Reining in Onion Prices by Introducing a Vertically Differentiated Substitute: Models, Analysis, and Insights

To appear in Manufacturing and Service Operations Management.

28 Pages Posted: 10 Jul 2019 Last revised: 28 Aug 2022

See all articles by Muge Yayla-Kullu

Muge Yayla-Kullu

University of Central Florida - College of Business Administration

Omkar Palsule-Desai

Indian Institute of Management Indore

Srinagesh Gavirneni

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: August 8, 2022

Abstract

Problem Definition: Onion is an indispensable ingredient of the Indian diet, and plays a vital role in Indian economy, society, and politics. The ever-lasting volatility in its prices leads to significant social unrest. In this paper, we are interested in helping decision-makers to rigorously evaluate a recent policy proposal to make dehydrated onion widely available to remedy the situation.

Methodology/ Results: Using a stylized analytical model, we look for conditions under which it is optimal to introduce a processed substitute and whether it should be managed by nonprofit or for-profit firms. We find that the solution is identified by threshold-based policies and outcomes are far better under the non-profit management. We also find that a non-profit processing firm may purposefully choose a strategy where consumers do not purchase its offering for a certain medium range of raw onion deterioration levels. In addition, we find that a for-profit firm would always choose to be the lower-quality substitute in the market unless the raw onion deterioration is high. We also find that when supply capacity is constrained, sales of the processed substitute might decrease with increased supply availability.

Managerial Implications: This is the first paper that takes perishability and consumer welfare into account in a two-period vertically differentiated market model and compares various scenarios of competition when there is consumer prejudice for the processed substitute. For India's policymakers, we find ample evidence to work towards implementing the processed substitute policy. We go deep and discuss tailored insights for certain regions in India. We find that while improved consumer perception is favorable in general, policymakers should be careful about some unintended consequences such as increased prices and lower availability.

Keywords: vertical differentiation, non-profit competition, perishability, consumer prejudice, India

Suggested Citation

Yayla-Kullu, Muge and Palsule-Desai, Omkar and Gavirneni, Srinagesh, Reining in Onion Prices by Introducing a Vertically Differentiated Substitute: Models, Analysis, and Insights (August 8, 2022). To appear in Manufacturing and Service Operations Management., Available at SSRN: https://ssrn.com/abstract=3416653 or http://dx.doi.org/10.2139/ssrn.3416653

Muge Yayla-Kullu (Contact Author)

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

Omkar Palsule-Desai

Indian Institute of Management Indore ( email )

Rau-Pithampur Road
Indore, Madhya Pradesh 453556
India

Srinagesh Gavirneni

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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