Research

Out of a wide gap between price of commodity paid by final consumers and the one obtained by farmers some part is attributed to cost of transportation, and the remaining is the markup that traders keep for themselves. Previous literature can explain part of the price difference between the origin and the destination of a good using the observed components of a market, but they still leave an unexplained part of the gap open to being driven by either the trade costs or the markups. The paper proposes a new method, which allows us to estimate trade costs and markups separately using only price data. The method explores the idea that the markups along the distribution chain of a good are shaped by the same final demand, and, therefore, respond similarly to a reduction in the price of a good at the initial point of the chain.