Does the Invisible Hand Efficiently Guide Entry and Exit? Evidence from a Vegetable Market Experiment in India

Abhijit Banerjee, Greg Fischer, Dean Karlan, Matt Lowe and Benjamin N. Roth

No 17488, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: What accounts for the ubiquity of small vendors operating side-by-side in the urban centersof developing countries? Why don’t competitive forces drive some vendors out of the market? We ran an experiment in Kolkata vegetable markets in which we induced (via subsidizing) some vendors to sell additional produce. The vendors earned higher profits, even when excluding the value of the subsidy. Nevertheless, after the subsidies ended vendors largely stopped selling the additional produce. Our results are consistent with collusion and inertial business practices suppressing competition and efficient market exit.

Date: 2022-07
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