Pricing Policy Under Double Market Power: Madagascar and the International Vanilla Market

This paper uses a price-leadership model of the international vanilla market to study the welfare consequences of alternative pricing policies for Madagascar – a country that controls domestic production through a single-channel marketing system and is the leader in the vanilla market. Econometric estimates of the model are used for simulations of welfare and revenue gains and losses and internal redistribution of income from alternative pricing policies. The results indicate that Madagascar could have gained between 0.9–2.6% of GDP per year on average over the period 1981–91 by following optimal pricing policies, and that producers were overtaxed suggesting that political economy considerations played a role in the pricing decisions.