30 input price pM1 could be observed for a perfectly competitive mill/exporter even more inefficient than that of D1 (D0) and so on.

_The institutional identification of market power_ It has been shown that deviations between p* and p measure a wedge between *R producer prices paid and the producer price prevailing at minimum efficiency scale (MES) under perfect competition. Under the restrictive assumption of constant returns to scale (CRS), where the mill/exporter is operating at MES, this wedge is a measure of pure market power, as defined as deviations from marginal cost pricing. Relaxing this assumption, it was shown that the measure (p* - p*R ) measures both market power and inefficiency. Unlike SCP analyses that did not uniquely identify market power and NEIO models that use structural estimates to identify market power, this paper will use features of the institutional reality in Costa Rica to distinguish between * market power and efficiency in the mark-down measure (p* - p R ).

As seen in the brief market power NEIO literature review of Section IV, for (p* - p*R ) to evidence strictly market power, it is essential to identify in Figure 7, on which demand and supply curves mills are operating. This is undertaken using Costa Rican specific institutional norms. The exercise of market power is evidenced by a price, pM < pPC, below the VMP (demand curve). This is easily observed in Figure 7, where the demand curves are laid out. The difficulty is, without knowing which mill/exporter is relatively more scale efficient (closer to the MES), the same measure (p* - p*R ) would indicate market power for the mill/exporter at point D or the relative scale inefficiency of the mill/exporter at point B.

The analysis does not propose to formulate structural demand equations capable of distinguishing between these two outcomes, as in the NEIO. Instead, let the demand curve D1 belong to the least efficient mill/exporter.<sup>31</sup> The analysis proposes to institutionally identify point B, the perfectly competitive input market behavior for the least efficient firms: Let point B represent the point of operation of cooperative mills in Costa Rica. This is essentially a two-pronged claim: First, it claims that cooperatives are less scale efficient than other mills, i.e. on a lower demand curve. Second, it claims that cooperative mills do not exercise market power vis-à-vis * farmers. If these two claims hold, then any (p* - p R ) greater than that observed for cooperative mills (seen as a further mark-down in Figure 7 to a level such as pM1) is taken as evidence of market power in the input market for cherries in Costa Rica. Before providing support for these claims, note that the wider analysis of market failure for producers (and the role of Fairtrade therein), namely mill inefficiency and

> 31 Recall that conclusions about scale efficiencies are drawn from the relative positions of the demand curves in Figure 7 on the assumption that mills have the same long run average processing curve. This assumption was made for expository purposes, but is unnecessarily restrictive. It is also maintained here for the sake of exposition, although it is relaxed below .Note, furthermore, that it is theoretically possible that a mill be on a lower demand curve if it is more scale efficient than a cooperative, but on a higher long run average processing cost curve. As this is not a likely outcome, it is assumed throughout that non-cooperative mills are at least as cost efficient as cooperative mills. This is supported by cost studies of mills in Costa Rica (Mosheim 2002). In that case, the exposition of Figure 7 holds.