Spatial Dispersion of Retail Margins: Evidence from Turkish Agricultural Prices

One sentence summary: The farmer share of Turkish grocery prices is only about 16 percent, corresponding to about 84 percent of a distribution share (77 percent of retail margins and 7 percent of transportation costs).

Non-technical Summary

The portion of agricultural retail prices received by farmers, the so-called farmer share, is about 15 percent across countries. Accordingly, the distribution share consisting of transportation costs and retail margins constitute the bigger portion of retail prices. The decomposition of this distribution share into its components is important to understand the welfare and policy implications for both consumers and farmers. For example, if the distribution share is high due to transportation costs, the optimal policy to improve welfare would be to reduce them through investments on infrastructure or subsidies on transportation-related costs, while if the distribution share is high due to retail margins, they can be subject to effective price regulations that can increase consumer welfare due to lower prices and increase farmer welfare due to higher sales. Since retail margins increase with the market share, the effects of retail margins (and thus the corresponding price regulation) may even be higher in regions with higher market power. Accordingly, it is essential to have a decomposition of the distribution share both an average and across regions to achieve optimal policies.

This paper achieves such decomposition by using retail- and farm-level micro price data on agricultural products across Turkish regions. In order to have an empirical motivation and implications for welfare, a simple model is introduced, where the economic environment consists of regions inhabited by individuals who consume local retail goods and retailers who purchase traded-inputs from producers subject to transportation costs. Since we empirically focus on individual products of green groceries, producers correspond to farmers who produce homogenous goods. Accordingly, each retailer searches for the minimum price across farmers at the product level, subject to transportation costs. Once transportation costs and source farms are identified through estimations based on price data obtained from both farmers and retailers, traded-input prices are determined for retailers. By further introducing a structure on local retail costs through the model, the retail prices are decomposed into farmer prices and distribution costs (consisting of transportation costs and retail margins).

The empirical results show that the farm share is about 16 percent of retail prices on average across agricultural goods and regions, corresponding to about 84 percent of a distribution share. The share of transportation costs in retail prices is only about 7 percent, while retail margins (defined as the ratio of retail to traded-input prices including transportation costs) are about 4.47, implying that about 77 percent of retail prices are accounted for by the retail sector. This result corresponds to slightly higher transportation costs within Turkey compared to similar costs in the U.S. of about 4 percent for food products. This may be surprising, because the U.S. is a much more spatially dispersed economy (due its land size) and thus one may expect lower transportation costs within Turkey. Nevertheless, since transportation costs between farmers and retailer highly depend on fuel prices, the difference in transportation costs of Turkey and the U.S. can easily be attributed to ratio of fuel prices in Turkey to those in the U.S. which has an average of about 2.6 between 1994 and 2011 according to World Development Indicators.?

When a comparison is achieved across regions, the dispersion of retail prices is mostly due to local wages and variable markups (95 percent), while the contribution of traded-input prices is relatively small (5 percent). When we further investigate the dispersion of traded-input prices across locations, the contribution of transportation costs dominate by 95 percent, while that of source prices is only 5 percent. It is implied that the high dispersion of farmer prices across locations is not reflected in the dispersion of retail prices due to factors such as local input costs, variable markups, and transportation costs. It is also shown that retail margins are dispersed across regions at the product level. The implications of the model suggest that the dispersion of retail margins (across regions) is explained 52 percent by traded-input prices, and 48 percent by local wages and variable markups. Since the dispersion of traded-input prices is mostly due to transportation costs, it is implied that final consumers face different retail margins across locations due to all of transportation costs, local wages and variable markups.

Finally, using the implications of the model for consumer welfare, on average across individual products, about 30 percent of the consumer welfare dispersion is explained by retail margins across Turkish locations, while another 70 percent is explained by differences in either real economic sizes of regions or traded-input prices. On the other hand, within the same location, retail margins contribute by about 60 percent to the consumer welfare dispersion across products. Hence, the retail margin (that can be mostly explained by local wages and variable markups) is one of the key variables in understanding the dispersion of consumer welfare across regions.

The published paper is available at Agricultural Economics.