (Meschi et al., 2018), and Structure-
Conduct-Performance or SCP (Perloff et al., 2007). More recent studies rely on the concept of
NEIO and the use of new econometrics methods for estimating market power—the
Generalized Methods of Moments (GMM), Empirical Likelihood (EL), Bayesian Methods of
Moments (BMM), Maximum Entropy (ME), and Generalized Maximum Entropy (GME)
(Perloff et al., 2007). Odongo et al. (2017) used Structural Equation Modeling (SEM) to
examine the role of power in supply chain performance. Stochastic Frontier (SF) also
considered in recent studies. For example, Lopez et al. (2015) employed the SF method to
estimate oligopoly power in 36 US food industries; Cechura et al. (2015) analyzed market
power in the European milk-processing sector using the SF approach; Panagitou and
Stavrakoudis (2016) also used the SF approach to estimate the market power in the US
meat-packaging sector.
The SF analysis essentially relies on the assumption that the divergence of a specific
decision-making unit from the expected frontier (a production or cost frontier) can be split
into two distinct parts: a classical stochastic noise part and an additional skewed residual that
captures individual inefficiency (Germeshausen et al., 2014). Kumbhakar et al. (2012) did not
consider the traditional production/cost frontier; rather, they estimated a frontier of the
proportion of revenue to the total cost. Further, the skewed residual denotes a firm-specific
mark-up term. This term is converted into a firm-specific estimate of the Lerner index, which
represents the relative mark-up of the price over the marginal cost. This ratio is used as a
measure of market power. This estimation process differs from traditional approaches to
examine market power (e.g. Bresnahan, 1989), and it offers several advantages. First, the
approach proposed by Kumbhakar et al. (2012) bears expressions for both time and
firm-specific mark-ups. It, therefore, delivers more comprehensive evidence of market power.
This is a clear advantage concerning other approaches that yield either time-constant or firm/
industry-constant estimates (e.g. the Hall-Roeger approach in Rezitis and Kalantzi, 2016).
Second, the procedure is not as restrictive as others. To capture the noise in the data, such as
supply/demand shocks, the model incorporates an error term. Moreover, it does not require
JADEE some commonly applied assumptions to get valid estimates, such as constant returns to scale
or definite demand conditions.
As is the case for many empirical studies, data availability is a central issue
(Germeshausen et al., 2014). For the estimation process applied in this paper, we rely on
price data that are available for all inputs and outputs, and we draw on the SF method based
on the efficiency estimation to measure mark-ups. To present the technology and to
subsequently measure the degree of oligopoly, this approach uses both primal and dual
specifications. The SF approach allows market power to be measured in constant or variable
return to scale, which allows for more flexibility in the estimation of mark-ups.
Although there have been several attempts to examine market power in the rice sector of
Bangladesh, the techniques previously applied did not make use of the most recent
econometric methods, such as the SF analysis, although it has proved to more accurately
estimate market power (see Kumbhakar et al., 2012). To our knowledge, there is no other
study that has used the SF approach (despite its advantage over the more commonly used
methods) to estimate market power along the rice value chain in Bangladesh.

3. Overview of the rice sector in Bangladesh

Millers and wholesalers are influential players in the Bangladesh rice value chain. Most
millers purchase paddy from farmers through commissioned agents or wholesalers (CBECL-
BD, 2014). A large number of millers operate throughout the country, but their exact number
varies widely in the literature. A recent estimation from the Ministry of Agriculture indicates
that there are about 16,000 rice mills across Bangladesh (Directorate General of Food, 2019).
However, many of them operate for only a few months during the year. According to Hossain
et al. (2012), three types of mills operate in Bangladesh: fully automatic mills, semi-automatic
mills, and hauler/husking mills. The major players are a small number of millers who operate
fully and semi-automatic mills and have control over rice processing (CBECL-BD, 2014).
These millers are well-organized and operate in an association, as do wholesalers who often
coordinate with them. Based on prices set by the millers, the wholesalers are able to set and
enforce their own prices in a particular marketplace or region.
The rice supply chain of Bangladesh is represented in Figure 2. In the rice supply chain,
the Farias are small businessmen who collect paddy from farms and households at farm-gate
prices and supply the Beparis, Aratdar, or millers [1]. The Farias and the Beparis do not have
a physical place in the market. They operate in farming areas to collect paddy to sell to
Aratdar and millers, who are often well-connected. In many cases, the millers provide cash in
advance to Aratdar, with instructions about the quality of paddy, its quantity, and price
range. The Aratdar purchase the paddy following these instructions and deliver to millers.
The Aratdar may also act as wholesalers; in this case, they are referred to as Aratdar-cum-
wholesalers. Aratdar, wholesalers, and Aratdar-cum-wholesalers may purchase milled and
processed rice from the millers to supply consumers directly or through retailers. Millers bear
the transportation costs to transfer the rice to the wholesalers, who receive their payment only
after the rice is sold.
The government procurement and distribution process is managed by the Directorate of
Food (DOF) and the Public Food Distribution System (PFDS) [2]. The procured paddy is
supplied by selected farmers and stored in silos, local storage depots (LSD), and central
storage depots (CSD) [3]. The stored paddy is later transferred to selected rice mills for
processing. The processed rice is kept in storage at the DOF for distribution to consumers
through social safety net programs.
A comprehensive study on the Bangladesh rice market structure was conducted by Raha
et al. (2013) using the Structure-Conduct-Performance (SCP) approach. According to these
authors, millers capture about 45.4% of the marketing margin; rice wholesalers, about 27%;
 Govt. Procurement
Market power
Social safety nets of millers and
wholesalers

Faria
Aratdar-cum-
Wholesaler Consumer

Retailer
Farmer Bepari Rice Mill Aratdar

Aratdar-cum-
Wholesaler Wholesaler Figure 2.
Rice Supply Chain in
Bangladesh.
Developed by authors
Miller’s Agent Wholesaler-cum-Retailer based on information
from Raha et al. (2013)
and Mujeri et al. (2014)
Note(s): Dash line represents paddy and solid line represents rice supply

paddy wholesalers, 5%; and rice retailers, 10%. Unlike Raha et al. (2013), Reardon et al. (2013)
found that the share of the marketing margin was distributed as follows: farmers, 52%;
paddy wholesalers, 12%; rice wholesalers, 4%; millers, 8%; and rice retailers, 24%. Reardon
et al. (2013) deviated from the general practice by including the farmers in the breakdown of
marketing margins. Different methods and research teams have led to different estimates of
the share of the marketing margins in the rice value chain of Bangladesh.
Raha et al. (2013) also described the Bangladesh rice market as being dominated by rice
millers who are the key players in the rice value chain, controlling the forward and backward
linkages. At the upstream of the value chain, many farmers supply paddy to wholesalers,
which, as we have seen, are well-organized and well-coordinated but are sometimes controlled
by a few dominant millers. As a result, the wholesale and milling levels operate as an
oligopsony. Down the value chain, a similar picture emerges. A few rice millers and wholesalers
(also well-organized and coordinated) supply to a large number of consumers and de facto
operate as an oligopoly (Raha et al., 2013). Evidence of the dominance of millers in controlling
rice prices is also discussed in Zaman et al. (2001). Their study reveals that rice millers act as
“speculative” investors, effectively capturing market benefits through purchasing and selling
tactics to maximize their profits. As a group, millers decide the quantity of paddy to be
purchased and the price to be offered to farmers. Concerns about these speculative practices
and market control have also recently received attention in the Bangladeshi media [4].

4. Method
To assess the market power in the Bangladesh rice value chain, we used the Stochastic
Frontier Analysis (SFA) approach proposed by Kumbhakar et al. (2012). The SFA approach
starts from the basic set-up of an industry exposing oligopoly at the point where output
price outstrips the marginal cost of production (Lopez et al., 2015). The research question can
be addressed by estimating a mark-up model and employing the stochastic frontier
JADEE methodology. The mark-up model is derived from the standard profit maximization problem.
The solution of the optimization problem results in the price of the product; price is equal to
the total marginal cost for a competitive market, and price exceeds the marginal cost for a
non-competitive market:
vC
P≥ (1)
vY
where, P is the price of output, Y is the output, and C is the total cost.
Multiplying both sides of the equation (1) by the share of output on total costs, we can
write:
P:Y vC Y vlnC
≥ : ¼ (2)
C vY C vlnY
The inequality can be transformed into equality by adding a non-negative, one-sided error
term (u), where u will represent a measure of market failure. Then, equation (3) can be
estimated using the stochastic frontier methodology first introduced by Kumbhakar et al.
(2012).
PY vlnC
¼ þu (3)
C vlnY
where, u ≥ 0, PY is the total revenue, C is the cost of production, vlnC=vlnY is the elasticity of
scale, and u is the non-negative, one-sided error term indicating the mark-up. Equation (3)
requires the estimation of the first derivative of the cost function. Since price information is
available, the duality theorem should not be employed (Kumbhakar et al., 2012). The elasticity
of scale, vlnC=vlnY, will be obtained from the trans-log cost function, which is defined as:
X
J X
J X
J
lnC ¼ β0 þ βj lnWj þ 0:5 βjk lnWj lnWk þ βY lnY þ 0:5βYY ðlnY Þ2
j¼1 j¼1 k¼1

X
J
þ βjY lnWj lnY (4)
j¼1

where βs are unknown parameters to be estimated, C denotes total cost, Y is the volume of
output, and W represents input prices. Through equation (4), with symmetry imposed, we get
the expression of vlnC=vlnY that follows (details on the expression of equation (4) and
vlnC=vlnY are presented in Appendix 1) the elasticity of scale is given as:
vlnC
¼ βY þ βYY lnY þ βYM lnwM þ βYL lnwL þ βYE lnwE þ βYO lnwO þ βYTr lnwTr
vlnY
þ βYK lnwK (5)

Substituting equation (5) with (3), adding a variable capturing statistical noise (v), and
imposing the homogeneity restriction by normalizing all input prices with respect to the price
of capital, the equilibrium condition can be written as:
PY wM wL wE wO wTr
¼ βY þ βYY lnY þ βYM ln þ βYL ln þ βYE ln þ βYO ln þ βYTr ln þuþv
C wK wK wK wK wK
(6)
The combined error term (u þ v) is similar to the one in the SF cost function. Assuming u is Market power
half-sided normal, which means u ∼ N þ ð0; σ 2u Þ, and v is the two-sided normal, which means of millers and
v ∼ Nð0; σ 2v Þ, we can use equation (6) to estimate the stochastic cost frontier with a maximum
likelihood approach. In the case of an SF cost function, the u term measures the cost
wholesalers
inefficiency, but in equation (6), it is treated as the mark-up.
There is a correlation between the mark-up and the degree of market power. The degree of
market power can be represented as θ ¼ ðP − MCÞ=MC [5]. Kumbhakar et al. (2012) expressed
market power as a function of the mark-up (u). By using the estimated mark-up (b u), the market
b
power (θ) can be obtained as:
b b
u
θ¼ (7)
c
vlnC
vlnY

Equation (7) indicates that a firm’s degree of market power increases, decreases, or remains
vlnC
constant when there is an increasing return to scale (vlnY < 1), decreasing return to scale
vlnC vlnC
(vlnY > 1), or constant return to scale (vlnY ¼ 1), respectively. The return to scale (RTS) and the
Lerner index (ℒ) are presented in equations (8) and (9), respectively.
!
d 1 d
vlnC
RTS ¼ (8)
vlnY
b ¼b
ℒ θ=ð1 þ b (9)
θÞ

The degree of market power can also be measured using the Lerner Index. It is the deviation
of the marginal cost from the product price and as a portion of the price.
ðP % MCÞ
ℒ¼ (10)
P
The Lerner index varies from 0 to 1. A Lerner Index closer to 1 denotes a weak competitive
market and the existence of market power. Rearranging the Lerner Index, we get:
" #
1
P¼ MC (11)
1%ℒ

where ð1 −1ℒÞ is the mark-up factor.

If the market is perfectly competitive ðP ¼ MCÞ, then no market power exists, and the
Lerner Index is zero ðℒ ¼ 0Þ.

5. Survey design and data collection

The data used for this empirical analysis are collected from millers and wholesalers of rice
markets in Bangladesh. Data were collected through structured interviews conducted from
June to August 2017. In this survey, 160 mills and 240 wholesalers were selected from 32
districts in eight divisions (Figure 3). From each district, five mills and seven or eight
wholesalers were selected.
The output (Y) for the millers and wholesalers is milled rice. The amount of rice sold is
measured in metric tons (thousand kilograms). The inputs in rice processing include paddy,
labor, capital, energy, transportation, and other materials. Price and quantity data on these
inputs were collected during face-to-face interviews.
The price of raw materials (wM ) is the amount of money spent per ton of paddy and rice
purchased by millers and wholesalers, respectively. The price of labor (wL) is the daily wage
JADEE

Figure 3.
Study sites in the eight
divisions of
Bangladesh. The map
was drawn by the
authors

of labor [6]. The price of energy (wE ) is the cost of electricity per day. The cost of other
materials (wO) is recorded weekly during interviews but was transformed into per-day basis
[7]. The price of capital (wK ) is the bank interest rate. The price of transportation (wTr) was
collected weekly as well but also transformed into per-day basis. Millers bear the
transportation cost, and as such, wholesalers do not have to pay for it. Tables 1 and 2
Variable Unit Mean Std. dev. Min Max
Market power
of millers and
Revenue share wholesalers
(PY
C) – 1.28 0.65 0.95 4.16
Output
Y ton/day 22.31 15.80 1.40 71.50
Input prices
wM Tk./ton 25319.69 517.86 24000 27000
wL Tk./day 142.11 16.33 120.00 180.00
wE Tk./day 830.06 675.46 13.33 3,000.00
wO Tk./day 3029.55 2672.56 571.43 12857.10
wTr Tk./day 2939.52 2297.15 428.57 9142.86 Table 1.
wK Percent 12.61 1.12 10.00 15.00 Descriptive statistics
Source(s): Survey with rice millers on rice millers

Variable Unit Mean Std. dev. Min Max

Revenue share
(PY
C) – 1.25 0.45 0.96 3.76
Output
Y ton/day 2.52 4.65 0.09 34.29
Input prices
wM Tk./ton 41127.08 1945.25 36000 50000
wL Tk./day 228.67 74.55 80.00 500.00
wE Tk./day 23.45 23.96 3.57 142.85
wO Tk./day 113.02 156.87 3.57 892.86 Table 2.
wK Percent 11.72 1.72 10.00 17.00 Descriptive statistics
Source(s): Survey with rice wholesalers on rice wholesalers

show descriptive statistics on output and input prices for millers and wholesalers,
respectively. The revenue share is quite similar for millers and wholesalers, but differences
exist on the price of inputs. As expected, millers exhibit higher capacity in terms of output per
day. The prices of raw materials and labor are higher for wholesalers who also enjoy lower
interest rates on capital, whereas millers spend more on electricity and other materials.

6. Results and discussion

Tables 3 and 4 show the estimated mean and standard deviation of the mark-up component
u), mark-up (b
(b θ), return to scale (RTS), and the Lerner index (ℒ), which indicates the degree of
market power exerted by rice millers and wholesalers. The estimated mark-up (b θ) is about
0.33 for millers and 0.29 for wholesalers. These estimates suggest that, on average, rice
millers charge about 33% beyond the marginal cost, whereas wholesalers’ margins are 29%
above the marginal cost. These results are in line with findings from previous studies on the
Bangladesh rice value chain. Raha et al. (2013) indicated that only a small proportion of the
miller-to-retailer price spread can be attributed to market power, whereas a large share of
margin spread is captured by millers (45.7%) and wholesalers (22.59%) as a result of their
collusive strategies. The value of the Lerner Index (ℒ) is significantly greater than zero (0.15
for millers and 0.16 for wholesalers), confirming that the rice market is far from being
JADEE competitive and that millers and wholesalers exercise market power. Estimated parameters
for the stochastic cost function are presented in Tables A1 and A2 (see Appendix 2).To our
knowledge, there are no previous studies in the context of Bangladesh that estimated market
power in the rice value chain. The closest study to this one is that of Raha et al. (2013), but they
did not estimate market power. Estimates in this study remain within the range of those
obtained in other studies in the agro-industrial sector. Specifically, Lopez et al. (2002) found an
oligopoly power of 0.25 for US rice milling industries. Azzam and Pagoulatos (1990) estimated
a market power of 0.22 in the US meat processing sector. The market power of US food
industries was measured at 0.18 by Bhuyan and Lopez (1997). Lopez (1984) estimated a
market power of 0.19 for Canadian food processing industries. O’Donnell et al. (2007)
estimated a market power of 0.14 in the Australian wheat output market. They also found a
market power of 0.27 and 0.25 for the Australian wheat and barley input market, respectively.
The market power of the US hog and pork market was estimated at 0.32 by Zheng and
Vukina (2009). Recently, Lopez et al. (2018) used the SF approach and estimated the market
power of US food industries at 0.47.
The existence of substantial market power in the rice market of Bangladesh is indicative
of market failures and should get the attention of researchers and policymakers. Excessive
control over prices, capturing of rents, and the restriction on price adjustment along the rice
value chain are matters of concern from both efficiency and equity standpoints. Ward (2010)
pointed out that even a minor degree of market power can translate into significant welfare

Variable Mean Std. dev. 1st quartile Median 3rd quartile

Half-normal distribution for the u term

b
u 0.320 0.645 0.031 0.089 0.159
b
θ 0.331 0.667 0.032 0.093 0.165
RTS 1.037 0.012 1.029 1.037 1.047
ℒ 0.155 0.199 0.031 0.085 0.142
Exponential distribution for the u term
Table 3.
b
u 0.319 0.646 0.033 0.090 0.159
Mark-up and return to b
scale estimates of rice θ 0.331 0.667 0.034 0.093 0.165
millers based on the RTS 1.037 0.012 1.029 1.036 1.046
cost function ℒ 0.155 0.199 0.033 0.085 0.142
approach (n 5 160) Note(s): Authors’ estimation. The results are based on Equations (6-9)

Variable Mean Std. dev. 1st quartile Median 3rd quartile

Half-normal distribution for the u term

b
u 0.285 0.449 0.027 0.115 0.290
b
θ 0.295 0.464 0.028 0.120 0.300
RTS 1.035 0.011 1.028 1.036 1.042
ℒ 0.169 0.177 0.028 0.107 0.231
Exponential distribution for the u term
Table 4.
b
u 0.285 0.449 0.027 0.115 0.290
Mark-up and return to b
scale estimates of rice θ 0.295 0.464 0.028 0.119 0.300
wholesaler based on RTS 1.035 0.011 1.029 1.037 1.042
the cost function ℒ 0.169 0.177 0.027 0.106 0.231
approach (n 5 240) Note(s): Authors’ estimation. The results are based on Equations (6-9)
effects. In the case of Bangladesh, we show that the rice value chain is affected by a high Market power
degree of market power exercised by both rice millers and wholesalers. of millers and
Although estimating the welfare implications of market power is beyond the scope of this
paper, it is suggested that it be analyzed in future research. The policy implications of this
wholesalers
research are worth noting. It appears that the simple “laissez-faire” currently observed by the
government of Bangladesh leads to power concentration at the wholesale and milling stages.
The presence of substantial market failures may justify policy intervention. One such policy
option is to encourage forming organizations for smallholder farmers/producers so that they
will be in a better bargaining position in both input and output markets.
Under the current rice procurement program, the government purchases a fixed quantity
of paddy/rice at a minimum support price (MSP). Although the MSP program is intended to
benefit farmers, it faces several challenges. The procurement quantity is very small (about
5% of the total production). In addition, farmers face challenges such as high transportation
costs (due to the distance from the farm to the procurement center), long waiting time to sell
their products, substantial price discounts based on allegedly unmet product quality
requirements, and the overall lack of transparency in the procurement process. These issues
must be addressed to provide a viable alternative to farmers who could decide where to sell,
and as a result, reduce the market power of dominant millers and wholesalers.
Another possible policy measure to be considered is to further deregulate rice markets and
develop an enabling environment to ease agribusiness. It will encourage new wholesalers and
millers to enter the market and compete with the existing oligopoly at the middle level of the
rice value chain. More competition at the wholesale and milling levels will most likely bring
margins down and benefit both farmers and consumers. Should competition still be
insufficient, the government can come up with more forceful interventions. One option could
be the possibility of establishing price ceilings for the consumer and price floors for the
producer. Such a price band within which market prices could fluctuate can be envisioned
and adjusted based on price movements in the world market. Alternative formulas for the
width of the price band can be explored. Before introducing such radical measures, these
should be announced and discussed transparently to allow targeted operators to change
behaviors preemptively. If the announcement does not dissuade operators, such a price
mechanism can be enforced for a limited duration during the year, depending on the real price
seasonality observed. Any such measures will need careful ex ante assessments as they will
likely require substantial investments in terms of price and cost monitoring, enforcement, and
administration. Based on their market-distorting nature, such interventions must be
considered as a last resort to address market power.

7. Conclusion and policy implication

The purpose of this study was to estimate the degree of market power millers and wholesalers
have in the Bangladesh rice value chain using the Stochastic Frontier (SF) approach.
Estimates from the SF approach reveal the oligopolistic power used by rice millers and
wholesalers. Results show that both rice millers and wholesalers have a high degree of market
power. On average, the rice millers charge 33% beyond the marginal cost, whereas
wholesalers capture margins that are 29% above the marginal cost. The Lerner Index for the
millers and wholesalers are both significantly greater than zero, which means that the rice
market is not competitive. This also indicates a market influence dominated by millers and
wholesalers. Therefore, a large proportion of the farm-to-retail price spread in the rice value
chain is attributed to market power, and wholesalers with millers are the key actors with high
market power. Government policies to incentivize increased competition among the rice value
chain actors, as well as the due implementation of antitrust laws, are reasonable solutions to
mitigate market power in the rice value chain of Bangladesh. Moreover, the underlying
JADEE factors contributing to the high market power of only a few dominant operators in the middle
of the value chain deserve to be studied. Although we believe that the environment set by the
dominant millers and wholesalers in the value chain (strong association, better organization,
tight control at forward and backward levels, etc.) might be conducive to such high market
power, we suggest that it be further investigated in future studies. This study used a rigorous
econometric approach to investigate and ascertain market power in the Bangladesh rice value
chain. Given this result, targeted policy interventions are deemed necessary to address such a
market failure. Among the options to be considered by the government of Bangladesh is the
procurement mechanism and its requirements that need to be revisited to offer a viable and
credible alternative for farmers. Likewise, measures to increase competition in the middle of
the value chain should be prioritized and fully explored to encourage the emergence and
development of agribusiness.

Notes
1. The Beparis are intermediaries who purchase paddy from the Farias and sell to Aratdar (traders
established in a physical marketplace, with a license to operate) and millers.
2. The goal of the Public Food Distribution System (PFDS) is to ensure availability of cereal food at
affordable prices, especially for people living below the poverty line (see Alam et al., 2014).
3. Across the country, there are 5 silos, 13 central storage depots (CSD), and 600 local storage depots
(LSD) established in strategic locations.
4. An article by The Daily Star (published on November 19, 2019) under the title “Rice gets pricier”
exposes the recent soaring in rice retail price and discusses how it affects consumer welfare.
5. MC represents marginal cost.
6. 8 h of work is equivalent to 1 day of work.
7. The cost of electricity and other materials were obtained on a weekly basis because most wholesalers
could not recall the daily estimate. For consistency in our estimation, it was transformed into per-day
basis. Other materials include sacks, ropes, yarn for sewing, lubricant, etc.

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Appendix 1 Market power
Translog cost function and restrictions
of millers and
wholesalers
1
lnC ¼ β0 þ βy lnY þ βYY ðlnY Þ2 þ βM lnWM þ βL lnWL þ βE lnWE þ β0 lnW0 þ βTr lnWTr
2
þ βK lnWK þ βYM lnY lnWM þ βYL lnY lnWL þ βYE lnY lnWE þ βYO lnY lnWO
1
þ βYTr lnY lnWTr þ βYK lnY lnWK þ βMM ðlnWM Þ2 þ βML lnWM lnWL
2
þ βME lnWM lnWE þ βMO lnWM lnWO þ βMTr lnWM lnWTr þ βMK lnWM lnWK
1
þ βLL ðlnWL Þ2 þ βLE lnWL lnWE þ βLO lnWL lnWO þ βLTr lnWL lnWTr
2
1
þ βLK lnWL lnWK þ βEE ðlnWE Þ2 þ βEO lnWE lnWO þ βETr lnWE lnWTr
2
1
þ βEK lnWE lnWK þ βOO ðlnWO Þ2 þ βOTr lnWO lnWTr þ βOK lnWO lnWK
2
1 1
þ βTrTr ðlnWTr Þ2 þ βTrK lnWTr lnWK þ βKK ðlnWK Þ2
2 2

wL 5 price of labor, wM 5 price of raw material, wE 5 price of energy, wTr 5 price of transportation,
wK 5 price of operating capital, and wO 5 price of other materials. We applied symmetric restriction in
the equation above as βLM ¼ βML, βLE ¼ βEL, βLTr ¼ βTrL, βLK ¼ βKL, βLO ¼ βOL,
βME ¼ βEM , βMTr ¼ βTrM , βMK ¼ βKM , βMO ¼ βOM , βETr ¼ βTrE , βEK ¼ βKE , βEO ¼ βOE ,
βTrK ¼ βKTr , βTrO ¼ βOTr and βKO ¼ βOK . Through the translog cost equation, with symmetry
imposed, we get the expression of vlnC=vlnY as:
vlnC
¼ βY þ βYY lnY þ βYM lnwM þ βYL lnwL þ βYE lnwE þ βYO lnwO þ βYTr lnwTr
vlnY
þ βYK lnwK

Appendix 2
Estimation of cost functions

Half-normal u distribution Exponential u distribution

Parameters Estimate Standard error Estimate Standard error

βY 1.30571 0.00791 1.35874 0.00006

βYY %0.00699 0.00033 %0.00620 1.75E-06
βYM %0.06361 0.00118 %0.06974 8.83E-06
βYL 0.05102 0.00047 0.04659 8.27E-06
βYE 0.00271 0.00013 0.00495 6.84E-07
βYO 0.00681 0.00013 0.00595 4.60E-07
βYTr %0.00136 0.00014 %0.00166 1.37E-06 Table A1.
σv 2.00E-08 3.61E-06 1.37E-09 3.18E-07 Parameter estimates
σu 0.71852 0.04017 0.31942 0.02525 for the rice miller cost
Note(s): The results are based on Equation (6) function
JADEE Half-normal u distribution Exponential u distribution
Parameters Estimate Standard error Estimate Standard error

βY 1.07519 0.00019 1.05972 0.00004

βYY 0.00574 6.4E-07 0.00575 3.8E-07
βYM %0.01731 0.00002 %0.01563 4.6E-06
βYL 0.01106 0.00001 0.01207 1.6E-06
βYE %0.00650 4.9E-06 %0.00609 7.3E-07
βYO 0.00121 7.6E-06 0.00057 5.6E-07
Table A2. σv 5.2E-10 3.6E-07 3.0E-09 3.4E-07
Parameter estimates σu 0.53060 0.02422 0.28457 0.01837
for the cost function of Note(s): The results are based on Equation (6). The transportation cost is absent here as the wholesalers do not
wholesaler bear it

Corresponding author
Mohammad Chhiddikur Rahman can be contacted at: m.c.rahman@irri.org

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