Just as we were breathing a sigh of relief that Covid-19 was almost behind us, we were hit by another crisis -- the Russia-Ukraine war with its eventual effect of enormous price rises.
After the diesel price was suddenly increased in August, trucks went off the road, providing a supply shock to the market. No responsible government could sit idle under such price spikes, and authorities in Bangladesh had to act. The rush to find culprits and stop the attack on the purses, however, runs the risk of ending up with the wrong suspect.
The case of Kazi Farms auctions appears to me to be just that.
Auctions are standard methods not just for buying and selling farm products but for a whole variety of things all over the world. The New Zealand Global Dairy Trade platform that allows sellers to sell a variety of dairy products through auctions is becoming so popular that buyers and sellers from many countries have started taking part. Even government procurements are required to follow competitive bidding methods by law in many developed countries to prevent corruption.
Kazi Farms' method of posting reserve prices (they call it “offer price”), inviting bids, and then establishing a price that all the successful bidders pay -- and keeping all records -- is in line with modern standards. It is a transparent method, and fair for both buyers and sellers.
It is possible, just like anything else, to abuse auctions for unfair gains. Sellers can increase prices artificially in auctions by illegal means. So, after Kazi Farms engaged me to study their auctions and comment on them, I started looking for aspects of their rules that may allow such opportunities. I also looked through the details of their auction records from Ashulia wholesale centre for the months of July, August, and September of 2022.
The contract allowed me to walk out without any obligation if I suspected any wrongdoing on the part of Kazi Farms based on my examination of records.
The nice thing about auctions is that many of the suspicious activities leave their traces in the bids, prices, and records. You can look at the rules for the auctions and tell whether certain aspects of the rules, and the way the auctions are conducted, could allow the seller to cheat.
For instance, Kazi Farms could not get a “shill bidder” (whose intention is to increase price rather than buying eggs) to bid aggressively and induce the other bidders to bid aggressively -- because in their “sealed bids” auctions bidders do not see how others are bidding.
Kazi Farms could manipulate the price by leaving large quantities of eggs unsold on days when the price is low and releasing them on days when the price is high. It turned out that they do not have refrigeration facilities in their wholesale centres and try to avoid keeping eggs overnight.
They could collude with one of their bidders to set a higher price in the auction. Indeed, they were accused of colluding with Faysal Enterprise between August 9 and 13 to raise the price in the auction.
The auction records for those five days show that Faysal Enterprise did bid on the higher side relative to the other bidders. Then again, they have bid on the higher side for many weeks both before and after those five days, so there is no evidence of foul play there.
The design of the Kazi Farms auctions makes it very difficult for them to profit from this type of collusion. If in an auction there are three successful bidders, it is the bid of the lowest of these three bidders that sets the market clearing price for the auction. Regardless of how high the bids or the other two bidders are they still pay that lower market clearing price.
The clinching defense on this point actually comes from the fact that Faysal Enterprise bids did not set the price in a single auction during those five days. One does not need to be an auction expert to see that under the Kazi Farms auction rules, even if Faysal Enterprise had entered bids of TK100,000 per egg in auctions they were successful from August 9-13, the prices of eggs would not change even by a poisha. So, their aggressive bidding did absolutely nothing except to ensure that they received the amount of eggs that they needed.
The biggest defense for Kazi Farms regarding their role in the sharp egg price increase to consumers in Bangladesh perhaps comes from an interesting measure that summarizes the company's ability to influence egg prices to consumers in Bangladesh. American regulators often look at a number called the Herfindahl- Hirschman Index (HHI) which measures the concentration of market power in an industry.
The maximum value of 10,000 is taken by HHI when there is only one farm in the market -- a monopoly market. The US Department of Justice considers any value of the index below 1,500 to be a competitive market where farms' influence on the market is negligible. The HHI for Bangladesh egg market is less than 30 -- pretty close to the textbook definition of perfect competition.
It takes expertise to see through the details of how auctions work. Even in the US regulators were afraid of using auctions for radio spectrum licenses that led to huge changes in the American telecom industry.
It is good that some businesses are beginning to use auctions as the method of selling. Incorrectly blaming such institutions runs the risk of discouraging businesses to adopt this modern method of trading which could generate long-term dividends for the Bangladesh economy if used more widely.
Indranil Chakraborty is Associate Professor of Economics, National University of Singapore.
