Auctions in Grain Markets and Farmer Welfare

A BANERJI, NEHA GUPTA, J V MEENAKSHI

1 Introduction
Modifications to the Agriculture Produce Market
Committee Acts have removed barriers to private
regulated wholesale markets (which numbered approxi-
participation and allowed trade outside regulated
In regulatedmately
mately
7,000India, 7,000Thericestructure
in 2010). wholesaleandandfunctioning
in 2010). wheat
of markets The are structure marketed (which numbered and primarily functioning approxi- through of
markets in the hope that it will help farmers and improve
these wholesale markets were planned by the Agricultural
market infrastructure. But a key feature of regulated Produce Marketing (Regulation) Act, ratified by various states

markets - the use of auctions to sell produce - has in the late 1960s and early 1970s. Among their main features
was prohibiting the sale of notified products outside regulated
attracted relatively little attention. This paper argues
markets. Over time, these markets have proliferated with
that the auction mechanism is central to protecting the growth of agriculture, but the average area served by an
farmers' interests in a given market, even in the presence
individual wholesale market continues to be large. In 2010, the

of collusion among some large buyers. More generally,average regulated market served an area ranging from 100 to
150 square kilometres in Punjab and Haryana, to 600 sq km in
it is a transparent mechanism of price discovery and
Madhya Pradesh and 800 sq km in Rajasthan, with the national
sets a benchmark with which any new market set up average at more than 400 km.1
by a private player has to compete, thus mitigating any In addition to a sense that the growth in regulated markets
adverse impact on prices received by farmers. has not kept pace with needs, concerns about the Agriculture
Produce Market Committee (apmc) -regulated marketing sys-
tem have also been voiced on grounds that it has not served
the interests of farmers. The Model apmc Act2 proposed in
2003 notes that the "monopoly of Government regulated
wholesale markets has prevented the development of a com-
petitive marketing system . ." The requirement that all buyers
and sellers be licensed works as a barrier to entry (although, in
principle, there is no limit to the number of licences that can
be given, space constraints in the market yard mean only a
limited number of agents can be accommodated).
The Model Act explicitly allowed private players to set up
markets, in the expectation that the marketing infrastructure
as a whole would improve. It also allowed for direct selling
either through farmers' markets or through contract farming.
Parallel developments include the restarting of futures trading,
and the relaxation of export restrictions on rice and wheat.
The implementation of the Model Act has not been uniform
across states. One of the debates surrounding its implementa-
tion is whether the changes were actually going to be bene-
ficial to farmers. A recent newspaper article titled "Where
Dismantling apmcs Doesn't Help Farmers" best exemplifies
these concerns. It notes that

[S]tates such as Orissa, Bihar, West Bengal and Assam, which have
increased their rice production significantly during the last five years
or so, have been finding it difficult to invite private players even after
dismantling the apmc Act . . in the absence of even basic infrastruc-
ture such as auctioning and cold storage, farmers are still at the mercy
of traders (Das 2012; emphasis added).
ABanerji (a.banerji@econdse.org), Neha Gupta ( nehagupta@econdse.org )
and J V Meenakshi ( meena@econdse.org ) are at the Delhi School of
The emphasis on the word "auctioning" is deliberate, because
Economics.
in all the discussion around the reform of the apmc Act, an

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 REVIEW OF RURAL AFFAIRS

essential feature of regulated markets, the sale of produce buyer remaining who is willing to purchase the lot. This is the
through auctions, has not got the attention it deserves. Thesale price, also known as the "win price", of the auction. Once
centrality of the auction mechanism in protecting farmers'the lot is auctioned, the buyers move on to the next lot, and the
interests by mitigating downward pressures on prices, and in auction process starts again. These auctions take place quite
providing a transparent mechanism for price discovery hasrapidly and it takes less than a minute to sell each lot. The auc-
been lost. tioneer gets a share of the final price, so he has an incentive to
This is the motivation for this paper, which attempts to ensure that lots are sold at the highest possible price.
address two broad sets of issues. First, it examines the efficiency How much bidders are willing to pay for a lot depends in
of the functioning of individual auction (regulated) marketspart on its quality. So the win price depends on quality. But a
by asking the following questions in Section 3 - (a) what is thelarge number of other factors also affect win prices. These in-
extent of collusion in grain markets, and what impact does thisclude the extent of competition in the market, as reflected by
have on farmers' prices when grain is sold through auctions?the number of buyers participating in the bidding; the number
(b) to what extent does the auctioneer work to maximise theof large buyers relative to smaller buyers; collusion among
prices that farmers receive through a judicious choice of buyers; the form the collusion takes; and the reserve price set
reserve prices? and (c) even in situations where sales are by the auctioneer.
negotiated bilaterally between a farmer and a buyer, what is For instance, the larger the number of buyers, the higher the
the role of the auction mechanism in setting the broad frame-price a lot will fetch. Similarly, if there are a few large players
work for the transaction? The second set of issues, set out in in the market, whose valuations for the lots are higher (either
Section 4, relates to the potential impact on prices received bybecause of distinct markets, or lower processing costs) than
farmers by the introduction of a new market set up by a privatethose of smaller buyers, the higher the price that the farmer
firm to purchase grain (as permissible under the reformedwill get. However, if buyers collude, prices could be depressed.
acts) in competition with the (old) regulated market. We con- Finally, the reserve price set by the auctioneer also matters,
sider several alternative scenarios that capture a range of pos-and involves a delicate balancing act. Setting a high reserve
sible outcomes. By way of background, a description of theprice may result in a high sale price, but too high a price runs the
conduct of grain auctions and a framework for their analysis risk of a lot not getting sold. These aspects are discussed later.
are set out in Section 2.

The focus of this paper is on wheat and paddy, crops which 2.1 SomeTheoryand Econometrics of Ascending Auctions
continue to dominate the policy discussion (and also the liveli- The recent literature on the econometrics of auction data is
hoods of most farmers, though not gross domestic product;closely integrated with the theory of auctions. This sub-section
gdp). Although much of the discussion is conceptual in nature,summarises the theory and the associated econometrics. (It
and the scenarios we consider are hypothetical, it is anchored may be skipped by those not interested in technical details.)
in surveys of auction markets we conducted in north India in The theory models an auction as a game of incomplete infor-
1999. We have deliberately retained the use of 1999 prices, asmation played by p bidders. "Private values" models (Krishna
the objective is to understand directions and magnitudes of2002) assume that each bidder i, (i=i,...,p) has a value vp or
changes in outcomes (including price changes), and not levels. the maximum he is willing to pay for the lot on sale. This value
The perspective in this paper is farmer-centric - whetheris privately known to the bidder. The uncertainty that other
market institutions ensure that farmers receive a remunera- bidders (and the auctioneer) have about what this value is, is
tive price. The key message is that auctions matter, both formodelled with the assumption that all bidders' values are
engendering efficient outcomes in given markets, and in medi-drawn from a known, joint distribution F(vjV.., vp) of the val-
ating the impact of new markets that may be set up without anues. The assumption of incomplete information about values is
auction mechanism. a key assumption in auction models - if values were known,
the auctioneer could simply choose to trade with the bidder
2 Ascending Auctions in Grain Markets with the highest value, at a suitably negotiated price, rather
Grain sales at regulated markets or mandis take place through than design an auction.
ascending auctions, as mandated by the apmc Act. In a typical In a private values setting, with an ascending auction, a bid-
regulated market for paddy or wheat, farmers' grain is displayed der's choice of bid or price at which he chooses to drop out of
in lots spread out across the mandi yard. Each lot is auctioned the auction is simple. In equilibrium, bidder i with value v.
separately and the auction begins with the auctioneer and the chooses to drop out at exactly this value. If he delays dropping
bidders making independent, visual assessments of the quality out beyond his value, there is a chance that all remaining bid-
of grain in the lot (quality attributes differ by type of grain). ders will drop out before he does, in which case he will win at
Having assessed quality, the auctioneer announces a reserve a price that exceeds his value. He will then incur a loss by
price, below which the grain will not be sold. He then raises buying the lot. On the other hand, if he drops out before the
this price in small increments (therefore the term ascendingprice reaches his value, and if it happens that all other bid-
auction). Bidders decide whether to stay with the bidding, orders' bids are less than v., he loses a profitable opportunity. If
drop out, at each such price. The auction ends at the price at he had not dropped out, he would have won the lot at a price
which the last but one bidder drops out. There is then only one lower than his value.

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 REVIEW OF RURAL AFFAIRS == =

This implies are aligned with international

that theprices) is not directlyprice
win relevant
the here, since the relatively
second-highest of thin coverage
the of wholesale
valuesmarkets
the auctioned translates
object. into large ranges inAs
prices. A surprisingly
the small pric
the lowest number ofdrops
value papers study individual out
markets themselves (Palas-
first,
values, until kas
the and Harriss-White 1996; Mattoo, Mishra andwith
bidder Narain 2007; t
out. More Ramaswami and Balakrishnanassuming
formally, 2002; Umali-Deininger and t
iour, the win Deininger
price 2001; Thomas 2003,
is and our
thestudies). Onlysecon
a subset
the p values of the
of these papers bidders.
analyses the features of individual mandis that Th
equivalent to observing
affect the
quantities of interest, such as the prices farmers expect se
from a sample of
to get by selling p market.
in a particular values (se
Nagaraja 1992).Our data set pertains to surveys of wholesale markets
In a grain in north India in the kharif
auction and rabi marketing seasons in 1999.
market, the
der/miller i Although dated, the data areto
assigns illustrativelot
of the kind oft out- dep
expects to make
comes we expect from
in grain auction markets. the sale
Market committee
minus the cost
Table 1 : of
Summary Statisticsprocessing
from Wheat Auctions in a Small Regulated Market th
storage costs). In other
Mean Std Deviationwords,
Minimum Maximum t
expects to make if
Win price (Rs/quintal, he
1999 prices) 562.60 6.37obtains
550.50 602.50
markets may be
Number distinct
of active bidders (for in
wheat market in north India from which we drew our auction Uniformity in grain size (Score)

sample were buying for large firms in south India, while the Absence of other foodgrains (Score) 2.74 0.46

Absence of foreign matter (Score) 2.49 0.60 1 3

small bidders were local millers), and their processing costs
depend on the state of machinery in their mills, which are likely records would of course be more current, and have informati
to differ from each other. It is reasonable to infer that these on the sale price, quantity, and the identity of the buyer, but n
distinct features lend some asymmetry to how much different the quality of the lot or the reserve price, which is necessary t
millers value a lot, and also make these values the private undertake the kinds of analyses proposed here.
information of respective millers. Thus the private values The sample for wheat from one of the markets we stud
model may be a reasonable approximation of the setting, once consisted of data on 720 lots that were auctioned. This wa
we condition for the quality of a given lot of grain. relatively small regulated market, with arrivals totallin
While the bidding behaviour here (bidding one's value) is 1,75,000 quintals in the main marketing months of Apr
simple, the econometrics is potentially difficult because typi- and May. Trained enumerators recorded information on
cally, in ascending auction data, we do not observe the pricesseveral quality parameters (ranked on a scale of 1 to 3), in ad
at which different bidders drop out. This is true in our wheat dition to the reserve price set by the auctioneer, the numbe
and paddy auction data as well. The auctions are conducted of bidders participating in the auction, the win price, an
too rapidly for these "bidder drop out" prices to be recorded. the identity of the winner of the lot. Table 1 presents som
What we do observe is the win price, the price at which the last summary statistics.
but one bidder drops out. In addition to the win price, we also In this market, the auctioneer invariably set a reserve pri
observe the identity of the winner of each lot. Athey and Haile equal to the minimum support price (msp). (In contrast
(2002) (see also Meilijson 1981) show that if bidders draw their this, in paddy auctions, there was substantial variation
values vlV.., vp independently, from possibly different valuethe reserve prices that auctioneers set across different lo
distributions Flt. . ., F , and we observe in the ascending auction of grain. Part of the reason for the constant reserve pric
data the joint distribution of the win price and winner identity, in the wheat market was that in the neighbouring state
we can identify the unobserved value distributions them- Haryana, the state government procured all wheat arriva
selves. This key identification result enables the estimation of at the msp.) The number of buyers varied between 6 and
unobserved value distributions of millers from observed win across different days. There was also variation in the sen
prices and winner identities. that some buyers were present earlier in the season and the
exited, whereas others entered the market later in the seaso
3 Win Prices and Farmers' Revenues
Three of these were large and purchased about 45% of t
in Grain Auction Markets
grain over the season. The other small buyers bought le
With this apparatus in hand, an analysis of the first setthan
of 2% each.
questions, which focuses broadly on the question of prices An OLS regression, presented in Table 2 (p 67), highlights
received by farmers when their grain is sold in individual
some key features of this market. It underscores the impor-
auctions, is possible. tance of the quality variables, all of which are significant, in
A focus on price formation in specific markets is warranted
explaining the variation in prices - higher quality lots sell at
because of the thin coverage of mandis. The related literature
higher prices. Also significant is the number of bidders - an
that addresses spatial efficiency (whether prices in various
increase of one buyer is associated with an increase in win
price of about 1%. These marginal effects take into account
markets differ only by transportation costs, and whether they

66 DECEMBER 29, 2012 vol XLVii no 52 Q3S9 Economic & Political WEEKLY

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 REVIEW OF RURAL AFFAIRS

factors outside the grain market affecting prices, such as of how

evolving information on grain market arrivals elsewhere. wheat m
These are captured by the week-specific dummies. better. Details of the estimates and the test are available in
Banerji and Meenakshi (2004). Here, we focus on using the
Although useful as a descriptive tool, the ols regression
estimates of the collusive model to answer other questions of
cannot capture the institutional features of the market, nor ex-
plain how efficiently the market is in operation. To do this,interest.
a We note that the statistical test corroborates an obser-
simple auction model must be estimated. vation from the field - that the three large bidders by and large
stayed out of each other's way, bidding singly on each lot in a
Table 2: Correlates of Wheat Win Prices, OLS Estimates

Dependent Variable: Win predetermined

Price (Rs/quintal) fashion.
Coefficient Std Error
The estimates of the underlying value distributions, condi-
Uniformity in grain size 3.7 0.5 tional on average quality, yield that in the peak arrivals period
Absence of foreign matter
(Week 2) the smaller bidders valued a lot of average quality at
Absence of other foodgrains
about Rs 560 on average; the large bidders h and sr had mean
Number of active bidders
valuations of Rs 585 and Rs 595 (the standard deviations are
relatively small, with the small bidders' value distributions
Week 2 dummy

Week 3 dummy

having the highest standard deviations of about Rs 9) while

Constant

sm's valuations were only slightly higher than that of the

R-squared

smaller bidders. With such asymmetries in the willingness to

We use the
pay for wheat, it is not surprising that these buyers had the id
set largest market shares.
up a likeli
ner What impact did this form of collusion have? Table 3
identity
the provides estimates of win prices and farmer revenues if
quality o
theirthe three value
large bidders would all bid on each lot, instead d
of designating only one of them to bid on a given lot. In
conditional o
tions particular,
are we perform the following counterfactual.
dist The
the second column of Table 3 gives the expected win price for
active bi
the an average quality lot in Week 3 if Bidder h bids against a
reserve p
This set of small bidders. In the third column is the counterfactual
framew
expected win price
tional if the two other large bidders bid on the
featur
lot, in addition to Bidder h and the small , bidders.
wholesale ma The
that percentage difference is statistically significant, but
they drafairly
thosemodest, of
at about 2.1% to 2.6%. the
call them h,
Table 3: Impact of Bid Rotation on Win Prices (Rs per quintal)

butions Fl}
Number of Expected Win Price Expected Win Price Percentage F
The Small Bidders H Is Sole Large Bidder All 3 Large Bidders Bid Difference
observab
three 6
quality
tion t 8
form t
tions are as
10

Simulation
to zero, and
bidders' value
These r
on rice
average pa
(c
ers," varieti
the para
tions 2008).
are esti
With takes
such t
co
it is More
natural i
t
marketquite
pricel
basmat
rotation. In t
with has
each eve
oth
ding. A secon
This, in
auction
players - and
likely selectin
to be s
to able
have re
large
expect
mating two
one presen
with non
data sells
better at
p
than t
characterised

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values bidders assign to a lot. Thus the challenge confronting The final question in this section deals with what happens
him is to set a high reserve price (so lots sometimes sell at when, instead of auctions, transactions are conducted through
the reserve price), without it being too high (in which case it mutual negotiations between buyers and sellers. This has been
would exceed what any buyer is willing to pay, and the observed in some regulated markets in north India, and occurs
lot would go unsold). Resolving this trade-off leads to the when the market committee entrusted with the running of a
"optimal reserve price" at which the expected revenue from particular market does not, or is not able to, carry out sales
the sale is maximised. through auctions. In this case, auctions happen very early in
Since bidders' values depend on grain quality, the optimal
the morning when arrivals are relatively light, and set the
benchmark for the rest of the day. As the day progresses, arriv-
reserve price would vary by lot, it being higher for higher quality
lots. In the wheat market under study, however, the auctioneer
als in the market pick up to a point that the infrastructure is
set the reserve price at the msp, not varying it at all across lots.not able to handle the volume of grain lots to auction. Instead,
Using our estimates of bidders' value distributions, we cana series of bilateral arrangements are made between buyers
estimate optimal reserve prices for each lot in our sample.and sellers. However, these transactions are not the typical
bilateral sales that may occur at the farm gate because both
(This is done by computing the expected revenue as a function
of reserve price, and choosing the reserve price that maximises
the farmer and seller in such transactions have the option of
the expected revenue. This expected revenue depends on our
going to other buyers/sellers in the market yard at little cost.
estimates of the value distributions for the bidders.) How do prices and trading outcomes in such markets, where
Across the sample of 720 lots collected over the entire sea-
mutual negotiations (with the possibility of a search for other
son, the optimal reserve prices that we estimate vary between
traders to negotiate with) predominate, compare with auction
Rs 537 and Rs 587. The average difference between it and themarkets? There are no easy answers, and in the absence of
reserve price of Rs 550, in absolute value, is Rs 8.2, with adata, we limit ourselves to a few remarks. Ascending auctions
standard deviation of Rs 7.1. Thus, by and large, the choice of
have the benefit of efficiency, in the sense that each lot of grain
using the msp as the reserve price appears to be judicious - the
goes to the bidder that values it most. If instead there are bilat-
optimal reserve prices, which presume knowledge of bidders'
eral bargains (with a search for trading partners), for efficiency to
obtain, for each lot, the buyer that values it most needs to be
value distributions, are not too different, on average, from the
observed reserve price of Rs 550. This conclusion is further
matched to it. (More generally, a lot for which its seller has the
supported by another counterfactual. This is a comparison (lot
lowest reservation value needs to be matched to the buyer that
by lot) of expected revenues when the reserve price is Rs 550values it most, and so on.) Some theoretical work (Rubinstein
with expected revenues when the reserve price is set optimal-and Wolinsky 1985; Gale 1987 are seminal) suggests that if
ly. In both cases, on average, expected revenue differences are
search and trading frictions are very low, such matching can
negligible (the average expected revenue is between Rs 563
indeed occur as buyers and sellers search for whom to trade
and Rs 564 in either case). with. In practice, in the markets under consideration here, we
The wheat market is perhaps somewhat special because are less sanguine. It is also not entirely clear whether the free-
there is not much quality variation across lots, and the esti-
dom to switch trading partners can substitute for the competi-
mated value distributions of buyers have low variances. Guptative pressure on prices in auctions. On the other hand, the
process of price discovery may be helped by the fact that
(2012a) has a detailed analysis of reserve prices in a market for
parmal paddy, which does not have these features, but reaches
some auctions are conducted in these markets in the early part
similar conclusions. In the parmal market, there is much moreof the day. Given that the markets where auctions are the trad-
ing mechanism function quite well, it would be desirable to
variation in quality, and therefore on optimal reserve prices.
improve mandi infrastructure so that large volumes can be
The auctioneer's choice of reserve prices does not coincide with
the msp, and varies significantly across lots. Thus the datahandled by auctions. This could require moving away from
there offers more opportunity to understand how well the auc-
auctioning the grain of each farmer separately to a system of
tioneer chooses reserve prices. She finds that the discrepancyquality grading and auctioning of larger volumes at one go, or
some format of multi-unit auctions.
between the auctioneer's reserve prices and the optimal reserve
prices is about four times larger than in the wheat market Overall, therefore, we find that in functioning auction mar-
above, on a similar base. However, the more germane comparisonkets, farmers' interests are served well, even in the presence of
large buyers who collude.
is what difference the optimal reserve prices make to expected
revenues from these auctions, compared with revenues gener-
4 Possible Price Effects of
ated by the auctioneer's observed reserve prices. Gupta shows
that this difference in expected revenues is less than Rs New
2 Private Entrants to Markets

(about 0.4%). Thus the auctioneer's knowledge of millers' valueChanges in the apmc act have enabled grain transactions to
distributions, and his incentives, are adequate for him totake place outside the ambit of government-regulated wholesale
choose reserve prices sufficiently well. Gupta shows further markets. In this section, we study one aspect of the enabling
that as the number of bidders increases, the expected revenueclause that permits firms to set up a private market to purchase
grain. When is it in the interest of a firm to take this route,
curve becomes flatter around the optimal reserve price, making
it easier for an auctioneer to choose a good reserve price. rather than operate through the already available channel of

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buying grain through a regulated wholesale auction market? Now suppose that firm l does not participate in the grain
And are there significant differences to farmers' revenues if a market auctions because it has set up a private market to buy
large firm chooses to set up a private market to buy grain grain from farmers at a single posted price that does not vary
rather than operate as a bidder in existing auction markets? ~ during the day. Call this Scenario bh. Assume firm l wishes to
Such private markets are only beginning and few, but are buy the same fraction k of market arrivals that it could pick up
increasing. Reardon et al's (2011) study of rural business hubs by bidding at auctions. This is an assumption about the capac-
suggests that in some states these alternative markets account ity limitation of firm l being equal to k times total market
for 9% of wheat sales, while the regulated market accounts arrival of grain, and appears reasonable in the short run. We
for 56%. Although rural business hubs offer much more than argue that then p(-l) may be a reasonable approximation for
just a place for selling output, we focus only on that aspect the mandi prices that will prevail, and also for the price that
of it. The key is that in this alternative market, there is only firm L will pay farmers in its private market.
one buyer (the firm that has set up the rural business hub) It is useful to think about what levels of the three variables
and as such is perhaps the single largest private purchaser (Pa, Pf kf) can constitute an "equilibrium" in the marketing
of the grain. season under Scenario bh. Here Pa is the average win price
that prevails in the auction market, Pf is the price that firm l
Thought Experiment charges, and (i-fc/) and kf are the fractions of total arrivals Q
In a typical scenario, the private market offers a single price sold at the auction market and firm l's private market respec-
that is set each day (Reardon et al 2011), while prices go up and tively. We will say (Pa, Pf kf) constitute an equilibrium if the
down during the day in the regulated market. Consider there- following conditions are satisfied.
fore the following thought experiment. A single large firm (i) Given the auction market price Pa and firm l's capacity k , its
(call it firm l) can choose to purchase grain from an auction price Pf is consistent with maximising profits.
market, or set up a private market to which farmers sell. If it (ii) Given the allocation of proportions (i-fc/) and kfoi grain to
operates as a bidder at grain auctions, call this Scenario l. In the auction market and firm L's market respectively, Pa is the
this scenario, the average price it would pay is approximately average win price derived from bidders' value distributions at
the average win price that prevails at these auctions.4 With n the auction market.
other firms bidding as well, and drawing values from given (iii) If in equilibrium, Pa < Pf then firm l's grain purchases
value distributions, let the average win price be denoted p(l). fills its granaries to (full) capacity k; similarly, if Pa > Pf the
Given its values for grain, firm l expects to purchase some bidders in the auction market get to buy enough grain to fill
fraction k of market arrivals; the fraction (i-fc) goes to the other their capacities. If Pa = Pf farmers are indifferent between
bidders. Note that p(l) is also the average sale price that farm- selling to firm l or at the auction market, and firm l gets to
ers expect. So it is an indicator of farmers' expected revenues purchase up to capacity (fraction k of arrivals), as do the bidders
and welfare if they choose to sell at the auction market. in the auction market (fraction (i-fc)).
The empirical framework used for the estimation of value We argue first that Pf < Pa is unlikely in equilibrium; for if
distributions made a simplifying assumption - that bidders' this were true, then firm l may not get any grain to purchase.
values did not depend on the inventory of grain they had al- Of course at these prices farmers prefer to sell to the higher-
ready purchased. Lacking data on inventories, this is reasona- priced auction market. Moreover, we assume that the totality
ble for some purposes, but it is also reasonable to believe that of capacities of bidders' at the auction market is big enough to
as purchases begin to fill capacity, a bidder's value for incre- absorb all these arrivals (recall the discussion based on Rear-
mental amounts of grain decreases. We will use the fractions don et al's 2011 survey of rural business hubs where the bulk of
k, (i-fc), purchased by firm l and the other bidders respectively, transactions occur in the regulated market). Given the large
in this context, in a moment. volume that is absorbed by the mandis, and using Reardon et
On the other hand, suppose firm l does not participate in al's numbers, it is conceivable that the many bidders there
these auctions while n other firms do. Suppose also that the would be able to absorb the 9% that goes to the rural business
total grain arrivals in the market are a fraction (i-fc) of the ar- hub, if that hub sets too low a price. On the other hand, Pf > Pa
rivals of Scenario l. At this level of arrivals, in the absence of is not possible in equilibrium either, because firm l can reduce
firm L, the other bidders get to purchase as much as they did in its price to equal Pa and still buy to capacity. Therefore, in
Scenario l. It is reasonable that their value distributions are equilibrium, Pf = Pa , firm l buys to capacity, that is a fraction
then about the same as they were in Scenario l. Denote the k of total arrivals, and the remaining fraction going to bidders
average win price in this scenario as p(-l). p(-l) is the expected in the auction market.
win price (or expectation of the second-highest order statistic; But the fraction (i-fc) of total arrivals Q that gets sold to bidders
Section 2) if firm l is not a bidder, and the other n bidders' val- in the auction market is then precisely the fraction of the auction
ue distributions are precisely as in Scenario l. p(-l) is lower market that they purchase in the other scenario, Scenario l.
than p(l), as there is now one less bidder at the auction; how(This implies that in equilibrium, kf = fc.) Therefore, their value
much less, depends on market characteristics. If the number of distributions are the same as in Scenario l, so that the average
firms is large, the absence of one bidder will have only a smallwin price Pa at this level of arrivals must equal p(-l). By our
downward impact on sale prices. argument, this is also the price set by firm l in its private market.

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REVIEW OF RURAL AFFAIRS

the auction market. In the extreme case in which it can do so

This means that if one large firm sets up a private market to
purchase grain rather than participate as a bidder in auction
fully, firm l's absence from the auctions does not change the
markets, the lower competition in auction markets can lead to
profile of bidders on any lot, and so does not change the aver-
an equilibrium in which both auction market prices and prices
age win price.
(iii) In states where the government is a large buyer of
in the private market are lower. The large firm in the private
grain, it typically picks up the entire arrival of grain in
market has to match the lower auction price that obtains if it
does not participate in the auctions. Thus it may be in the
many mandis. The above analysis with private firms bidding
interest of a large enough firm to take the route of setting up ain auction markets is less applicable here - a firm that sets up
private market rather than bid in auctions. This choice can
a private market will basically have to match the msp at
also lead to lower sale prices for farmers. which the government buys. There is no downward effect
However, there are many reasons to be circumspect about
on prices.
(iv) The large costs of setting up private markets probably
this conclusion, and several unexplored aspects that qualify it.
We turn to these now. imply that intermediate-sized firms would not be interested in
(i) The quantitative impact on prices of a large firm eschewing
taking this route. Simulations also suggest that if they do, their
the auction market and setting up a private market is fairly
downward impact on prices is lower compared to that of large
limited. This is seen by simulating the impact of the two firms. Note also that the analysis in (i) talks of the decision of a
scenarios (Scenarios l and bh) on average win prices, using
single large firm to set up a business hub. What if there are two
our estimates for players' value distributions in the wheat
or more such firms that contemplate the same move? If two
mandi. Suppose that small bidders in an auction market draw
large firms, for example, set up separate private markets and
their values for wheat from normal distributions with mean must match mandi prices to attract farmers, Table 4 suggests
560 and standard deviation 20 (n(s6o,2o) for brevity), as is
that grain prices may be quite a bit lower than if both were
estimated in Week 2 of our wheat auction data. Firm l, andbidders at the auction market. (As an example, this is like firm
other large bidders, draw values from 1*1(595,20) - their values
L and one other large firm bidding with eight small firms and
are Rs 35 higher on average, in line with the estimate for the
generating an average win price of Rs 592.9, versus both set-
bidder sr in our wheat sample.5 ting up privately, lowering the win price to Rs 577.) But this
analysis is potentially misleading - if several large firms
As Table 4 indicates, the magnitude of the decrease in grain
sale prices in the event of firm l setting up a private market choose
is to set up independent private markets, competition
quite limited, at most about 2%. Moreover, the differences are
among these private markets can hold prices to higher levels;
not significant. Note also that the downward impact is less the
we have ignored this effect.
(v) The analysis in (i)-(iv) above does not consider the impor-
higher the competition in the auction market. With eight small
bidders and another large bidder, the downward impact is less
tant spatial role of a market (whether auction market or other-
than 1% (and insignificant). wise). The setting up of an additional market reduces the
Table 4: Comparing Farmer Revenues under Two Scenarios (Rs per quintal)
transport costs of farmers in a certain radius around it, bene-
Average Win Price fiting them, possibly greatly. For instance, if firm l in the
Other Bidders Firm L Bids in Auction Firm L Sets up RBH Percentage Difference above thought experiments locates a private market at a place
5 small where regulated auction markets are not present, an extend-
8 small ed analysis may show that reductions in farmers' transport
8 small, 1 large costs make up or more than make up for any negative impact
8 small, 2 large 598.6(11.1)
on sale prices. Whether locating in such places is feasible, or
Standard deviations are displayed in parentheses; all values in
profitable, relative to locating close to existing auction mar-
This simulation kets is a consideration that would
highlights take us too far
the away from
role of well
lated auction the current focus.
markets at a time of change i
tutions. With auction markets and a relativ
5 Conclusions
bidders, a firm that sets up a private marke
tively high win price.
In this paperThis
we have attempted
weakens
to focus attention
any
on the roledo
sale prices to a great
played byextent.
auctions as the medium of exchange between buyers
(ii) The downward and impact on
sellers. The focus is on prices
wheat (and paddy) markets,iswhichfu
auction markets witness collusion
continue to matter the most for the vast majority of of
farmers th
in
Section 3 - simpleIndia.
bid This was motivated in a large part
rotation by the almost-con-
among lar
for example, that ifspicuous-by-silence
firmneglect of the mechanism of exchange and
l participates in
there are two large its impact bidders (and
in discussions of the Model Act. Whilesome
the Model Act s
large bidders agreehas several
they other welcome
willfeatures that
bothwe do not discuss
not bid
each bids on half the lots. In the
here, it does not lay adequate emphasis on the alternativ
role played by
L is not a bidder auctions.sets
and Private markets
up are not
a required
privateto purchase grain
mark
remaining largebidder is
through auctions; this is notfree to
even recommended. Nor bid
is there on
bidder has enough much discussion on this.
capacity, it can in a sens

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 e REVIEW OF RURAL AFFAIRS

Instead, there is a lot of interest in the conduct of contract

of the government as a buyer of wheat and rice in some states.
farming, which the act now enables. However, the impact
While questions of government procurement would take us too
of contract farming on wheat and rice as a whole far
willafield, we note that some of these questions can also be in-
probably be quite limited outside of basmati rice. Contract
formed by a knowledge of the working of regulated auction
farming can potentially have larger beneficial effectsmarkets.6
on
While auctions cannot prevent collusion, our analysis of
products that are perishable, that have longer supply chains
than wheat or rice, and where quality improvements wouldwheat and rice auctions shows that the impact of collusion in
these markets is limited by (a) collusion being restricted to a
matter a great deal more. In the case of basmati rice, it offers
small set of bidders; (b) a reasonably large number of bidders,
farmers a certain price for their output. In this, it substitutes
for a forward market that neutralises risk. In wheat and signifying competition; and (c) the presence of the sellers
non-basmati rice, in states where the government is a large
(farmers) at the open outcry auctions. Competition from auc-
buyer, the msp can be said to play a similar role. (To tion
the markets also serves to shore up prices at other markets
extent the msp acts as a price support, its function is more
where auctions do not occur, as is now permitted. We conclude
akin to that of an option.) that while private markets have their potential benefits, as do
other changes to the apmc Act (for instance, removing entry
The primary focus of this paper has been regulated markets,
barriers), the institution of auctions as a trading mechanism is
and by implication, the role of the government as a facilitator
an effective one that should be strengthened.
of trade. We have therefore not discussed the large presence

notes Das, S (2012): "Where Dismantling APMCs Bengal Food Economy", Journal of Develop-
Does Not Help Farmers", Financial Express,
ment Studies, Vol 30, No 1, pp 1-57.
i http ://agmark
htm;
5 June.
accessed - (1996): "The Identification of Market Exoge- o
Gale, D (1987): "Limit Theorems for Markets with neity and Market Dominance by Tests Instead
2 http://agma
Sequential Bargaining", Journal of Economic of Assumption: An Application to Indian
htm; accessed o
Theory, Vol 43, pp 20-54. Material", Journal of International Development,
3 The collusion
8 (1), pp 11-23.
Gupta, N (2012a): "Do Wholesale
from the Markets Serve standa
the Interests of Farmers? An Analysis of Ramaswami, B and P Balakrishnan (2002): "Food
discussed in th
Reserve Price Setting and Farmers' Expected Prices and the Efficiency of Public Intervention:
Krishna 2002).
Revenues in a Grain Auction Market", mimeo, The Case of Public Distribution System in
and rejected fo
India", Food Policy, 27 (5-6), pp 419-36.
and Delhi School of Economics, Delhi.
Meenaksh
- (2012b) : "Rethinking Grain Procurement Policy",
Reardon, T, B Minten, M Mehta, S Das Gupta,
4 More precise
S Rajendran, A Sarawgi and B Beohar (2011):
be the mimeo, Delhi School of Economics, Delhi.expected
"Synthesis: Agri-Services in Madhya Pradesh
Krishna,
tional V (2002): Auction Theory (San Diego:
upon Aca- fir
for Inclusive Rural Growth: Baseline Findings
find demic Press). in our sim
and Implications", Report, International Food
Mattoo, A, D Mishra and
close toA Narain (2007): From the
Policy Research Institute (IFPRI), New Delhi. exp
difference.
Competition at Home to Competing Abroad: - (2011): "Synthesis: Agri-Services in Uttar
5 A Case Study of India's Horticulture
The (New
standar Pradesh for Inclusive Rural Growth: Baseline
Delhi: World Bank and Oxford University
than what we observed and are meant to be
Findings and Implications", Report, IFPRI,
illustrative of markets more generally. Press).. New Delhi.
6 See, for instance, Gupta (2012b), which uses Meenakshi, J V and A Banerji (2005): "The Rubinstein, A and A Wolinsky (1985): "Equilibrium
this framework to argue that the large govern- Unsupportable Support Price: An Analysis of in a Market with Sequential Bargaining",
ment procurement of rice through the "custom- Collusion and Government Intervention in Econometrica, Vol 53, pp 1133-50.
milled rice" channel, and neglect of the "levy" Paddy Auction Markets in North India", Jour-
Thomas, S (2003): "Agricultural Commodity Mar-
channel, has increased its cost of procurement nal of Development Economics, 76, pp 377-403. kets in India: Policy Issues for Growth", mimeo,
without providing any additional benefit to
Meilijson, I (1981): "Estimation of the Lifetime
Indira Gandhi Institute for Development
farmers. Distribution of the Parts from the AutopsyResearch, Goregaon, Mumbai.
Statistics of the Machine", Journal of Applied
Umali-Deininger, D L and K Deininger (2001):
Probability, 18, pp 829-38. "Towards Greater Food Security for India's
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81, Article 4.

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