Optimal Market-Integration Decisions by Policymakers: Modeling and Analysis of Agriculture Market Data

Policymakers often seek to integrate markets as a way to maximize social welfare. Prior research has examined the effect of market integration on social welfare (surplus) only at two extremes-when the markets are fully integrated and when they are fully isolated. But there is scarce information available for (i) how large the social surplus is at intermediate levels of market integration and (ii) whether social surplus is maximized when markets are fully integrated, fully isolated, or partially integrated. In this article, we consider the spectrum of all possible integration policies spanning full isolation to complete integration, and characterize the socially optimal market integration, under general demands. Our setting consists of a policymaker, a price-setting firm, and a continuum of consumers in two markets. We identify market conditions under which social surplus is indeed maximized at partial market integration. For the linear price-responsive demand model, these conditions are identified as thresholds on (i) the relative size of the markets being integrated and (ii) the relative price sensitivity of consumers in these markets. We then apply the model to the commercial seed market in the European Union (EU). We first identify the optimal level of market integration between the markets for seed corn in various countries in the EU. Subsequent analysis shows that socially optimal market integration for these countries provides a further improvement in the social surplus for the EU by 2.80%, relative to complete integration. Overall, our results show that policymakers should exercise caution in determining the extent to which markets are integrated.