Testing for Oligopoly Power in the Kenyan Seed Maize Processing Industry

Abstract

In the recent past, the concentration of seed maize processing and marketing in Kenya has raised serious public concerns. The inability of this industry to ensure affordable prices of certified seed maize for the farming community has led policy makers to question its market behaviour. In spite of these concerns, the performance of agricultural markets in Kenya has received little attention. This study evaluates the market conduct of the industry using the New Empirical Institutional Organization framework and tests the hypothesis of price taking behaviour. A system of five equations was used to estimate conjectural variations elasticity while a Lerner index was constructed to measure market power using data from Kenya's Central Bureau of Statistics. The estimated average conjectural variations elasticity of 0.702 was significantly different from zero and therefore the hypothesis of price taking was rejected. The degree of market power as measured by the difference between price and marginal cost was estimated at 0.450. In general, the estimated own price demand relationships conformed to economic theory except in the case of labour and capital where unexpected positive own price relationships were reported. The estimated conjectural elasticity and Lerner index indicated that the sector was anticompetitive in the period under analysis. These findings give compelling evidence to conclude that the assumption of price-taking behaviour is inappropriate for the seed maize processing industry in Kenya.