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LEIBNIZ INSTITUTE OF AGRICULTURAL DEVELOPMENT
IN TRANSITION ECONOMIES
IAAE Symposium 2016| 4 – 6 April
Residual demand elasticity estimates of Russian wheat
exports
Kerstin Marit Uhl
IAAE Symposium 2016 | 4 – 6 April
www.iamo.de 3
Overview
• Motivation
• Research questions
• Literature review
• The residual demand elasticity approach
• Estimation results
• Summary
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Motivation
• Wheat is a staple crop with relevance for food security;
• Differences in import prices suggest market imperfections in
international wheat trade;
• Russia emerged as a major exporter;
• Dependency of several countries on Russian wheat.
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Motivation II
15
020
025
030
035
040
0
imp
ort
price
(U
SD
/t)
2006 2008 2010 2012 2014year
Egypt Armenia
Azerbaijan Georgia
Turkey
Source: Own compilation based on data published by FAOSTAT.
Average wheat import price
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Motivation III
Share of Russian wheat imports in total wheat imports (2006 – 2014)
Concentration ratios of Russian exporters (2006 – 2014)
Egypt Turkey Armenia Azerbaijan Georgia
CR – 4 37 22 67 47 51
CR - 10 63 44 80 62 63
Egypt Turkey Armenia Azerbaijan Georgia
Share in % 34.13 52.40 87.24 42.12 67.20
Source: Own compilations; UN Comtrade, APK Inform.
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Research question
• Are Russian wheat exporters able to price discriminate in
international wheat markets?
• To which extent do they exert market power?
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Literature review
Studies targeting Russian wheat exports:
• Applying Krugman`s (1986) pricing-to-market approach:
– Pall et al. (2013);
– Friebel et al. (2015);
– Gafarova et al. (2015);
• Applying the residual demand elasticity approach:
– Pall et al. (2014).
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RDE study
• Quantification of market power by Russia;
• Countries under study: Egypt, Turkey, Armenia, Azerbaijan,
Georgia;
• Analysis based on weekly data over 2006 - 2014.
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Theoretical background
• Baker & Bresnaham’s (1988) residual demand elasticity (RDE) approach:
– A downward-sloping RD implies that a seller can influence the export
price by choosing its export quantity;
– Estimation of an exporter’s RDE;
– Absolut value of the RDE bears information regarding the extent of
market power.
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Theoretical background II
• Wheat exporting countries face the following inverse demand functions:
• 𝑃1 , 𝑃2 and 𝑃3 are export prices of exporting country 1, 2, and 3;
• 𝑄1, 𝑄2 and 𝑄3 are export quantites of competitor 1, 2, and 3;
• 𝐷1, 𝐷2, 𝐷3 are wheat demand functions of country 1, 2, and 3;
• 𝑍 is a vector of demand shifters in the export destination;
• 𝛼1, 𝛼2, and 𝛼3 are price elasticities.
(1) 𝑃1 = 𝐷1 𝑄1, 𝑄2, 𝑄3, 𝑍, 𝛼1
(2) 𝑃2 = 𝐷2 𝑄1, 𝑄2, 𝑄3, 𝑍, 𝛼2
(3) 𝑃3 = 𝐷3 𝑄1, 𝑄2, 𝑄3, 𝑍, 𝛼3
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Theoretical background III
• Profit maximization problem (exemplary for exporting country 2):
• 𝐶2 is country 2‘s cost function;
• 𝑊2 is a vector of country-specific factor prices;
• 𝑊 is a vector of industry-wide factor prices;
• 𝛽2 are parameters.
(4) 𝑚𝑎𝑥 П2𝑄2 = 𝑄2 ∗ 𝑃2 𝑄1, 𝑄2, 𝑄3, 𝑍, 𝛼
2 − 𝐶2 𝑄2,𝑊,𝑊2, 𝛽2
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Theoretical background IV
• Country 2‘s FOC yields the following optimality condition (𝑃𝑀𝑅 = 𝑀𝐶):
• 𝜃1 is a conduct variable regarding the behaviour of all exporters but state 1.
(5) 𝑃2 𝑄1, 𝑄2, 𝑄3, 𝑍, 𝛼2, 𝜃1 +
𝑄2 𝜕𝑃2 𝜕𝑄2 + 𝜕𝑃2 𝜕𝑄1 ∗ 𝜕𝑄1 𝜕𝑄2 + 𝜕𝑃2 𝜕𝑄3 ∗ 𝜕𝑄3 𝜕𝑄2 = 𝑀𝐶2 𝑄2,𝑊,𝑊2, 𝛽2
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Theoretical background IV
• Country 1‘s RD curve is derived by solving the demand and supply equations of
exporting countries 2 and 3 simultaneously:
• 𝑸 is the sum of 𝑄2 and 𝑄3, 𝐸−1 is the equilibrium quantity of all 1‘s competitors;
• Replacing (6) in (1) yields:
• Substituting out the redundancies yields:
• 𝑅1 means inverse residual demand of exporting country 1.
(6) 𝑸 = 𝐸−1 𝑄1, 𝑍,𝑊2,𝑊3,𝑊, 𝛼2, 𝛼3, 𝛽2, 𝛽3, 𝜃2, 𝜃3
(7) 𝑃1 = 𝑃1 𝑄1, 𝐸−1 𝑄1, 𝑍,𝑊2,𝑊3,𝑊, 𝛼2, 𝛼3, 𝛽2, 𝛽3, 𝜃2, 𝜃3 , 𝑍, 𝛼1
(8) 𝑃1 = 𝑅1 𝑄1,𝑊2,𝑊3,𝑊, 𝑍, 𝛼, 𝛽2, 𝛽3, 𝜃2, 𝜃3
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Econometric implementation
• Eq. (8) is typically estimated in a log-linear transformation:
• 𝜂 is a parameter, and 𝜶, 𝜷, 𝝑, and 𝜹 vectors of parameters to be estimated, ε𝑡 is
the error term;
• Interpretation of 𝜂:
– Zero estimate: perfectly elastic RD perfect competition
– Negative sign: RD curve has a negative slope imperfect competition
(9) ln 𝑃𝑡1 = 𝜂 ln𝑄𝑡
1 + 𝜶 ln 𝑍 + 𝜷 ln𝑊𝑡 + 𝝑 ln𝑊𝑡1 + 𝜹 ln𝑊𝑡
3 + ε𝑡
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Econometric implementation II
• Price and quantity are determined simultaneously:
𝑄𝑡1 has to be instrumented;
Goldberg and Knetter (1999) propose cost shifters as instrument;
• Criteria for the selection of instruments:
Relevance ;
Validity;
• Estimation method:
GMM;
2SLS.
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Econometric implementation III
Variables included in the econometric model
Cost shifters Egypt Turkey Armenia Azerbaijan Georgia
Exchange rate USA X X
Exchange rate France X
Exchange rate Ukraine X X X
Exchange rate Kazakhstan X X X X
Export price USA X X
Export price France X
Producer price Ukraine X X X X
Producer price Kazakhstan X X X X
Oil price X X X X X
Export ban Kazakhstan X X X X
Export tax Ukraine X X X
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Econometric implementation IV
Variables included in the econometric model
Demand shifters Egypt Turkey Armenia Azerbaijan Georgia
Real GDP per capita X X X X X
CPI food X X
Wheat retailer price X X X
Time X
Other variables Egypt Turkey Armenia Azerbaijan
Georgia
Dummy season X X X X X
Dummy currency depreciation
X
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Econometric implementation V
Selected instruments
Notes: Ban Russia is a dummy variable for the period of Russian wheat export ban (15.08.2010 - 30.06.2011); Tax Russia is equal to the export tax rate (10 (12.11.2007 - 30.04.2008), 40 (29.01.2008 – 30.06.2008), and 0 otherwise; Q Caucasus is the total Russian wheat export quantity to the Caucasus; War GEO is a dummy variable for the period of war between Russia and Georgia (07.08.2008 - 16.08.2008); PP Russia is the Russian wheat producer price.
Instrument Egypt Turkey Armenia Azerbaijan Georgia
Ban Russia X X X X X
Tax Russia X X X X X
Q Caucasus X
War GEO X
PP Russia X
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Econometric implementation VI
Statistics regarding relevance and validity of chosen instruments
Notes: Criteria for relevance of instruments: F-value of first-stage regression; criteria for validity:
Test of overidentifying restriction (H0: Overidentifying restrictions are valid): Hansen’s J statistic
(Egypt, Turkey, Azerbaijan, Georgia) and Sargan test (Armenia); term in brackets are p-values.
Selection criteria
Egypt Turkey Armenia Azerbaijan Georgia
Relevance 50.74 [0.0000]
24.31 [0.0000]
8.63 [0.0000]
43.97 [0.0000]
30.53 [0.0000]
Validity 1.16251 [0.2809]
0.583754 [0.7469]
5.84852 [0.0537]
0.932238 [0.3343]
2.29768 [0.3170]
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Data
• Estimations based on a weekly dataset provided by APK Inform;
• Data period: 2006 week 1 – 2014 week 52;
Number of observations
Egypt Turkey Armenia Azerbaijan Georgia
348 328 269 388 349
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Contact:
Kerstin Marit Uhl Leibniz Institute of Agricultural Development in Transition Economies
Tel: +49 345 29 28 570 Fax: +49 345 29 28 299 Address: Theodor-Lieser Str. 2, 06120 Halle Saale, Germany email: [email protected] www.iamo.de
https://twitter.com/iamoLeibniz #SilkRoadConf
https://www.facebook.com/iamoLeibniz/
Thank you for your attention !
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Selected estimation results
Variable Egypt Turkey Armenia Azerbaijan Georgia
Export q RUS -0.0261 -0.1039*** -0.1457*** -0.0181 -0.1608***
ER KZT -0.0153 0.6771*** 0.2510 0.2150
ER UAH 0.3262*** 0.4852*** 0.6880***
PP KAZ 0.1258*** 0.7164*** 0.4818*** 0.0830
PP UKR 0.4117*** 0.5234*** 0.6878***
Export p FR 0.4732***
Export p US 0.1206** 0.4214***
GDP_r_cap 0.2837*** 0.3011** -0.1552 0.2359 0.4695
CPI_food -1.7418*** -0.0615
Wheat RP 4.1222*** 1.9810*** 0.6534**
Dummy season
-0.0022 0.0685*** 0.0941** -0.1119 0.1340***
Notes: Export q RUS abbreviates Russian wheat export quantity; ER KAZ, ER UAH are the exchange rates in national currency per KZT and UAH, respectively; PP KAZ and PP UKR are the Kazakh and Ukrainian wheat producer prices; Export p FR and Export p US are the French and US wheat export prices; GDP_r_cap is the real GDP per capita of the importing country; CPI_food is the CPI for food; Wheat RP is the wheat retailer price in the importing country, and Dummy season is a dummy variable capturing seasonal effects.
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Conclusion
• Evidence for Russian market power in Armenia, Georgia, and Turkey based on RDE estimation;
• No evidence for Russian market power in Egypt, and Azerbaijan;
• Considerable differences in wheat import prices among these five countries:
– Turkey pays highest wheat import prices;
– Azerbaijan pays lowest wheat import prices;
• High dependency of Caucasus on Russian wheat imports:
– Armenia (87 %), Azerbaijan (42%), Georgia (67%);
• Concentration ratios of Russian wheat imports high in Armenia, and moderate in other states;
• Estimation results in line with Hotelling’s model of spatial price discrimination.
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References
• Baker, J. B. and T. F. Bresnaham. 1988. Estimating the residual demand curve facing a single firm. International Journal of Industrial Organization 6 (3): 283-300.
• Friebel, K. M., O. Perekhozhuk and T. Glauben. forthcoming. Price discrimination in Russian wheat exports: evidence from firm-level data, Journal of Agricultural Economics.
• Gafarova, G., Perekhozhuk and T. Glauben. 2015. Price discrimination and pricing-to-market behavior of Black Sea region wheat exporters, Journal of Agricultural and Applied Economics 47 (3): 287-316.
• Goldberg P. K. and M. M. Knetter. 1999. Measuring the intensity of competition in export markets. Journal of International Economics 47 (1): 27-60.
• Knetter, M. M. 1995. Pricing to market in response to unobservable and observable shocks, International Economic Journal 9 (2): 1-25.
• Krugman, P. 1986. Pricing to market when the exchange rate changes. Working Paper No. 1926, Cambridge MA, National Bureau of Economic Research.
• Pall, Z., O. Perekhozhuk, R. Teuber, and T. Glauben. 2013. Are Russian wheat exporter able to price discriminate? Empirical evidence from the last decade, Journal of Agricultural Economics 64 (1): 177-196.
• Pall, Z., O. Perekhozhuk, R. Teuber, T. Glauben, S. Prehn and R. Teuber. 2014. Residual demand measures of market power of Russian wheat exporters, Agricultural Economics 45 (3): 381-391.
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Appendix I: Summary statistics
Egypt Mean Std. Dev.
Quantity 9.28e+07 7.06e+07
Price_t_USD 217.5908 59.69476
GDP_real_capita 70.11422 7.272818
CPI_food 101.069 1.588793
Oil price 86.24373 22.66057
EGP_EUR 7.96857 0.7959349
EGP_USD 5.955326 0.5832629
EGP_UAH 0.8234815 0.1885084
Export price US 239.4046 61.1048
Export price France 182.8693 46.81779
Producer price Ukr 1514.784 558.1194
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Appendix I: Summary statistics II
Turkey Mean Std. Dev.
Quantity 5.14e+07 4.04e+07
Price_t_USD 227.3142 52.79223
GDP_real_capita 15.62338 1.686969
CPI_food 100.87 1.636161
Oil price 89.12971 22.82146
TRY_USD 1.691748 0.2999471
TRY_UAH 0.2168697 0.0314591
TRY_KZT 0.0112941 0.0010962
Export price US 248.8812 54.28319
Producer price Ukr 1640.474 544.1551
Producer price Rus 6397.973 2087.246
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Appendix I: Summary statistics III
Armenia Mean Std. Dev.
Quantity 7400618 6147196
Price_t_USD 225.2358 78.5632
GDP_real_capita 6034.367 671.1075
Wheat RP 100.2888 2.657507
Oil price 99.8131 4.28485
AMD_KZT 2.581234 0.2475405
Producer price Kaz 23479.49 6116.872
Quantity_Cauc_Rus 3.21e+07 2.10e+07
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Appendix I: Summary statistics IV
Azerbaijan Mean Std. Dev.
Quantity 1.19e+07 1.25e+07
Price_t_USD 225.189 72.76159
GDP_real_capita 18.79507 3.059922
Wheat RP 100.7774 3.267009
Oil price 99.83092 3.963304
AZN_KZT 0.0057053 0.0009595
Producer price Kaz 23130.82 6705.376
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Appendix I: Summary statistics V
Georgia Mean Std. Dev.
Quantity 1.10e+07 7938890
Price_t_USD 220.5163 54.47653
GDP_real_capita 19.66704 2.294259
Wheat RP 100.3957 2.901382
Oil price 99.92719 4.046399
GEL_UAH 0.2444999 0.0787526
GEL_KZT 0.0119996 0.0019218
Producer price Ukr 1516.795 594.8149
Producer price Kaz 22660.03 6967.728
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Appendix II: Estimation results
Variable Egypt Turkey Armenia Azerbaijan Georgia
Export q RUS -0.0261 -0.1039*** -0.1457*** -0.0181 -0.1524***
ER KZT -0.0153 0.6771*** 0.2510 0.2540
ER UAH 0.3262*** 0.4852*** 0.6792***
PP KAZ 0.1258*** 0.7164*** 0.4818*** 0.0888
PP UKR 0.4117*** 0.5234*** 0.6981***
Export p FR 0.4732***
Export p US 0.1206** 0.4214***
GDP_r_cap 0.2837*** 0.3011** -0.1552 0.2359 0.4435
CPI_food -1.7418*** -0.0615
Wheat RP 4.1222*** 1.9810*** 0.6281**
Oil price -0.1327 -0.3113* 0.1229 0.4462 0.1972
Dummy season -0.0022 0.0685*** 0.0941** -0.1119 0.1317***
Ban Kazakhstan -0.0172 -0.1197 -0.0170 -0.0609
Tax Ukraine -0.0044* -0.0082*** -0.0061
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Appendix II: Estimation results II
Variable Egypt Turkey Armenia Azerbaijan Georgia
Time 0.0022***
Depreciation 1 -0.5957***
Depreciation 2 -0.8786***
Constant 6.9470*** 0.8373 -13.5411*** -15.2422*** -1.7357
Egypt Turkey Armenia Azerbaijan Georgia
Number of obs 348 328 269 388 349
R squared 0.9376 0.8927 0.4654 0.5257 0.4942
Adj. R squared 0.9354 0.8882 0.4490 0.5118 0.4776
