Market Structure and Inequality: Welfare Implications of Products Bans

We study the distributional effects on consumers and firms of regulatory interventions that impact market structure. We do this in the context of the noodles market in India, where the largest manufacturer was found in non-compliance with nutritional standards and banned from the market for six months. We show substantial market heterogeneity in consumers’ responses across income categories and the presence of negative spillovers to competitors. We identify demand and supply responses to the intervention by estimating a structural model of consumer and firm behavior. Through the calculation of counterfactuals, the model allows us to analyze if firms’ responses were driven by changes in competition (e.g., the remaining firms face less competition after the intervention), changes in consumer behavior (e.g., consumers abandoning the entire category rather than just the targeted firm), or a combination of the two. Of particular interest is the analysis of whether higher- or lower-income consumers were more likely to respond to the ban by substituting away from the focal product category.