Optimal Market-Integration Decisions by Policymakers: Modeling and Analysis of Agriculture Market Data

Abstract

Policymakers often seek to integrate markets as a way to maximize social welfare. In this article, the authors consider the spectrum of all possible integration policies, from full isolation to complete integration, and characterize the socially optimal market integration, under general demands. They identify market conditions under which social surplus is indeed maximized at partial market integration. For the linear price-responsive demand model that is used extensively in the operations management literature, these conditions are identified as thresholds on (i) the relative size of the markets being integrated, and (ii) the relative price sensitivity of consumers in these markets. The authors then apply the model to the commercial seed market in the European Union (EU). Their analysis shows that socially optimal market integration for these countries provides a further improvement in the social surplus for the EU by 2.80%, relative to complete integration. Results show that policymakers should exercise caution in determining the extent to which markets are integrated.