The unsupportable support price: an analysis of collusion and government intervention in paddy auction markets in North India

This paper uses auction theory, incorporating buyer asymmetry, to analyse the structure of a small market for parmal paddy in North India and to assess the implications of alternative government policies. Our results suggest that two buyers collude in this market; we are able to quantify the extent to which prices are depressed as a consequence. Such collusion probably characterizes many small grain markets in India. Government intervention in grain markets in India is pervasive, and has in recent years led to its acquiring excessive food stocks and an unwillingness to enforce the support price. Using simulations, we demonstrate that while reducing the support price for paddy may not have the desired effect of reducing government purchases, a decrease in the percentage that millers are required to sell as levy to the government will. JEL classification: C7; L1; Q13; Q18 Keywords: Auctions; Collusion; Grain markets: Government intervention