Artificial Shortage in Agricultural Supply Chains

32 Pages Posted: 28 Feb 2019 Last revised: 3 Jun 2020

See all articles by Retsef Levi

Retsef Levi

MIT Sloan School of Management - Operations Research Center

Somya Singhvi

Massachusetts Institute of Technology (MIT)

Yanchong Zheng

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: June 2, 2020

Abstract

Problem Definition: Price surge of essential commodities despite inventory availability, due to artificial shortage, presents a serious threat to food security in many countries. To protect consumers' welfare, governments intervene reactively with either (i) Cash Subsidy, to increase consumers' purchasing power by directly transferring cash, or (ii) Supply Allocation, to increase product availability by importing the commodity from foreign markets and selling it at subsidized rates.

Academic/Practical Relevance: This paper develops a new behavioral game-theoretic model to examine the supply chain and market dynamics that engender artificial shortage, as well as to analyze the effectiveness of various government interventions in improving consumer welfare.

Methodology: We analyze a three-stage dynamic game between the government and the trader. We fully characterize the market equilibrium and the resulting consumer welfare under the base scenario of no government intervention, as well as under each of the interventions being studied.

Results: The analysis demonstrates the disparate effects of different interventions on artificial shortage; while supply allocation schemes often mitigate shortage, cash subsidy can inadvertently aggravate shortage in the market. Further, empirical analysis with actual data on onion prices in India shows that the proposed model explains the data well and provides specific estimates on the implied artificial shortage. A counterfactual analysis quantifies the potential impacts of government interventions on market outcomes.

Managerial Implications: The analysis shows that reactive government interventions with supply allocation schemes can have a preemptive effect to reduce the trader's incentive to create artificial shortage. While cash subsidy schemes have recently gained wide popularity in many countries, we caution governments to carefully consider the strategic response of different stakeholders in the supply chain when implementing cash subsidy schemes.

Keywords: Artificial shortage, government interventions, shortage-induced budget adjustment, consumer welfare, agricultural supply chains, behavioral operations, socially responsible operations

Suggested Citation

Levi, Retsef and Singhvi, Somya and Zheng, Yanchong, Artificial Shortage in Agricultural Supply Chains (June 2, 2020). Available at SSRN: https://ssrn.com/abstract=3332493 or http://dx.doi.org/10.2139/ssrn.3332493

Retsef Levi

MIT Sloan School of Management - Operations Research Center ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Somya Singhvi

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Yanchong Zheng (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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