Unit 8 Supply and demand: Markets with many buyers and sellers

8.11 Application: Why information about prices matters

Fish and fishing are a major part of the life of the people of Kerala in India. Most of them eat fish at least once a day, and more than a million people are involved in the fishing industry. But before 1997, prices were high and fishing profits were limited due to a combination of waste and the bargaining power of fish merchants, who purchased the fishermen’s catch and sold it to consumers.

When returning to port to sell their daily catch of sardines to the fish merchants, many fishermen found that merchants already had as many fish as they needed that day. Fishermen were in a weak bargaining position, because if they couldn’t sell their catch, they would be forced to dump it back into the sea. A lucky few returned to the right port at the right time when demand exceeded supply, and they were rewarded by extraordinarily high prices.

Figure 8.22 illustrates the luck, or lack of it, of fishermen returning to the ports along the Kerala coast on 14 January 1997. On that day, eleven boatloads of fish brought to the market at the town of Badagara were jettisoned because of excess supply. But at fish markets within 15 km of Badagara, there was excess demand and high prices: 15 buyers left the Chombala market unable to purchase fish at any price. In just seven of the 15 villages (on the vertical line) the market cleared, with prices ranging from Rs4 per kilogram to more than Rs7 per kilogram.

In this scatter plot, the horizontal axis displays two measures: the number of boatloads of fish destroyed (excess supply), and the number of unsatisfied buyers of fish (excess demand). It ranges from -12 to 16, with negative numbers corresponding to excess supply, and positive numbers corresponding to excess demand. The vertical axis displays the price in rupees per kilogram, and ranges from 0 to 10. Coordinates are (measure on the horizontal axis, price). Several points are shown, with coordinates: (-11, 0) labelled Badagara, (-6, 0), (-4, 0), (0, 3.8), (0, 4.2) labelled Aarikkadi, (0, 6), (0, 6.2), (0, 6.8), (0, 7), (1, 8.2), (2, 8.5), (11, 9.4), (12, 9.5), and (16, 9.6) labelled Chombala. The average price in markets with excess demand is 9.3 rupees per kilogram. The average price in markets with neither excess demand or supply is 5.9 rupees per kilogram.

Figure 8.22 Bargaining power and prices in the Kerala wholesale fish market (14 January 1997). (Note: Two markets had the same outcome, with a price of Rs6.2 per kilogram.)

Robert Jensen. 2007. ‘The Digital Provide: Information (Technology), Market Performance, and Welfare in the South Indian Fisheries Sector’. The Quarterly Journal of Economics 122 (3) (August): pp. 879–924.

It is clear that neither fishermen nor merchants were subject to the Law of One Price. The conditions for a competitive equilibrium did not hold because the individual markets were small, and in the sardine market as a whole, sellers did not have information on prices.

This all changed when the fishermen got mobile phones. While still at sea, the returning fishermen would phone the beach fish markets and pick the one at which the prices that day were highest. If they returned to a high-priced market, they would earn an economic rent (that is, income in excess of their next best alternative, which would be returning to a market with no excess demand or even one with excess supply).

By gaining access to real-time market information on fish prices, the fishermen could adjust their pattern of production (fishing) and distribution (the market they visit) to secure the highest returns.

A study of 15 beach markets along 225 km of the northern Kerala coast found that, once the fishermen used mobile phones, differences in daily prices among the beach markets were cut to a quarter of their previous levels. No boats jettisoned their catches. Reduced waste and the elimination of the dealers’ bargaining power raised the profits of fishermen by 8% at the same time as consumer prices fell by 4%.

We know that one of the conditions for competitive equilibrium is that buyers and sellers are aware of the prices at which others are trading. Mobile phones allowed the fishermen to get more information about prices, and become very effective rent-seekers. Their rent-seeking activities changed how Kerala’s fish markets worked: they came close to implementing the Law of One Price, to the benefit of fishermen and consumers (but not of the fish dealers who had acted as intermediaries).

Question 8.12 Choose the correct answer(s)

Figure 8.22 shows how bargaining power affected prices in Kerala beach markets on 14 January 1997. Based on this information, what can we conclude?

  • The higher the excess supply, the lower the price of fish.
  • The price of fish in all markets with excess demand is 9.3.
  • The data satisfies the Law of One Price.
  • The data demonstrates that buyers have bargaining power when there is excess supply.
  • The price of fish is zero in all markets with excess supply.
  • The average price in the markets with excess demand is 9.3, but the higher the excess demand, the higher the price.
  • The Law of One Price is not satisfied because fish are sold at different prices in different places.
  • When there is excess supply, the price is zero. The buyers have all the bargaining power while sellers have none.