Optimal Investment in Transportation Infrastructure When Middlemen Have Market Power: A Developing-Country Analysis

Transportation costs and buyer market power reduce prices and income received by farmers in developing countries. Transportation costs directly affect the marketing margin and also exacerbate market power by limiting farmers’ access to buyers. This article develops a multistage spatial model to determine optimal investment in transportation improvements, taking account of impacts on marketing costs and competition. The beneficial impact of investments from farmers’ perspective is mainly through enhanced competition, meaning significant under-investment may occur if this effect is ignored. However, the optimal investment depends on the relative importance of transportation costs; in some settings, transportation improvements reduce farm prices because buyers rationally over-compensate farmers for these costs. Copyright 2007, Oxford University Press.