Do Consumers Benefit from Supply Chain Intermediaries? Evidence from a Policy Experiment in Edible Oils Market in Bangladesh

Commodity traders are often the focus of popular resentment. Food price hikes in 2007-2008 resulted in protests and food riots, and spurred governments to regulate traders. In March 2011, the Bangladesh Government banned Delivery Order traders (DOTs) in the edible oils market, citing cartelization, and replaced them with a dealer’s network appointed by upstream refiners. The reform provides a natural experiment to test alternative models of marketing intermediaries. We develop three models and derive testable predictions about the effects of the reform on the intercept of the margin equation and passthrough of international price. Using wheat as a comparison commodity, a difference-of-difference analysis of high frequency price data shows the reform led to (i) an increase in domestic prices and marketing margins, and (ii) a weakening of the pass-through of imported crude prices. The evidence is inconsistent with the standard double-marginalization-of-rents (DMR) model wherein intermediaries exercise market power while providing no value-added services, or with a model where DOTs provide credit to wholesalers at below-market interest rates. The evidence supports a model where DOTs relax binding credit constraints faced by the wholesale traders. We would like to thank seminar participants at NEUDC 2014 at Boston University and GCER Conference 2015 at Georgetwon University, and IGC conference at Dhaka for comments on earlier drafts and to acknowledge Wally Mullin, Chris Woodruff, Sabyasachi Das, Sebastian Bustos, Nidhiya Menon, Wahiduddin Mahmud, Fahad Khalil and Will Martin for helpful comments on earlier drafts and/or discussions at various stages of this project. Thanks to Rubaiya Emran for help with the graphs. The project received funds from KCP Trust Fund (World Bank) and IGC Bangladesh country program. An earlier version of the paper was circulated under the title “Food Prices and Marketing Intermediaries: Evidence from a Policy Experiment in Edible Oils Market in Bangladesh”. This paper supersedes the earlier version.