New Delhi: anyone who has bargained with Thelewala Or roadside vendors in India know that they often apply large mark-ups on prices and earn good margins. Nevertheless, selling fruits and vegetables in India is generally associated with “peanuts” when it comes to earnings and business potential.
To understand why, Nobel laureate Abhijit Banerjee of the Massachusetts Institute of Technology, along with scholars from prestigious universities in the US, UK and Canada, studied the market behavior of over 1,500 fruit and vegetable vendors in Delhi.
The researchers found that these local vendors earn an average of 29 percent on their purchase cost. When discounts are taken into account, even a local seller can make a margin of 21 percent.
Still, very few sellers attempt to expand their business. Instead, they exhibit risk-averse behavior when it comes to competition and expansion in the market.
in one August 2022 Working Paper For the National Bureau of Economic Research (NBER), a US-based nonprofit, the authors ask: “What is stopping vendors from stockpiling additional products, reducing prices, and competing more aggressively? “
For their answers, they looked to not only a Delhi survey but an “experiment” set up in Kolkata to see if they could encourage sellers to change their attitudes toward expanding their inventory – and found that Even though sellers made more profit when they were part of the experiment, they returned to their old practices soon after.
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Trends in Delhi’s Fruit Markets
The authors first conducted a survey on 1,179 street vendors and 309 fruit vendors who appear in designated weekly markets in South Delhi.
Based on this survey, the authors identified some key features of the fruit market in Delhi.
First, there is heavy competition among sellers. According to the study, a fruit vendor is likely to find around three to four competitors within a radius of 25 metres.
Another observation was that most of the fruit vendors sit idle throughout the day and work only for a few hours. On average, a fruit vendor sees 15 customers an hour, with evening and morning usually being the busiest times. The report states that the top 5 percent of fruit vendors can reach 42 customers in an hour.
Finally, the authors found that there is a high degree of product variation among fruit vendors. So, even if there are four more competitors for a fruit vendor within a radius of 25 meters, only one of them is likely to sell the same fruit, the study found.
Given this, the survey uncovered what the authors describe as a “puzzle”. Sellers have the ability to serve more customers, lower their prices and stock a greater variety of products to grab more market share from their neighbors. Yet, they do not try these methods to maximize their profits.
The authors offered some possible explanations for this: unqualified customer demand due to factors such as “loyalty” to particular vendors, lack of knowledge/capacity/money on the part of vendors to diversify their products, despite knowing that Not realizing it’s profitable, or that expansion could work in their favor.
“Explicit or implied collusion between vendors or inertial business practices arising from multiple behavioral factors may perpetuate this behavior over the long term,” the authors said.
But, they did not end here. To understand why these markets do not exhibit ‘perfect competition’, where sellers cannot charge a premium for a long time, the authors conducted an experiment in vegetable markets in Kolkata, the capital of West Bengal.
What explains imperfect competition?
The authors studied 20 markets in Kolkata, but because of the cost of the experiment, they intervened in only three – Charu Market, Sarkar Bazar and Alambazaar.
In these three markets, scholars provided a cash subsidy to vendors to buy and sell carrots at Rs 20 per kg – which was their average cost before the subsidy.
The authors provided this subsidy at the rate of Rs 30 per kg to all the sellers of the three markets who purchased carrots and to those selling less peas.
The authors found that during the subsidy period, vendors in the three markets were 57 percentage points more likely to sell carrots and 39 percent more likely to sell peas compared to markets where no such subsidies were given.
The authors found that sellers, even after receiving subsidies, did not tend to sell vegetables below market price, as a result, 90 percent of subsidized vendors reported an increase in their profit on the sale of these two items.
After the subsidies were removed, the authors found no significant inclination among participating vendors to sell these vegetables. To understand why this happened, the authors conducted a survey on them.
In the survey, the vendors revealed that there were already a lot of vendors in the market trading peas and carrots and if they procure these vegetables, it may annoy other vendors. Some even demonstrated their confidence in a new vegetable – they were afraid about the right price, being overcharged by the wholesaler and worrying about the quality, etc.
These responses were in line with “loss avoidance” – despite earning more profits during the subsidy period, the potential for smaller losses in the future was enough to deter them from changing their practices.
In short, the risk-averse behavior of sellers appears to reduce competition in the markets, despite knowing the benefits of making a profit and expanding.
These findings, the authors noted, have implications for policy interventions to benefit small sellers and consumers in developing countries.
The authors conclude, “Ease of collusion and/or inertial business practices may be why interventions aimed at making markets more competitive have at best limited success so far.”
(Edited by Asawari Singh)
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