Does Digital Divide or Provide? The Impact of Cell Phones on Grain Markets in Niger

Abstract

Due partly to costly information, price dispersion across markets is common in developed and developing countries. Between 2001 and 2006, cell phone service was phased in throughout Niger, providing an alternative and cheaper search technology to grain traders and other market actors. We construct a novel theoretical model of sequential search, in which traders engage in optimal search for the maximum sales price, net transport costs. The model predicts that cell phones will increase traders' reservation sales prices and the number of markets over which they search, leading to a reduction in price dispersion across markets. To test the predictions of the theoretical model, we use a unique market and trader dataset from Niger that combines data on prices, transport costs, rainfall and grain production with cell phone access and trader behavior. We first exploit the quasi-experimental nature of cell phone coverage to estimate the impact of the introduction of information technology on market performance. The results provide evidence that cell phones reduce grain price dispersion across markets by a minimum of 6.4 percent and reduce intra-annual price variation by 12 percent. Cell phones have a greater impact on price dispersion for market pairs that are farther away, and for those with lower road quality. This effect becomes larger as a higher percentage of markets have cell phone coverage. We provide empirical evidence in support of specific mechanisms that partially explain the impact of cell phones on market performance. Robustness checks suggest that the results are not driven by selection on unobservables, nor are they solely a result of general equilibrium effects. Calculations of the four-firm concentration index suggest that the grain market structure is competitive, so the observed reductions in price dispersion are not due to greater market collusion. The primary mechanism by which cell phones affect market-level outcomes appears to be a reduction in search costs, as grain traders operating in markets with cell phone coverage search over a greater number of markets and sell in more markets. The results suggest that cell phones improved consumer and trader welfare in Niger.