Monopoly Power and Distribution in Fragmented Markets: The Case of Groundwater

This paper uses data from Pakistan's Punjab to examine monopoly power in the market for groundwater--irrigation water extracted using private tubewells--a market characterized by barriers to entry and spatial fragmentation. Our analysis of individual groundwater transactions over an 18 month period shows that tubewell owners price discriminate in favor of their own share-tenants, as a simple optimal contracting model would predict. Consequently, tubewell owners and their tenants use considerably more groundwater than do other farmers. We also find evidence that monopoly pricing of groundwater leads to compensating, albeit small, reallocations of canal water, which farmers exchange in a separate informal market. Despite the substantial misallocation of groundwater, a welfare analysis shows that efforts to counteract monopoly pricing would have only modest effects on efficiency and equity.