Reining in Onion Prices by Introducing a Vertically Differentiated Substitute: Models, Analysis, and Insights
48 Pages Posted: 10 Jul 2019 Last revised: 19 Feb 2020
Date Written: February 18, 2020
Onion is an indispensable ingredient of the Indian diet, and plays a vital role in Indian economy, society, and politics. The ongoing volatility in its prices leads to significant social unrest. In this paper, we are interested in helping decision-makers to rigorously evaluate policy proposals to remedy the situation. We identify conditions under which it is optimal to introduce a processed substitute and whether it should be managed by nonprofit or for-profit firms. Our models capture the inherent vertically differentiated competition over two periods, consumers' prejudice for the processed produce, and perishability of the fresh produce. We find ample evidence to work towards implementing the processed substitute policy. In addition, management by a nonprofit would be a far better solution, resulting in a much higher consumer surplus (by about 243\%) and lower prices (down to 48\%). While improved consumer perception is favorable in general, policymakers should be careful about some unintended consequences such as increased prices and lower availability. Moreover, contrary to the conventional wisdom, we find that a non-profit may purposefully choose a strategy where consumers do not purchase its offering when fresh onion deterioration is high and consumer prejudice is low. We also find that a for-profit firm would always choose to be the lower-quality substitute in the market when fresh onion deterioration is low.
Keywords: vertical differentiation, non-profit competition, perishability, consumer prejudice, India
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