Competition and Collusion in Grain Markets: Basmati Auctions in North India

Many small wholesale grain markets in India are characterized by large numbers of sellers, and a relatively small number of buyers, thereby lending the price formation process open to manipulation through collusion. Government intervention limits the extent of such manipulation by instituting regulated markets where the rules of exchange are clearly spelled out. The key institutional features of these markets are (a) sales through open ascending auctions; (b) the presence of "commission agents" representing both buyers and sellers. We present simple models of noncooperative and collusive behavior in auctions incorporating the above, and some more market specific, assumptions. We exploit data from a primary survey of a market for basmati paddy in North India. The main findings are (i) the collusive model explains the data better; (ii) the incentives of sellers and a subset of the large buyers are aligned; (iii) this, along with a Principal-Agent slack between millers and commission agents who buy for them, facilitates the form that collusion takes, and (iv) due to (ii) and (iii), the impact of collusion on market prices is not necessarily adverse. Insofar as the features of the market we study are common to grain markets in North India, we believe that these findings may be of much wider significance.