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Humboldt-Universität zu Berlin - Lebenswissenschaftliche Fakultät - Quarterly Journal of International Agriculture

Quarterly Journal of International Agriculture No. 1/10


Competition in the gum arabic market:
a game theoretic modelling approach

Afaf H. Rahim
Philipps-Universität Marburg, Germany

Ekko C. van Ierland and Hans-Peter Weikard
Wageningen University, The Netherlands


Abstract

Gum arabic is mainly produced from two Acacias that are found in the gum belt of Sub-Saharan Africa. These are Acacia senegal that produces high quality gum and Acacia seyal that produces low quality gum. In recent years the gum market structure has changed and Sudan lost its near monopoly position as Chad and Nigeria became important gum suppliers. In order to understand the competition between Sudan, Chad and Nigeria in the export of high and low quality gum arabic we develop a von Stackelberg model with interdependent markets. Whereas Sudan (the leader) has an absolute cost advantage in the export of high quality gum, Chad and Nigeria (the followers) have a cost advantage in the export of low quality gum. We determine the market equilibrium outcomes and study the impact of development assistance scenarios to promote either the high or low quality gum. Our results suggest that the leader is better off promoting the quality for which it has cost advantage, i.e. the high quality gum. This also leads to a lower reduction in the competitors’ profit than promoting low quality gum. Similarly, when followers promote the quality for which they have cost advantage, i.e. the low quality gum, this results in a lower reduction in the leader's profit than when they promote high quality gum. The best strategy of the followers is, however, sensitive with respect to the elasticities of demand.

Keywords: Sub-Sahara, gum arabic, oligopoly, interdependent markets, Stackelberg equilibrium

JEL: D43, L11, Q13, Q17

Vol. 49 (2010), No. 1: 1-24