Credit-Product Interlinkage and Captive Markets in Backward Agriculture: A Theoretical Analysis

27 Pages Posted: 3 Jun 2002

See all articles by Sarbajit Chaudhuri

Sarbajit Chaudhuri

University of Calcutta

Asis Kumar Banerjee

University of Calcutta - Department of Economics

Date Written: February 20, 2002

Abstract

This paper builds a model of fragmented duopsony in backward agriculture following Basu and Bell (1991) in which the purchasers (traders) have captive markets each but compete in a contested market. We focus on the formation of captive markets through trader-farmer interlinkage in the form of interlinked credit-product contracts (ICPCs). ICPC (or the formation of captive markets) is not an entry-preventive strategy in the model. Its motive is to push the farmers to their reservation income level. However, the captive and the contested markets are linked by the requirement that the reservation income of a captive farmer has to equal the income of a farmer in the contested market. In general, in our model strategic considerations determine the extent of use of ICPCs rather than explaining their existence. (In a special case, however, they do explain existence.) We also show that a credit subsidy policy will reduce the size of the captive market, improve the welfare of the farmers and raise the agricultural productivity of the economy while the effects of a price subsidy policy will be ambiguous.

Keywords: Trader, Farmer, Captive segment, Contested segment, Interlinkage, Nash equilibrium, Subsidy policy

JEL Classification: Q13, D43, C70

Suggested Citation

Chaudhuri, Sarbajit and Banerjee, Asis Kumar, Credit-Product Interlinkage and Captive Markets in Backward Agriculture: A Theoretical Analysis (February 20, 2002). Available at SSRN: https://ssrn.com/abstract=311883 or http://dx.doi.org/10.2139/ssrn.311883

Sarbajit Chaudhuri (Contact Author)

University of Calcutta ( email )

56A, B.T. Road
Kolkata, West Bengal 700 050
India
+91 33 2557 5082 (Phone)
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HOME PAGE: http://econpapers.repec.org/RAS/pch11.htm

Asis Kumar Banerjee

University of Calcutta - Department of Economics ( email )

56A, B.T. Road
Kolkata, 700050
India

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