Two-sided Benefits of Price Transparency in Smallholder Supply Chains

Abstract

Information platforms have emerged in the developing world to improve price transparency and welfare for smallholder suppliers. Meanwhile, sustaining welfare improvement often requires such platforms to benefit both suppliers and buyers. This paper studies the impact of price transparency on market price and welfare in smallholder supply chains, and identifies conditions and driving forces for creating benefits to both suppliers and buyers. Motivated by granular data from smallholder supply chains, we develop a new Hotelling model of price search, where price-setting buyers face the operational challenges of demand asymmetry and costly underage or overage amid uncertain supply. We find that high overage costs, combined with  high demand asymmetry that dominates random supply variations, give rise to two-sided benefits, driven by price competition benefiting the suppliers and demand signaling benefiting the buyers under increased transparency. Moreover, achieving two-sided benefit requires implementing a well-chosen level of price transparency, and, in some cases, creating a low uncertainty environment for buyers. These results help close the gap between the empirical literature and the theoretical economic literature on this topic, and offer possible explanations for the variation in empirical findings. We provide managerial recommendations for information platform designers, including for our partnering platform, on identifying the target markets and whether to implement full or partial transparency.

Keywords: smallholder supply chains, information platforms, newsvendor, collusion, price transparency