From bilateral trade to centralized markets: A search model for commodity exchanges in Africa

Several African countries have recently centralized their agricultural markets by launching a commodity exchange. What will be the impact of such a move? Who will be the winners and the losers? We develop a simple search model to study the impact of introducing a commodity exchange in a village economy where traders and farmers exchange on a bilateral basis. We study the efficiency gains from moving from the status quo to a trading regime where farmers have the option of selling their produce to a commodity exchange. We describe how the gains from trade are distributed between farmers, traders and the commodity exchange itself. We show that a dual economy where high-cost farmers remain in the bilateral exchange market while low-cost ones sell to the commodity exchange can exist in equilibrium, and that forcing all farmers to sell into the commodity exchange can make some farmers worse off.