Friday, January 15, 2010

Information and Markets

From the Economist's Economics focus for last week. One of Hayek's insights was that markets are essentially an information processing device: converting desires and resources into consumption. More and better information is good for both buyers and sellers
By examining historical data for the price of fish as mobile-phone coverage was extended down the coast of Kerala in southern India between 1997 and 2001, for example, Robert Jensen of Harvard University showed that access to mobile phones made markets much more efficient, eliminating wasted catches and thereby bringing down consumer prices by 4% and increasing fishermen’s profits by 8%.
Similarly, Jenny Aker of the University of California at Berkeley analysed grain markets in Niger to see how the phasing-in of mobile-phone coverage between 2001 and 2006 affected prices. She found that it reduced price variations between one market and another by at least 6.4%, and more in remote and hard-to-reach markets. With transaction costs cut, prices for consumers were lower and profits for traders higher.
The article also describes how ITC introduced internet kiosks (e-choupal) in Madhya Pradesh in an effort to improve transparency in the market for Soybeans.
Farmers in the region sell their soyabeans to intermediaries in open auctions at government-regulated wholesale markets called mandis, a system that was set up in order to protect farmers from unscrupulous buyers. The intermediaries then sell on the produce to food-processing companies. The problem with this approach for the farmers is that the traders have a far better idea about the prices prevailing in different markets and being offered by processing companies. With only a few traders at each mandi, they can easily collude to ensure that they pay less than the fair market price; they can then boost their profits by selling on the beans at a higher price.
However, in a long supply chain, different parties have different interests. ITC had an interest in cutting the middlemen out, and stimulating the farmers to produce more.
By the end of 2004 a total of 1,704 kiosks had been set up, each of which served its host village and four others within a five-kilometre (three-mile) radius. The kiosks displayed the minimum and maximum price paid for soyabeans at 60 mandis, updated once a day, along with agricultural information and weather forecasts. ITC also posted the price it was prepared to pay for soyabeans of a particular quality bought direct from farmers at 45 “hubs” (mostly in the same towns as mandis). By setting up the kiosks, ITC enabled farmers to check that the prices being offered at their local mandi were in line with prices elsewhere. It also gave them the option to sell direct.
The result was that the farmers produced more, and earned more. The middlemen lost out, and ITC got to purchase more at lower prices.
She found that the presence of kiosks in a district was associated with an instant and persistent increase of 1.7% in the average price paid at mandis in that district. As expected, the availability of price information increased the level of competition between the traders, raising prices and reducing the variation in prices between nearby mandis. Farmers’ profits increased by 33%, and the cultivation of soyabeans increased by an average of 19% in districts with kiosks. And by buying some produce direct, ITC reduced its costs, which paid for the kiosks.

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