Two-sided Benefits of Price Transparency in Smallholder Supply Chains

Abstract

Smallholder supply chains of the developing world face the challenge of insufficient price transparency that limits the welfare of smallholder farmers. Digital information platforms have been introduced to improve price information access. For such platforms to sustainably improve welfare, however, they need to promote widespread adoption and achieve benefits for 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 two-sided benefits. Motivated by the context of 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 moderate increase in price transparency can lead to strong Pareto improvement in equilibrium for buyers and suppliers. This effect comes from more competitive pricing benefiting the suppliers, and reduced supply uncertainty and more efficient demand signaling benefiting the buyers. Such welfare benefits and strong Pareto improvement persist even under price collusion. These findings contrast with the typical assumption that increased transparency leads to one-sided benefits at the cost of the other side. We also establish that the impact of transparency on supply uncertainty is a key determinant of welfare: the welfare benefits of transparency can only be fully realized if transparency is created without increasing supply uncertainty. Our analyses reveal important nuances about the interplay between transparency, pricing and supply uncertainty, bringing new insights to the existing literature and managerial insights for information platform designers.

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