Agricultural Support Policies in Imperfectly Competitive Markets: Why Market Power Matters in Policy Design

Most agricultural policy analysis assumes that markets are perfectly competitive, despite increasing evidence to the contrary. We demonstrate that the interaction of market power and government intervention may lead to outcomes that are counter to key results of policy analysis for perfectly competitive markets. We show that market power may reduce or eliminate entirely the net welfare benefits from removing two traditional support mechanisms, price floors and deficiency payments, and may increase considerably the government's cost of implementing either of them. Accordingly, optimally designed price support measures may improve welfare in the presence of downstream oligopoly and/or oligopsony power. Copyright 2011, Oxford University Press.