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Cutthroat or cartel? Analyzing the "markets" in farmers markets.

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veggies.jpgLet's do some word association: Farmers Market.

What comes to mind? Probably words like fresh, local, community.

How about competition... collusion... even price? Didn't think so! So it is with the economists and other academics who have studied the modern farmers market phenomenon in the US. The more romantic, "civic agriculture" aspects of farmers markets dominate our conversation about them, as well as the research literature. Consequently, there's been surprisingly little effort put into understanding how the "markets" in "farmers markets" actually work.

To an economist, one critical aspect of how markets work, of course, is competition. And one way to assess the state of competition is: what happens to prices when more vendors are competing to sell a product? In my recently published Masters thesis, an original Food Industry Center dataset allowed us to look at precisely this dynamic across five different metro areas. The data also let us look at the interesting question of whether farmers market prices seem to have much to do with prices at nearby supermarkets.

I'll share the outcome in a minute... but why do we care? After all, aren't farmers market shoppers supposed to be folks with plenty of money, who really just come for fresh food, open air, a sense of community, and supporting local agriculture? Do prices and competition even matter?

Here's my argument, in a nutshell. Farmers markets are exploding - even right through the recession, they opened at record pace. More and more Americans are shopping there, of all types, and the old stereotype is fading (the paper traces this development, at some length, through the literature). In addition, the US government has explicit policy goals to encourage more markets in lower-income neighborhoods, and to expand the use of WIC and food stamps in farmers markets. So while price is certainly not the only thing that matters at the farmers market, it does matter - more all the time.

Now, for the good stuff...

So: is there much competition at the farmers market? Consider a couple examples. Here are the median and minimum recorded prices in the market for every week lettuce was on sale in 2009 at a farmers market we call TwinCities1. Each point represents a separate weekly observation.

HorwichBlogFig1.JPG

The paper includes another chart showing that prices don't do anything terribly interesting when plotted chronologically (with date on the X-axis). But plot them by the number of vendors, as seen here, and bingo: the more people who show up to sell lettuce, the lower the price goes. A bigger lettuce market is associated with a better deal for consumers. Even in an "oligopolistic" market with imperfect competition (and farmers markets certainly qualify on a number of fronts) this is generally what theory would predict. And - always a nice side-benefit - it conforms with common sense.

Now take a look at another market: Fuji apples for sale in Syracuse. This graph also includes the maximum recorded price in the farmers market for each day.

HorwichBlogFig2.JPG

Whoa... something's weird here. In this case, the minimum price goes down as vendors increase; as more people set up shop, at least one vendor chooses to respond by trying to underprice the other guys. But the median price prevailing in the market hardly budges; if anything, it increases a little.

The maximum prices show that at the same time as some vendors are lowering prices, others are raising them (or new, higher prices vendors are entering the market). Consumers shopping for apples here don't seem to benefit from "competition" at all (unless they are particularly intrepid, and make the effort to seek out the minimum-price vendors).

In all, the data allowed me to analyze 23 different "product-markets" like this, across five U.S. cities. Many unambiguously "worked" like the lettuce market above. A few were statistically ambiguous. And a number of others were "backwards," you might say, to a statistically significant degree (that is, prices actually went up as more vendors moved in).

Why competition some times, and not others?

One distinction appeared to be critical, and a meta-analysis of the full set confirms it is highly significant: perishable products (in this sample, lettuce and blueberries) are generally competitive; less perishable ones (apples and frozen ground beef), much less so.

One reasonable explanation for this is just common sense, but also fits like a textbook case of a basic, so-called "Cournot" market. The Cournot model presumes a closed market, with a limited number of competitors who choose a production quantity with which to go to market. Similarly, farmers market vendors must literally choose how much to put on the truck each day. Vendors of products that can spoil are compelled (as in Cournot) to sell what they've brought, and they drive the price down as the number of competitors grows.

But if you're selling hearty apples or ground beef... well, it's a lot easier for you to just throw your unsold inventory back on the truck for another day. The Cournot patterns doesn't apply to you... or at least, the incentives are much weaker.

Just what logic does apply, then? That's when this stuff gets really fun to think about! When competition's not happening, there must be other factors at play. How easy is it for customers to browse the market and compare prices? How easy is it for new vendors to enter the market and start selling there? If a product is easy to sample (like apples) what incentives does that create for people to shop around... or not; once you've sampled, do you feel a greater obligation to buy?. (Hat-tip to my adviser Rob King for bringing up his apple-sampling experience.)

"Bad apples"?

Perhaps the most provocative possibility: are vendors fixing prices? The same sense of close-knit community and camaraderie that we might treasure about farmers markets can also be seen, through an economic lens, as anti-competitive collusion. There is evidence from the literature that vendors can indeed form cartels, checking with each other to keep prices at a certain level (and turning the cold shoulder to vendors who might try to undercut them). Indeed, where market prices seemed unusually static, I could look at the raw data and perceive instances where prices moved in sync to an uncanny degree, and rarely to the consumers' advantage. This is certainly not the rule, but it appears to happen.

All of these insights suggest possible policies that market managers or the government, where it has a stake, might explore to encourage greater competition and lower prices. Of course... is that what we want, if it spoils some of what otherwise makes farmers markets special? That's certainly not for me to answer!

Finally, there was the secondary issue I mentioned above: how well do farmers market prices track the prices in nearby supermarkets? According to this dataset, at least, the answer is: not well at all. In fact, there appear to be very few cases where prices in farmers markets and supermarkets move together to any significant degree. They are their own world, seemingly divorced from whatever forces set the prices in more conventional settings.

And how about one last question, which just about everyone I talked to about this research seemed to ask me: are farmers markets cheaper? Not according to this data, at least in any categorical sense. But nor are they categorically more expensive; local factors and product differences would appear to be critical here.

Feel free to leave your comments below, and happy shopping! For more, I invite you to dig into the paper. Either way, I hope you'll never look at farmers markets the same way again!



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1 Comment

I was delighted to recently read Jeff Horwich’s work, as I think it presents some much needed analysis of the economics within markets. We tend to see what some might call 'alternative' retail systems only in light of traditional ones, as if the chain grocery stores were the standard against which to compare, and their units of measurement the the only way to “play ball” with credibility in the food retail sector.


As farmers markets grow, we continue to learn more about the complexities of their moving parts, expanding our understanding of how, philosophically and mechanically, they offer an alternative to an alienating corporate food system fraught with all kinds of negative consequences. Seldom do researchers or advocates try to dissect the elements of this unique kind of marketplace, with good reason-- farmers markets not only defy conventional economics, but defy generalization as a system. As Horwich himself says, "It's a great reminder that even the simplest-seeming market is vastly more complex than economic theory." He’s right to admit that price is not the only thing that matters. The variables that converge to create a value tag are going to vary in weight depending on where a market is located, individual market's policies, seasonality, vendor motivation, and even the degree of development pressure on agricultural land. But plotting these other things as variables in a chart (especially together at once!) is where things get complicated.

But let’s stick purely with price for a moment. Within the farmers market sector, price is in fact a big deal. For decades (or more) agricultural producers have undercut themselves in the marketplace, taking whatever price wholesalers will offer, or, even when opting for direct-to-consumer sales, simply using the local grocery store chain prices as a gauge for their own. This is problematic for them, surely, but also for consumers, who are only further conditioned to expect food as uniform and predictable in availability, quality, and price. Among the recommendations Horwich makes in his thesis is “let vendors know that friendly agreement on pricing is not OK.” Of course, price fixing is illegal, and bad for everyone. I’d also agree with his recommendation to make it easier for new vendors to enter a market, provided that their products, location, and business model don’t violate market policies, and especially if the alternative is a closed circuit of only those producers who “got in” at the right time, and feel threatened if even a single other vendor offers a comparable, competing product line.

What I like to call “coopetition” in a farmers market works best when entrepreneurs are driven by competitors to innovate by improving their quality, diversity, or marketing-- while at the same time knowing that their own sales are dependent on a healthy market, which itself relies on healthy relationships between vendors. As Denise Beeden-Ost of Getty’s Creek Farm says in her Farmers Market Inspiration Award honorable mention essay Market Neighbors, “You might think, being in the same business with the same customers, we'd see each other as competition. But as Jeff told Sean years ago, ‘Other farmers aren't what hurts us; it's Kroger's that hurts us. And besides, who would you rather stand beside for five hours every summer Saturday- -a competitor, or a neighbor?’...At market, we've learned to be businesspeople as well as farmers--to be passionate about quality, ask fair prices without apology, and greet every customer with a smile.” This isn’t collusion-- it’s simply consciousness and consideration of the sales environment of which they are a living, breathing member.

In the case of vegetables, for which there is high demand at most markets, there is often a lot of room for competition. For something like high-end gluten-free pastries, maybe less so-- and that’s a question of appropriate market mix that a good market manager can navigate without too much conflict.

However, I urge caution about managers urging producers to lower prices at mid-day, as Horwich suggests-- unless, for example, they are marketing greens that have wilted from the heat. It didn’t cost them any less to produce a product at 11 am as it did at 8 am, so why should they create a perception in the consumers’ minds that the suckers who paid full price first thing in the morning were being overcharged, and that this new discounted price is what the tomatoes are REALLY worth?

In his blog summary of the thesis research, Horwich postulates that price-fixing may be behind the reason that sometimes, an increase in the number of vendors for a particular product correlate with higher maximum prices, and therefore higher median prices. In fact, the Fuji apple price example he offers seems to me a demonstration that the market succeeded in achieving the best case scenario: increased diversity of producers, product characteristics, and price options. Because alongside those higher maximum prices as the number of vendors selling fuji apples increased, the minimum price also decreased. Affordability and access was in fact improved, even if the averages don’t easily show it.
The idea that all lettuce, and all apples, for that matter, are created equal, is simply not true. We attribute all kinds of values to our food, and I’ll use myself as a convenient example:

I am a cheapskate. I use coupons, make irrational and time-consuming trips to co-ops and stores that have only one or two products I like on sale, and infamously deliberate over even the most prosaic purchases (e.g. if and where to buy paper towels). But at the farmers market, where I shop every week, I am making conscious and sub-conscious decisions left and right, and few of them have to do with price. I choose one mid-priced meat vendor over another because I like not only the quality of the meat, but the fact that the farming couple offers periodic sales to be more accessible to new shoppers, is consistent in showing up to the market, and because, for whatever reason, they are always smiling, helpful, and interested in how I end up preparing and eating their meats. Other comparable vendors may have higher prices with more slick marketing (and, I notice, fancier shoes), or lower prices but more questionable production practices. Shopping for red peppers, cantaloupe, kale, etc. are all infused with these kinds of decision-making mini-matrices like these. At one point, with some small but still embarrassing degree of spite, I stopped buying from a farmer who dropped out of the market’s EBT program, because a) I knew I had other (even if less desirable) options, and b) think being accessible to SNAP participants is important. What good is “voting with our wallets,” if we don’t actually exercise the right to do so, at the micro level?

Horwich offers some provocative questions that acknowledge the wide diversity among farmers markets and the need for more research. The Farmers Market Coalition, along with other partners, is interested in exploring indicators like these that expand our understanding of the farmers market-place. What would it look like if we analyzed other indicators related to economic development, like sales per square foot, sales per hour, or new business start-ups per year? More robust analysis of farmers markets is much needed, and I look forward to increasingly nuanced dialogue shedding light on what could represent a new and much needed economic paradigm. Please visit this response on the FMC web site to share your comments!

Stacy Miller, Farmers Market Coalition

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This page contains a single entry by Jeff Horwich published on October 17, 2012 2:07 PM.

A Look into the Produce Industry was the previous entry in this blog.

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