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Why don’t Indian fruit sellers make it big despite good profits? Imperfect competition, says study

Study by Nobel laureate Abhijit Banerjee & other scholars from US, UK and Canada found that fresh produce vendors charge high mark-ups but fail to adopt competitive market practices.

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New Delhi: Anyone who has haggled with a thelewala or streetside vendor in India knows that they often apply big mark-ups on prices and make good margins. Yet, selling fruits and vegetables in India is generally associated with “peanuts” when it comes to earnings and business potential.

To understand why this is so, Nobel laureate Abhijit Banerjee of the Massachusetts Institute of Technology in collaboration with scholars from reputed universities in the US, the UK, and Canada studied the market behaviour of more than 1,500 fruit and vegetable vendors in Delhi.

The researchers found that on average, these local vendors make 29 per cent over their procurement costs. When discounts are factored in, a local vendor can still make a 21 per cent margin.

Yet, very few vendors try to expand their business. Instead, they display risk-averse behaviour when it comes to competing in the market and expansion.

In an August 2022 working paper for the National Bureau of Economic Research (NBER), a US-based non-profit, the authors ask: “What is preventing vendors from stocking additional products, lowering prices, and competing more aggressively?”

For their answers, they looked not just at the Delhi survey but an “experiment” they set up in Kolkata to see if they could encourage vendors to change their attitudes towards expanding their inventory — and found that even though the vendors made more profits when they were part of the experiment, they reverted to their old practices shortly thereafter.


Also read: Why is rural India grappling with higher inflation than urban parts? High food prices hold key


Trends in Delhi’s fruit markets

The authors first conducted a survey over 1,179 street vendors and 309 fruit sellers who appear at designated weekly bazaars in South Delhi.

Based on this survey, the authors identified some key characteristics of the fruit market in Delhi.

Firstly, there is huge competition among sellers. According to the study, a fruit vendor is likely to find about three to four competitors within a radius of 25 metres.

Another observation was that most of the fruit sellers sit idle throughout the day and work for only a few hours. On average, a fruit seller attends to 15 customers an hour, with evenings and mornings generally being the busiest times. The top 5 per cent of fruit vendors can attend to upto 42 customers an hour, the report stated.

Lastly, the authors found that there is a higher degree of product differentiation among fruit sellers. So even if there might be four more competitors for a fruit seller in the radius of 25 metres, only one of these is likely to sell the same fruit, the study finds.

In view of this, the survey exposed what the authors describe as a “puzzle”. Vendors have the capacity to serve more customers, the leeway to lower their prices to grab more market share from their neighbours, and to also stock a greater variety of products. Yet, they do not try these methods to maximise their profits.

The authors offered some possible explanations for this: inelastic customer demand due to factors like “loyalty” to particular vendors, lack of knowledge/capacity/funds on the part of vendors to diversify their products despite knowing this to be profitable, or not realising that expansion could work in their favour.

“Explicit or implicit collusion between vendors or inertial business practices arising from a number of behavioral factors could sustain this behaviour in the long run,” the authors noted.

But, they did not end there. To understand why these markets do not exhibit ‘perfect competition’, where sellers cannot charge a premium for long, the authors conducted an experiment in the vegetable markets of Kolkata, the capital of West Bengal.

What explains imperfect competition?

The authors studied 20 markets in Kolkata, but due to the cost of the experiment, they intervened in only three — Charu Market, Sarkar Bazaar and Alambazar.

In these three markets, the scholars provided a cash subsidy to vendors for procuring and selling carrots at Rs 20 per kilogram — which was their median cost prior to the subsidy.

The authors provided this subsidy to all the vendors in the three markets who procured carrots and to infrequent pea sellers at Rs 30 per kg.

The authors found that during the subsidy period, vendors in the three markets were 57 percentage points more likely to sell carrots and 39 percentage points more likely to sell peas compared to the markets where no such subsidy was offered.

The authors found that sellers, even after receiving subsidies, did not tend to sell the vegetables below the market price, consequently, 90 per cent of the subsidised vendors recorded a rise in their profits on the sale of these two items.

After the subsidy was removed, the authors found no significant inclination in the participant vendors to sell these vegetables. To understand why this happened, the authors conducted a survey on them.

In the survey, the sellers revealed that there were already too many sellers trading peas and carrots in the market and that if they procured these vegetables, it could anger the other vendors. Some also exhibited their underconfidence in a new vegetable — they feared about the right price, being overcharged by the wholesaler and quality concerns etc.

These responses were consistent with “loss aversion” — despite earning higher profits during the subsidy period, the possibility of small losses in the future was enough to deter them from changing their practices.

In a nutshell, despite earning profits and knowing the benefits of expansion, the risk-averse behaviour of the vendors appears to reduce the competition in the markets.

These findings, the authors note, have implications for policy interventions to benefit small sellers and consumers in developing countries.

“The ease of colluding and/or inertial business practices may be reasons why interventions aimed at making markets more competitive have had at best limited success so far,” the authors conclude.

(Edited by Asavari Singh)


Also read: Vote-buying encourages graft, hurts rule of law, finds study. And it’s getting worse in India


 

 

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