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. However, sustaining welfare improvement often requires such platforms to ensure benefits to both suppliers and buyers. This paper studies the impact of price transparency on 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 supply uncertainty. We find that a well-chosen level of price transparency, and sometimes full transparency, can lead to strong Pareto improvement, through competitive pricing benefiting the suppliers and demand signaling benefiting the buyers. Such welfare benefits and resultant strong Pareto improvement persist under price collusion. Leveraging transparency to reduce supply uncertainty can further enhance the welfare benefits. The 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 practical guidelines for information platform designers, including for our partnering platform, on whether to implement full or partial transparency and when a reduction in supply uncertainty is key to ensuring two-sided benefits.

Keywords: smallholders, informal supply chains, collusion, market design, newsvendor, price search