The Economics of Vegetables

Yesterday, happened to visit a "farmers' market" - the amateur economist in me noticed several things, which I am not sure has been covered by the economists. If you visit any such market in India, you would have noticed a few things:
1. There are a very large numbers of sellers, mostly selling an assortment of vegetables. The stocks that the individual sellers carry are fairly small (around 20-25kgs), obviously a sensible strategy since they need to get rid of the entire stocks within a day or two. The optimal mix and quantities is a matter of trial-and-error but how many chances does the vendor have?
2. While some vegetables (e.g. potatoes, onions et al) could last a few days, much of their stocks (e.g. greens, tomatoes etc) would not last more than 1-2 days. Should the mix combine the two types as a hedging strategy? Curiously, you do not see this very often.
3. There is definite lumpiness in demand - while weekends/ holidays tend to be busy, weekdays are almost always slow. Should the vendor then stock more at the beginning of a weekend? How much more?
4. There are extreme cases of a specific vegetable/fruit that is in demand for a specific purpose (e.g. festival) - in such cases, there is a huge spike in demand in the run-up to the festival day, followed by a complete collapse in demand. In such a scenario, how much should a street vendor buy from the wholesaler to sell?
5. The supply chain until that point (i.e. to the suppliers to these vendors) is reasonably well- organized, with bodies like the APMC, setting wholesale prices. One could assume that these prices, in turn, set the floor-price for these vendors. Is cost-plus pricing the right thing to do in such a case?

All of the above must present a highly complex problem to the vendors who are obviously not equipped with any of the fine mathematical tools(!) that have been foisted by the economists. And yet, they seem to be doing reasonably well - not quite sure if they are able to maximize their profit function, but their survival itself demonstrates a keen sense of the market, including discerning its intra-day fluctuations and the ability to react them rapidly. A few trips to such markets throw up some interesting observations:
1. At the beginning of the day, the prices tend to fluctuate quite a bit - with the variation markedly higher for perishables (e.g. tomatoes as against potatoes). The strategy must be to grab as much of the consumer surplus as possible before the market settles down on a price. What the vendor is betting on is quite simple - most buyers would not have the time/inclination to do an extended search for each vegetable to compare prices etc.
2. However, as the day progresses, prices tend to settle down - presumably, at some point above the floor price. The network effects (exchanging notes between themselves, buyers transmitting the information during the process of haggling) probably come into play - and the curious thing here is why these sellers do not turn this information flow into a oligopolistic situation (by price-fixing). Wonder why that happens.
3. The toughest part for the seller, undoubtedly, comes towards the end of the day. She needs to make decisions on how much to carry for the next day, or worse, if the stocks will not last till the next day, when to start dumping at below the marginal cost (i.e. the floor-price). In all this, she needs to ensure that she has recovered her total costs (which could be the sum of her procurement costs and all other overheads, including the travel costs, payoff to the local tout etc)

By now, it is obvious that these vendors are subject to the most brutal, unforgiving form of 'market economics'. And so the question of the welfare-seeker would ask - are there any interventions that are possible to make their lives a little easier? One alternative could be to do a price-setting exercise for the entire market on every day. Obvious implementation issues are - how would this be done (perhaps a committee - but we all know where committees lead) and more importantly the principal agent problem (how can you ask the sellers to set a price without equal representation from the buyers?) All these have upstream effects on the supply chain, all of which makes it an extremely volatile and hence risky industry for all the parties involved (producers, wholesalers, retailers).

In India, such interventions are routinely exercised in cases of food grains (much in the news of late, thanks to inflation), but not much seems to have been done where markets are localized (producers and consumers are typically within a 100km radius). This comes with a simple disadvantage that the supply chain participants are not a vocal enough political force and are hence bypassed by the democratice process.

One obvious intervention could be to invest in better storage facilities (e.g. cold storage) at all levels in the supply chain to help smooth out the supply/demand imbalances. The other intervention could be to create a information network (say using mobile phones) whereby prices are exchanged between the various parties (between sellers as well as between buyers/sellers), removing some of the price distortions.

Interestingly enough, the supermarket chains may be helping in the process - while they do take the market away from the street-vendors, they do bring improved stability of demand further up the supply chain. But the politics (and economics) of the supermarket chains in India is another story altogether.

For now, the street vendor deserves a little more respect - no amount of mathematical modeling can even begin to capture the mind-boggling number of variables and decision matrices that they seem to process effortlessly to eke out a living - may be the 'rational choice theory' is actually an non-oxymoron 'instinctive rational' choice theory !!