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

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 nonprofit management. We also find that a nonprofit 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 toward implementing the processed substitute policy. We go deep and discuss tailored insights for certain regions in India. We find that although improved consumer perception is favorable in general, policymakers should be careful about some unintended consequences such as increased prices and lower availability.