World Development 134 (2020) 105034

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World Development
journal homepage: www.elsevier.com/locate/worlddev

Supermarket procurement and farmgate prices in India

Chandra S.R. Nuthalapati a, Rajib Sutradhar b, Thomas Reardon c, Matin Qaim d,⇑
a
Institute of Economic Growth, University of Delhi Enclave, New Delhi, India
b
Christ University, Bangalore, India
c
Michigan State University, East Lansing, MI, USA
d
University of Goettingen, Goettingen, Germany

a r t i c l e i n f o a b s t r a c t

Article history: Supermarkets have gained in importance in the food systems of many developing countries, with pro-
Accepted 3 June 2020 found implications for smallholder farmers. Several studies analyzed effects of selling to supermarkets
Available online 22 June 2020 on smallholder productivity and income. However, no previous work systematically analyzed effects of
supermarkets on farmgate prices, even though prices are important determinants of farmers’ profits
Keywords: and livelihoods. Here, we use data from smallholder vegetable growers in India to compare output prices
Supermarkets received in supermarket and traditional market channels. We also quantify farmers’ transport and trans-
Small-scale farmers
action costs in both channels. Even after controlling for quality differences, prices are significantly higher
Hedonic price models
Transaction costs
in supermarket channels. Positive price effects are confirmed through hedonic price models and propen-
India sity score matching. Average effects of supermarkets on farmgate prices are in a magnitude of 20% or
more. Higher farmgate prices are due to fewer intermediaries and lower transaction costs in supermarket
channels. In the absence of binding contracts, supermarkets also need to pay higher prices to ensure reg-
ular supply of high-quality vegetables. These results suggest that the rise of supermarkets can contribute
to increased market efficiency with positive effects on farmgate prices and revenues.
Ó 2020 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).

1. Introduction fourth looks at effects on food security and nutrition (Bellemare

In the early-2000s, the literature identified a ‘‘supermarket rev-
olution” that had taken off mainly in the 1990s and was hypothe-
sized to be important for rural development and the food
economies of developing countries (Reardon, Timmer, Barrett, &
Berdegué, 2003). For half a decade, a series of articles documented
the patterns and determinants of the diffusion of supermarkets in
different regions over time (Reardon & Gulati, 2008; Traill, 2006).
Then, in the past decade, there has been a wave of literature on
the impacts of supermarkets on farmers and consumers.
There are several strands of the recent literature on supermar-
ket impacts on farm households. The first strand is on impacts on
farmers’ net returns and incomes (e.g., Bellemare, 2012; Minten,
Randrianarison, & Swinnen, 2009; Rao & Qaim, 2011; Michelson,
2013; Meemken & Bellemare, 2020). A second strand explores
employment effects (e.g., Neven, Makokha, Reardon, & Wang,
2009; Rao & Qaim, 2013). A third strand analyzes impacts on pro-
ductivity and efficiency (Rao, Brümmer, & Qaim, 2012), and a
⇑ Corresponding author at: Department of Agricultural Economics and Rural
Development, University of Goettingen, 37073 Goettingen, Germany.
E-mail addresses: chandra@iegindia.org (C.S.R. Nuthalapati), reardon@msu.edu
(T. Reardon), mqaim@uni-goettingen.de (M. Qaim).
& Novak, 2017; Chege, Andersson, & Qaim, 2015; Qaim, 2017).
However, the emerging literature has not yet focused much on
the impacts of supermarkets on farmgate prices. Studies that found
positive income effects often assumed that these income effects
are largely due to higher prices in supermarket channels, but price
effects have rarely been examined explicitly. At most, we have
been able to identify descriptive literature suggesting that prices
differ between supermarket and traditional market channels, such
as for vegetables in India and Kenya (Mangala & Chengappa, 2008;
Pritchard, Gracy, & Godwin, 2010; Rao & Qaim, 2013). We hypoth-
esize that selling to supermarkets has a significant impact on the
prices received by farmers. This could happen via several
mechanisms.
First, supermarkets may pay higher prices to farmers as a qual-
ity premium. Especially for fresh produce, supermarkets tend to
have higher quality requirements than traditional traders and
wholesalers. Higher quality typically also results in higher prices
for fresh vegetables at the retail level (Schipmann & Qaim, 2011).
Second, supermarkets may pay a higher price as an incentive for
farmers to regularly sell their high-quality produce to supermar-
kets instead of selling to other buyers. For supermarkets, regular
supply of fresh produce is particularly important, because super-
market customers tend to expect consistent availability of certain

https://doi.org/10.1016/j.worlddev.2020.105034
0305-750X/Ó 2020 The Authors. Published by Elsevier Ltd.
This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
2 C.S.R. Nuthalapati et al. / World Development 134 (2020) 105034
key food items. Such price incentives are especially relevant when
supermarkets do not have binding contracts with farmers
(Ochieng, Veettil, & Qaim, 2017).
Third, supermarkets may also be in a position to pay higher
prices because of higher levels of efficiency and economies of scale
in the downstream supply chain. Supermarket chains often have
their own distribution centers where large quantities are handled
without passing through the hands of various traders. Some of
the resulting cost advantages may possibly be passed through to
farmers (Swinnen & Vandeplas, 2010).
Fourth, farmers may save transaction costs when selling to
supermarket collection centers instead of traditional markets. In
smallholder settings, traditional markets are often characterized
by inefficiencies resulting from poor institutions, low trans-
parency, and multiple layers of intermediaries (Key, Sadoulet, &
de Janvry, 2000). For farmers, it is not primarily the market price
that matters, but the farmgate price that corrects for farmers’
transaction costs (Omamo, 1998a, 1998b). If these transaction
costs are lower in supermarket channels than in traditional chan-
nels, farmgate prices may be higher, even if the market prices
themselves would not differ (Fafchamps & Vargas-Hill, 2005).
Fifth, selling to supermarkets may reduce farmers’ price risk. In
some cases, the average price that supermarkets pay may not be
higher than the traditional market price, but may have lower vari-
ance. This would mean that selling to supermarkets provides de
facto insurance against market volatility.1 Lower price variance
was found in a study of vegetable farmers’ sales to supermarkets
in Nicaragua (Michelson, Reardon, & Perez, 2012), even though pos-
sible differences in product quality were not accounted for.
While all or some of these mechanisms may occur simultane-
ously, there is a dearth of empirical evidence to test related
hypotheses. This article addresses this research gap and evaluates
the impacts of supermarkets on farmgate prices using the example
of India. We conducted a survey of 795 vegetable growers in differ-
ent parts of India. The sample includes farmers selling to super-
market chains as well as farmers that only sell in traditional
markets. The survey captured the market channel choices of farm-
ers, the quality attributes of the vegetables sold, the points of sale,
and the transaction costs faced by farmers, including the time
taken for transactions from start to finish. This information allows
us to address the question as to how supermarkets affect the prices
received by farmers, adjusted for quality and transaction costs. We
analyze prices using data from 3,628 market transactions and
hedonic price models that control for relevant parameters. We also
use propensity score matching to reduce possible issues of selec-
tion bias.
We find clear evidence of higher prices for farmers in supermar-
ket channels, which can partly be attributed to higher product
quality. However, even after controlling for quality, farmgate prices
in supermarket channels are higher than in traditional markets. In
the absence of contracts, supermarket collection centers probably
offer higher prices as an incentive for farmers to sell in this channel
rather than in traditional markets. We also find that selling to
supermarket collection centers is associated with lower transac-
tion costs for farmers. With our farm survey data we cannot ana-
lyze prices and transaction costs further downstream in
supermarket and traditional supply chains.
High transaction costs and related market inefficiencies are the
main reasons for low farmgate prices and lower than optimal mar-
ket participation rates of smallholders in developing countries (de
Janvry, Fafchamps, & Sadoulet, 1991; Goyal, 2010; Key et al., 2000;
Timmer, 1997). New supply chains that help to reduce transaction
1
More generally, Bellemare, Lee, and Novak (2018) showed with data from
Madagascar that participation in contract farming is associated with reduced income
variability among smallholders, mainly due to higher price stability.
costs for smallholders can therefore be an important avenue for
agricultural income growth and broader rural development (Aker
& Fafchamps, 2014; Barrett et al., 2012; Mitra, Mookherjee,
Torero, & Visaria, 2018; Narayanan, 2014). Our results suggest that
the rise of supermarkets contributes in this direction. While previ-
ous studies showed that smallholder farmers often benefit from
selling to supermarkets (Andersson, Chege, Rao, & Qaim, 2015;
Michelson, 2013; Minten et al., 2009; Rao & Qaim, 2011), the
underlying mechanisms in terms of lower transaction costs and
higher farmgate prices were not analyzed before.
The rest of this article is structured as follows. Section 2 pre-
sents the context of the marketing channels for vegetables in India.
Section 3 discusses the survey data and statistical methods. Sec-
tion 4 provides descriptive statistics on product quality, transac-
tion costs, and price distributions in supermarket and traditional
channels. Section 5 analyzes observed differences in farmgate
prices with hedonic price models, whereas section 6 presents the
propensity score matching results. Section 7 concludes.
2. Marketing of vegetables in India
There are three general market channels to which farmers in
India sell their fruits and vegetables: public regulated wholesale
markets, other public markets, and private firms (including super-
markets) and cooperatives. We discuss each in turn.
2.1. Public wholesale markets
The main channel (in terms of the share of total volume mar-
keted) for the marketing of fruits and vegetables in India is through
public regulated wholesale markets operated by state govern-
ments. These public wholesale markets are also called mandis.
There are 2,477 principal regulated markets based on geographical
catchment areas and 4,843 sub-market yards regulated by the
respective Agricultural Produce Market Committees (APMCs) of
the states (GoI, 2015). It is officially required for farmers to sell
fruits and vegetables in these regulated wholesale markets. The
regulations usually specify that transactions should occur by auc-
tions of ‘‘commission agents.” These agents charge the farmers
commission fees ranging from 2.5% to 10% (Artiuch & Kornstein,
2012; Singh, 2016). In practice, several studies have shown that
auctions are rare and that the commission agents are often also
the wholesalers themselves. Thus, unneeded commission fees are
charged, leading to prices for farmers that are lower than they
should be (Cohen, 2013; Fafchamps, Vargas-Hill, & Minten, 2008;
Minten, Vandeplas, & Swinnen, 2012). Collusion among commis-
sion agents occurs in some situations (Meenakshi & Banerji,
2005). Buyer competition is rare, due to state regulations that pre-
vent supermarkets, processors, and other private entities to
directly act as buyers in the wholesale markets (Cohen, 2013). A
2003 reform of the APMC to allow direct purchases by supermar-
kets and processors was announced and pursued by individual
states to some extent, but 15 years later only very few states
(e.g., Maharashtra) have fully implemented this reform due to
entrenched interests (Rao, Sutradhar, & Reardon, 2017).
2.2. Other public markets
Though most states’ laws specify that vegetable marketing must
occur in public regulated markets, some marketing also happens in
other kinds of public markets. First, there are wholesalers who buy
directly from farmers and then sell to retailers. This can happen via
their roving agents and brokers or in market sites that are substi-
tutes – legal in some places, illegal but actively functioning in
others – for the public mandis. An example is the case of potato
 C.S.R. Nuthalapati et al. / World Development 134 (2020) 105034 3

sales in the biggest potato zone in India, in Agra in Uttar Pradesh. no studies that have compared supermarket collection center
Reardon, Chen, Minten, and Adriano (2012) found that farmers fre- prices with public wholesale prices controlling for transaction
quently sell potatoes at cold storage premises instead of the costs and quality differentiation, which we proceed to do below.
required regulated wholesale markets.
Second, there are non-mandi public markets called haats. They
3. Materials and methods
are usually located in villages and function daily or weekly. Farm-
ers can sell directly to wholesalers or consumers in haats. A more
3.1. Survey sampling methods
formal variant of these has been set up by some state governments
to skirt traditional wholesale channels and allow farmers to
We use data from a survey undertaken in 2014 by the authors.
directly sell to consumers with nominal market fees. Some exam-
The sample comprises 795 vegetable growers from 58 villages in
ples include Rythu Bazaars in Telangana and Andhra Pradesh, Apni
four different states. Of the 795 farmers, 386 sell at least some of
Mandi in Haryana, Uzhavar Sandhai in Tamil Nadu, and Shetkari
their vegetables to supermarkets through collection centers,
Bazaar in Maharashtra.
whereas 409 sell only to traditional markets. The survey gathered
detailed information on the characteristics of the farm households,
2.3. Supermarkets, processors, and cooperatives
their production behavior, and all their vegetable sales to each
marketing channel during a 12-month period. The study covered
Private companies and cooperatives sometimes buy their fruits
the national capital region (Delhi and Haryana) in the North of
and vegetables from the mandis or from off-market wholesalers,
India, Telangana in the South, Maharashtra in the West, and West
but direct procurement from farmers via own collection centers
Bengal in the East. The states were chosen to capture variation in
has also become quite common in many regions. The literature
agroclimatic and socioeconomic conditions. The interviews were
often presents these direct arrangements as paying for products
carried out between June and October 2014 and covered the veg-
differentiated by quality (such as size and color), in contrast to
etable transactions for the period June 2013 to May 2014.
the public markets where rewards for quality differentiation tend
To select the sample, we began by identifying the catchment
to be low (Fafchamps et al., 2008; Pritchard et al., 2010).
areas of vegetable procurement by supermarkets in big cities in
There are three categories of direct arrangements. First, some
the study regions – New Delhi, Hyderabad, Mumbai, and Kolkata
large processors directly contract farmers. An example is the case
for North, South, West, and East, respectively. We listed the blocks
of FLI (Pepsico) potato contract farming in Maharashtra and Kar-
(district subdivisions comprising a cluster of villages) and villages
nataka (Singh, 2010). Second, some cooperative retail chains such
supplying vegetables to the collection centers of supermarkets
as Safal or Mother Dairy operated by National Dairy Development
based on information from interviews with key informants that
(NDDB) source some of their fruits and vegetables from farmers via
included procurement officers of supermarkets and officers of gov-
collection centers, in particular for their operations in Delhi and
ernment departments covering horticulture and marketing. We
Mumbai. Third, supermarket chains emerged mainly in the 2000s
then undertook a vegetable farm census in each of the identified
and have grown quickly since then, although their spread is some-
villages to differentiate between households that sell only to tradi-
what uneven across states (Reardon & Minten, 2011). Unlike other
tional channels and households that sell at least some of their veg-
countries, where supermarkets often started by only selling pro-
etables to supermarket collection centers. Based on this census, the
cessed foods, supermarkets in India have started early on to also
villages were categorized as ‘‘high intensity” or ‘‘low intensity” vil-
sell fresh produce, given the importance of vegetables in a country
lages depending on the number of farmers selling to supermarkets.
where many people are vegetarians. While supermarkets often
Farmers were selected randomly in these villages: 10 supermarket
source from the mandis and off-market wholesalers, several chains
farmers and 5 traditional farmers in each of the high intensity vil-
also procure directly from farmers (Reardon, Timmer, & Minten,
lages, and 10 supermarket and 10 traditional farmers in each of the
2012). Leading domestic supermarket chains – like Reliance Fresh,
low intensity villages. Both types of farmers were surveyed at the
More, and Spencer’s – buy directly from farmers through own col-
same time to ensure data comparability. Because we undertook a
lection centers. Others – like Food Bazaar and Metro – depend on
census we were able to generate sampling weights for the dispro-
dedicated wholesalers (Suganthi, 2013).
portionate sample of supermarket farmers compared to what it
In this article, we study farmers’ sales to supermarket collection
would have been had we simply sampled randomly in the study
centers. For illustration, we provide additional details on the oper-
areas.
ation of collection centers of Reliance Fresh. Other collection cen-
ters operate in a similar way. The head of the collection center is
typically given a procurement target by the supermarket chain 3.2. Survey interviews
for the next day. Based on this, he/she informs farmers of what is
needed. Farmers do not have a binding contract with the collection Personal interviews with all sample farmers were conducted in
centers, but lists of regular suppliers exist. Farmers are informed local languages by a small team of interviewers using a structured
about the price in the morning of the purchase day (Singla, questionnaire developed for this purpose. The interviewers were
Singh, & Dhindsa, 2016). Some studies found that farmers prefer trained and supervised by the researchers. The survey questions
selling to supermarket collection centers, because prices are felt included details on crop cultivation and marketing as well as gen-
to be more attractive than in public wholesale markets, especially eral socioeconomic characteristics of the farm and the farm
for high-quality produce (Mangala & Chengappa, 2008; Pritchard household.
et al., 2010). This was also confirmed in farmer focus group discus- Particular emphasis was put on production and marketing of
sions and key informant interviews that we had carried out prior to the five leading vegetables produced in the study areas (in volume
implementing the structured survey. As collection centers cannot terms), namely tomato, cauliflower, okra, eggplant, and cabbage.
institute contracts, they instead pay somewhat higher prices than For each type of vegetable, farmers were asked to provide details
the mandis for quality produce in order to meet the procurement of all sales transactions that they had made during the 12-month
targets. This can be contrasted with situations such as Walmart period prior to the survey, including the time of the transaction,
in Nicaragua that pays less than the wholesale market but provides the place, as well as the quantity and quality of the produce and
a contract and thus a risk management mechanism to farmers the price received. While many farmers did not find it easy to
(Michelson et al., 2012). However, as mentioned above, there are remember all these details out of their head for the last 12 months,
4 C.S.R. Nuthalapati et al. / World Development 134 (2020) 105034
they used written records, bank account statements, and mobile
money records to answer the questions.2 We captured a total of
3,628 sales transactions, out of which 23% were sales to supermarket
collection centers. The rest were transactions in traditional markets,
including public wholesale markets (mandis) but also other tradi-
tional channels. It should be noted that supermarket farmers did
not make all of their sales to supermarket collection centers but also
sold some of their vegetables in traditional markets. This allows us to
compare transactions not only between different types of farmers,
but also between different types of marketing channels supplied
by the same farmers.
During the interviews, recording quantities was sometimes a
challenge, because different local units of measurement – such as
bags, baskets, bundles, or boxes – are commonly used. Cabbage
and cauliflower are also sometimes sold per piece. We recorded
all quantities as stated by farmers and used locally-verified weight
conversion factors to later calculate quantities in terms of kilo-
grams. To assess quality, we asked farmers to categorize each por-
tion sold in terms of the size (small/average/big), uniformity
(percent of vegetable deformed), color (bad/average/good), and
damage (scratches yes/no) of the vegetables.3 Farmers selling to
supermarket collection centers were familiar with these criteria
and categories, as the same criteria are also used for the official qual-
ity grades A, B, and C. Farmers only selling in traditional markets
have less experience with the official quality grades, simply because
many of the sales in traditional markets are not quality graded. Nev-
ertheless, traditional channel farmers were also able to assess the
quality of their vegetables sold, because the visual traits are easy
to identify. During the interviews, we used pictures of vegetables
in the different categories to make sure that all farmers used the
same reference points. We are confident that all farmers understood
the quality grading well, as we also observe significant variation in
the quality reported across the different transactions made by the
same farmers, which is true for both supermarket and traditional
channel suppliers.
During the interviews, we also recorded farmers’ transaction
costs. Transaction costs in this study refer to all costs faced by
farmers to get the vegetable harvest from the farm plot to the point
of first sale, including costs for communication with the buyer or
intermediaries, loading, transportation, and unloading, as well as
taxes, commission charges, and related expenditures. Time costs
were valued at typical local wage rates. For each transaction, the
total costs are divided by the quantity sold to obtain a transaction
cost per kilogram of each vegetable type. Note that transaction
costs are originally defined in a narrower way to only include the
indirect costs in setting up, conducting, and monitoring a transac-
tion (North, 1992; Williamson, 2010), which would exclude direct
transport and communication costs. In the context of our study,
including direct costs seems useful, as high transportation costs
are often a serious impediment for market transactions of small-
holder farmers (Andersson et al., 2015; Fafchamps & Vargas-Hill,
2005; Key et al., 2000).
3.3. Statistical methods
Our objective is to test whether the farmer’s choice of market
channel affects the price received, controlling for product quality
and other relevant factors. For the analysis, we use descriptive
statistics and econometric techniques, including hedonic price
2
Most commercial vegetable farmers in the study regions have a bank account, and
payments by wholesalers and supermarket collection centers are often made through
money transfers.
3
Vegetables sold in one transaction always belong to the same quality category.
When different quality categories were mentioned for different portions, then these
were recorded as separate transactions.
models and propensity score matching. We start the analysis by
comparing prices in supermarket and traditional channels with
simple tests for mean differences. In addition, we use the
Kolmogorov Smirnov test as a non-parametric method to relax
the assumption of a normal distribution of the price variables.
Prices of a product may vary depending on product quality and
the location and time of the transaction (Deaton, 1988). Hedonic
price models are commonly used in developed country situations,
but are increasingly used also in developing countries (Edmeades,
2007; Minten, Reardon, & Sutradhar, 2010; Schipmann & Qaim,
2011). Assuming that the marginal utility and the implicit price
of each characteristic or hedonic trait of each product is constant,
we can model price as
X
N
Ph ¼ bkh X kh þ v h ð1Þ
k¼0
where Ph is the price of product h, X kh is the level of attribute k in
product h, bkh is the implicit price of attribute k, and v h is a stochas-
tic error term. We run separate regression models for each of the
five vegetables (tomato, cauliflower, okra, eggplant, and cabbage).
The independent variables in our hedonic regressions include the
quantity of produce sold in the transaction and different categorical
variables to capture marketing channel, product quality (using the
farmers’ assessment of the visual quality characteristics and cate-
gories, as explained above), and month of the transaction. Finally,
we control for farmer characteristics, such as sex, age, and educa-
tion, which may determine negotiation skills and therefore also
the price received.
The quantity sold in a transaction is expected to be positively
related to price because farmers selling more may have more bar-
gaining power with the buyer. Similarly, we expect positive effects
of product quality on price. Vegetable prices vary by month, with
periods of relative scarcity (the start and end of the season) seeing
higher prices. We control for the month of sale to capture such
variation. However, the main variable of interest in our hedonic
price models is the marketing channel. The hypothesis we want
to test is whether selling to supermarket collection centers affects
prices positively also after controlling for quantity, quality, and
other product and farmer characteristics.
In spite of controlling for relevant factors, a certain level of
uncontrolled heterogeneity between the farmers or products
traded in supermarket and traditional channels may still persist
in the hedonic price models. As farmers decide themselves where
to sell their vegetables, it is possible that better-performing farm-
ers, who produce better quality and would achieve higher prices
anyway, self-select into the supermarket channel. If such non-
random self-selection occurs, the estimated supermarket effects
on prices may be overestimated. In a robustness check, we there-
fore run the hedonic price regressions also as panel data models
with farmer fixed effects. This is possible, because we have more
than one transaction for most farmers and also observe some mar-
keting channel variation across transactions for the group of super-
market farmers.
As an alternative strategy to deal with farmer heterogeneity we
also use propensity score matching (PSM) (Dahejia & Wahba,
2002). PSM allows us to control for confounding factors in terms
of observed characteristics between the treatment group (super-
market transactions in this case) and the control group (traditional
market transactions) (Rosenbaum & Rubin, 1985). PSM compares
both groups in terms of a set of X observed characteristics, first
by generating propensity scores that indicate the probability of a
supermarket transaction, and then calculating the average treat-
ment effect (ATT) on the outcome variable, product price in our
case. Following Caliendo and Kopeinig (2008), we estimate the
 C.S.R. Nuthalapati et al. / World Development 134 (2020) 105034
mean difference in price over the common support, appropriately
weighted by the propensity score distribution:
sPSM
ATT ¼ EðPðXÞjC¼1Þ fE½M 1 jC ¼ 1; PðXÞ  EdM 0 jC ¼ 0; PðXÞeg
M1 and M0 are prices received by farmers in supermarket and
traditional channels, respectively. C1 and C0 are transactions in
supermarket and traditional channels, and PðX Þ are the propensity
scores.
We use a kernel matching algorithm. This non-parametric
method uses maximum observations from the control group, con-
trary to other matching algorithms such as nearest neighbor
matching. Kernel matching also uses weights depending on the
distance between each observation in the control group and the
treatment observation for which the counterfactual is estimated
(Smith & Todd, 2005). The greater flexibility associated with the
non-parametric kernel estimator is subject to selection of the
appropriate bandwidth. This is crucial as too large and too narrow
bandwidths can cause comparison problems (Galdo, Smith, &
Black, 2005). We use Gaussian kernel bandwidth optimization in
STATA and provide robustness checks with alternative procedures
(see details below). Covariates are balanced using balancing tests
following Leuven and Sianesi (2003) and Kassie, Shiferaw, and
Muricho (2011).
While PSM controls for observed heterogeneity, it cannot con-
trol for unobserved heterogeneity as it assumes that assignment
to treatment is associated only with observable variables
(Dahejia & Wahba, 2002). If there are any unobserved variables
that influence price and that are correlated with supermarket par-
ticipation, hidden bias might arise (Rosenbaum, 2002). Unobserved
variables that might play a role in our study could be farmer char-
acteristics such as individual bargaining skills that are difficult to
measure in surveys. Another possible difference between super-
market and traditional channel farmers is the lower familiarity of
traditional farmers with quality grading systems, which could pos-
sibly lead to reporting bias. The good thing is that the robustness of
the results to possible hidden bias can be tested, which we do. We
employ the bounding approach suggested by Rosenbaum (2002)
and use the Mantel-Haenszel test statistic following Becker and
Caliendo (2007) to test for the sensitivity of the results to hidden
bias.
4. Descriptive statistics
4.1. Vegetable transactions by marketing channel
Descriptive analysis of the data (Table 1) shows that 23% of all
vegetable transactions made by sample farmers were sales in
supermarket collection centers. This is actually a limited share
given that the sample was drawn from villages in the vicinity of
supermarket collection centers. Some regional differences are
observed. In the South and the West, the share of supermarket
transactions is somewhat higher with over 30%, whereas in the
North and the East it is below 20%. Of the traditional market trans-
actions, most are made in public wholesale markets (mandis),
which account for 61% of all vegetable transactions made by sam-
ple farmers. Other traditional markets include public village mar-
kets (haats), private retail markets, Rythu Bazaars, and others.
Also here some regional differences occur. Especially in the East,
mandis play a relatively small role for vegetable transactions,
whereas haats play a much more important role.
Table 2 shows a breakdown of the 3,628 transactions captured
in our survey by vegetable type, as well as by the number of farm-
ers and villages observed. Of the 58 villages surveyed in the four
states, most grow several or all five vegetable types. Also many
of the farmers grow and market several vegetable types, meaning
5
the transactions observed for each vegetable are distributed over
a wide geographical area.
The average number of transactions per farmer is 3–4 per veg-
ð2Þ etable type for both supermarket and traditional farmers.4 How-
ever, fewer than half of the transactions made by supermarket
farmers are sales to supermarket collection centers. Most supermar-
ket farmers also sell to traditional channels. According to own state-
ments, supermarket farmers sell their better-quality produce to
supermarket collection centers, because this is where quality is felt
to be rewarded more, whereas average and low quality produce is
sold in traditional markets. A breakdown of transactions by month
of sale is shown in Table A1 in the Online Appendix. Nearly 70% of
all transactions were done between August and December, corre-
sponding to the Kharif growing season in India.
4.2. Farm household characteristics
Vegetable growers in India are generally small-scale farmers
with less than five acres of land. Table 3 shows that supermarket
farmers in our sample have somewhat larger land sizes than tradi-
tional farmers. Supermarket farmers also have more years of
schooling, larger families, a higher share of land under irrigation,
a higher share of land under vegetables, and more farm and live-
stock assets. These comparisons – especially in terms of irrigation
and landholdings – echo supermarket farmer surveys in India
(Alam & Verma, 2007; Joseph, Soundrarajan, Gupta, & Sahu,
2008; Mangala & Chengappa, 2008) and other developing countries
(Rao & Qaim, 2011; Reardon, Barrett, Berdegué, & Swinnen, 2009).
As expected, supermarket farmers also have significantly higher
profits from vegetable production than traditional farmers
(Table 3). Another difference is that supermarket farmers are less
likely employed as farm wage workers and also less likely to par-
ticipate in public work schemes, which are particularly designed
for poorer and seasonally unemployed rural households. As can
also be seen in Table 3, supermarket farmers live closer to super-
market collection centers than traditional farmers. And for both
supermarket and traditional farmers, the average distance to
supermarket collection centers is smaller than the distance to tra-
ditional wholesale markets. This is related to our sampling frame-
work, as we selected villages in the vicinity of supermarket
collection centers. Nevertheless, it is interesting to note that in
major vegetable-growing regions supermarket collection centers
are found at a higher density than traditional wholesale markets
for vegetables.
4.3. Vegetable quality
Table 4 shows vegetable quality for two of the quality charac-
teristics considered, as reported by farmers for the different trans-
actions made. Most of the vegetables sold to supermarkets are of
the best quality in terms of size and uniformity, whereas in tradi-
tional markets the average product quality is lower. This general
picture also remains when taking into account quality differences
that exist between the different sub-channels of traditional
markets.5
4
Most farmers in our sample had more than 3–4 vegetable transactions during the
12-month period covered in the survey, because they grow different types of
vegetables, often successively on the same plot.
5
Interestingly, the average quality of the vegetables sold by supermarket farmers
in traditional markets is very similar to the average quality of traditional farmers
selling in traditional markets. This underlines that supermarket farmers sell their
highest quality produce to supermarket collection centers. The similarity in the
quality reported by supermarket and traditional channel farmers for their traditional
market sales is also an indication that there is no systematic reporting difference
between the two groups. Systematic reporting differences could have been expected,
because traditional farmers were less familiar than supermarket farmers with the
quality criteria used in the survey.
6 C.S.R. Nuthalapati et al. / World Development 134 (2020) 105034

Table 1
Share of vegetable transactions by market channel and region (%).

Market channel South (n = 756) North (n = 1762) West (n = 660) East (n = 450) Total (n = 3628)
Supermarket collection center 32.1 18.5 30.8 16.0 23.3
Public wholesale market (mandi) 65.7 69.7 67.6 7.3 60.8
Other traditional marketsa 2.0 11.8 1.6 76.7 15.9
Total 100 100 100 100 100
a
Other traditional markets include public village markets (haats), private retail markets, Rythu Bazaars, among others.

Table 2
Breakdown of the number of transactions by vegetable type and number of farmers.

Number Tomato Cauli-flower Okra Eggplant Cabbage All crops

Total transactions 1508 679 554 475 412 3628
Total farmers 341 219 157 140 133 795
Total villages 47 40 36 37 37 58
Farmers per village 7 5 4 4 4 14
Farmers selling to supermarkets (SM) 147 140 84 68 79 518
Farmers selling to traditional markets (TM) 194 79 73 72 54 472
Farmers selling in both channels 139 114 71 60 64 448
Transactions of traditional market farmers 823 218 236 225 167 1669
Transactions of supermarket farmers 685 461 318 250 245 1959
Transactions to supermarkets by SM farmers 289 210 125 94 126 844
Transactions to TM by supermarket farmers 396 251 193 156 119 1115
Transactions per farmer 4.42 3.10 3.53 3.39 3.10 3.66
Transactions per TM farmer 4.24 2.76 3.23 3.13 3.09 3.54
Transactions per SM farmer 4.66 3.29 3.79 3.68 3.10 3.78
No. of transactions to SM by SM farmers 1.97 1.50 1.49 1.38 1.59 1.63
No. of transactions to TM by SM farmers 2.69 1.79 2.30 2.29 1.51 2.15

Note: The total number of farmers and villages in the last column (all crops) is not always the sum of the previous columns, because many farmers and villages grow more
than one vegetable type. SM, supermarkets; TM, traditional markets.

Table 3
Characteristics of farm households by market channel.

Variable Supermarket (n = 376) Traditional (n = 419)

Mean SD Mean SD
Age of farmer (years) 49 23 49 10
Education of farmer (years) 7.4*** 8.6 5.8 3.9
Family size 6.2*** 4.5 5.6 1.9
Owned land (acres) 4.1* 8.6 3.4 3.6
Share of land under vegetables (%) 54*** 44 47 18
Share of land under irrigation (%) 91*** 46 80 26
Farm assets (thsd. Rs.) 167*** 621 89.4 146
Livestock assets (thsd. Rs.) 50* 268 33 50
Vegetable cultivation experience (years) 20 24 19 8
Working as farm wage worker (%) 9*** – 17 –
Participating in public works (%) 6*** – 11 –
Distance to supermarket collection center (km) 3.8*** 4.7 8.1 8
Distance to wholesale market (km) 14.3*** 13.0 17.9 16.2
Profit from vegetable production (thsd. Rs.) 101*** 97 78 51

*Difference between supermarket and traditional farmers significant at the 10% level. *** Difference between supermarket and traditional farmers significant at the 1% level.

Table 4
Quality of produce sold by market channel.

Supermarket (n = 844) Traditional markets (n = 2784)

Wholesale Othera All traditional
Tomato Size (% in biggest category) 83.4 36.2 34.1 36.3
Uniformity (% in best category) 95.5 52.8 70.6 55.3
Cauliflower Size (% in biggest category) 53.3 46.2 37.0 44.5
Uniformity (% in best category) 98.6 80.8 79.6 78.7
Okra Size (% in biggest category) 86.4 45.6 54.6 55.2
Uniformity (% in best category) 98.4 52.7 94.6 62.2
Eggplant Size (% in biggest category) 77.7 29.5 66.0 34.9
Uniformity (% in best category) 97.9 53.6 86.0 57.5
Cabbage Size (% in biggest category) 64.3 34.9 50.0 35.0
Uniformity (% in best category) 92.1 60.8 87.5 60.5
a
Other traditional markets include public village markets (haats), private retail markets, Rythu Bazaars, among others.
 C.S.R. Nuthalapati et al. / World Development 134 (2020) 105034
Beyond the farmers’ own quality assessment of their vegetables
during the survey, we also asked them whether the vegetables sold
were officially quality graded by the buyers during the transactions
made. Table 5 shows that most of the vegetables sold to supermar-
ket collection centers were quality graded, and that over 90% of
them were graded in the highest quality grade A. In contrast, most
of the vegetables sold in traditional markets were not officially
quality graded. ‘‘Not graded” does not necessarily imply that most
vegetables in traditional markets are of low quality; it just means
that official quality grading is much less common in traditional
markets. This is also the reason why we do not use these official
quality grades in the econometric analysis below. Instead, we con-
trol for product quality by using farmers’ own quality assessment
based on the quality criteria and categories explained in section
3 (size, uniformity, color, damage).
4.4. Transaction costs
Table 6 shows various types of transaction costs that farmers
face in the different market channels, expressed per kilogram of
vegetables sold. Overall, transaction costs in the supermarket
channel are 70% lower than in traditional markets. A breakdown
of the different categories of transaction costs reveals that farmers
selling to supermarkets save in almost all categories, but especially
in terms of lower commission charges and lower transportation
costs (Table 6). As was shown above, the supermarket collection
centers are located closer to the villages than the traditional
wholesale markets (mandis).
Given that some of the cost variables are not normally dis-
tributed, we performed Kolmogorov Smirnov tests to ascertain
the significance of the differences between the cumulative distri-
butions of transaction costs for all five vegetables (Fig. 1). In all
cases, the test results confirm that transaction costs are signifi-
cantly lower when selling to supermarkets than when selling in
traditional markets. These findings corroborate observations of
other studies in India (Alam & Verma, 2007; Aparna &
Hanumanthaiah, 2013; Joseph et al., 2008; Mangala, 2008), even
though these earlier studies did not quantify the details of relevant
transaction costs.
One interesting question is whether supermarket farmers face
lower transaction costs than traditional farmers anyway, even
when selling in traditional markets. For instance, this could be
because of general locational advantages of supermarket farmers
(e.g., closeness to markets), better means of transportation, or
other factors. Indeed, Table A2 in the Online Appendix shows that
supermarket farmers face lower transaction costs than traditional
farmers also when selling in traditional markets. However, when
only looking at the transactions made by the subsample of super-
market farmers, the transaction costs are still significantly lower in
supermarket channels than in traditional market channels
(Table A2). This comparison suggests that differences in farmer
and locational characteristics are not the only factors driving the
transaction cost results. In the hedonic price models below, we also
run versions with farmer fixed effects to control for observed and
unobserved heterogeneity. In the PSM analysis, we also control
for farmer and locational characteristics.6
6 prices between different types are not directly comparable. The
Also of interest is to compare the total transaction costs by type of farmer. For
instance, if supermarket collection centers reject some of the vegetables delivered,
farmers would face higher transactions costs, because then they would have to
transport the rejected produce to traditional markets. To test for this option, we
added up the total transaction costs faced by supermarket and traditional farmers and
divided by the total quantity of vegetables sold. The comparison by type of farmer is
shown in the last two columns of Table A2 in the Online Appendix. The data reveal
that the transaction costs for supermarket farmers remain significantly lower than
the transaction costs for traditional farmers for all five vegetables.
7
4.5. Output prices
Comparisons of output prices that farmers received in super-
market collection centers and traditional markets are shown in
Table 7. Except for cabbage, where the price difference is small
and statistically insignificant, mean output prices are significantly
higher when selling to supermarket collection centers than when
selling in traditional markets. For tomato and eggplant, the differ-
ences are primarily due to lower prices paid in traditional whole-
sale markets. In other traditional markets, tomato and eggplant
prices paid to farmers are more similar to those paid by supermar-
ket collection centers. For okra and cauliflower, all traditional mar-
kets pay significantly less than supermarket collection centers.
Again, as not all of the prices follow a normal distribution, we
used Kolmogorov Smirnov tests to verify statistically significant
differences. The test results confirm the findings from Table 7;
price differences are significant for all vegetables, except for cab-
bage (Fig. A1 in the Online Appendix).
As supermarket farmers sell vegetables in supermarket collec-
tion centers and in traditional markets, it is also interesting to
compare prices only for this group of farmers. This is done in
Table A3 in the Online Appendix. As one would expect, sales of
these farmers to supermarket collection centers fetch significantly
higher prices than the same farmers’ sales in traditional markets. In
addition, Table A3 compares traditional market sales of supermar-
ket farmers with sales of traditional farmers. While some price dif-
ferences are observed, these are positive for some of the vegetables
and negative for others. Interestingly, for tomato and cabbage,
mean prices received by supermarket farmers in traditional chan-
nels are significantly lower than the prices received by traditional
farmers. These comparisons support our assumption that the price
differences observed between supermarket and traditional market
transactions are not primarily driven by systematic differences in
farmer characteristics and self-selection.
Important to note is that the prices that farmers receive in
either the supermarket collection centers or in traditional markets
are not net farmgate prices, as the delivery to the point of first sale
is associated with transaction costs. In order to calculate net farm-
gate prices, farmers’ transaction costs have to be deducted. We do
so by using the transaction costs calculated for each type of veg-
etable (see above). Cumulative distribution functions of these
imputed farmgate prices are shown in Fig. 2. As farmers’ transac-
tion costs were found to be lower in supermarket channels, we
would expect the price differences between supermarket and tra-
ditional channels to widen. This is confirmed in Fig. 2; imputed far-
mgate prices are significantly higher in supermarket channels than
in traditional channels for all types of vegetables, this time also
including cabbage.
5. Hedonic price models
5.1. Main model results
Results from the hedonic price models are summarized in Fig. 3.
The unit of observation is the individual vegetable transaction. We
estimated separate models for each type of vegetable, because
dependent variable in each of the models is the imputed farmgate
price (output price received minus farmers’ transaction costs)
expressed in rupees (Rs) per kilogram. The main explanatory vari-
able of interest is a supermarket dummy that takes a value of one if
the farmer sold to a supermarket collection center in the particular
transaction, and zero otherwise. Other control variables that may
also influence prices (e.g., farm and farmer characteristics, product
8 C.S.R. Nuthalapati et al. / World Development 134 (2020) 105034

Table 5
Share of produce sold in different official quality grades by market channel.

Vegetables Supermarket (n = 844) Traditional markets (n = 2784)

Wholesale Othera All traditional
Tomato Grade A 95.5 4.6 9.5 5.9
Grade B 1.4 16.4 13.5 16.1
Not graded 3.1 78.9 77.0 78.0
Total 100 100 100 100
Cauliflower Grade A 92.9 16.5 20.4 18.8
Grade B 4.8 13.5 5.6 12.6
Not graded 2.4 70.1 74.1 68.7
Total 100 100 100 100
Okra Grade A 92.0 22.6 1.8 20.8
Grade B 1.6 14.0 0 11.0
Not graded 6.4 63.4 98.2 68.3
Total 100 100 100 100
Eggplant Grade A 97.9 11.5 16.0 15.8
Grade B 0 13.0 4.0 10.8
Not graded 2.1 75.3 80.0 73.5
Total 100 100 100 100
Cabbage Grade A 90.5 13.7 12.5 13.3
Grade B 4.8 25.5 12.5 24.5
Not graded 4.3 60.8 75.0 62.2
Total 100 100 100 100
a
Other traditional markets include public village markets (haats), private retail markets, Rythu Bazaars, among others.

Table 6
the hedonic price models. These robustness checks are shown in
Transaction costs by market channel (Rs/kg).
Table 8. Part A of Table 8 repeats the original results from Fig. 3
Category of cost Supermarket Traditional markets for easy reference. In part B, we included an additional dummy
(n = 844) (n = 2784)
as explanatory variable to control for non-mandi traditional mar-
Bagging 0.04*** (0.24) 0.27 (1.13) kets, such that the supermarket effect only captures the price dif-
Transportation 0.46** (2.69) 0.82 (2.43)
ference between supermarket collection centers and mandis. As
Loading 0.01* (0.02) 0.03 (0.19)
Offloading 0.01*** (0.13) 0.05 (0.15) was shown above, prices in traditional markets can vary by market
Payment at check point or 0.00 0.00 type. However, the supermarket effects on farmgate prices remain
road block significant and similar in size to those in the main models. In part
Personal transport to market 0.02*** (0.18) 0.09 (0.22) C, we reduced the number of observations by only considering the
or back
Entry license fees 0.02 (0.47) 0.04 (0.30)
most recent two transactions of each farmer per vegetable type.
Packaging cost 0.05 (1.85) 0.01 (0.11) One could expect that farmers remember price, cost, and quality
Commission rate 0.001*** (0.05) 0.93 (8.96) details better for their most recent vegetable sales than for trans-
Storage charges 0.001 (0.05) 0.00 (0.009) actions that already happened ten or twelve months ago. Hence,
Local tax 0.00 0.00
focusing on the most recent transactions may reduce possible mea-
Other fees 0.07 (1.41) 0.05 (0.30)
Total transaction cost 0.68** (5.52) 2.29 (11.10) surement error. However, also in these models with fewer observa-
tions the supermarket price effects all remain positive and
Notes: Mean values are shown with standard deviations in parentheses. * Differ-
significant.
ence between supermarket and traditional markets significant at the 10% level. **
Difference between supermarket and traditional markets significant at the 5% level. In part D of Table 8, we did not consider transport costs when
*** Difference between supermarket and traditional markets significant at the 1% calculating farmgate prices. That is, we subtracted other transac-
level. tion costs that farmers incurred from the prices received, but not
transport costs. This test can help to see whether the supermarket
quantity, quality attributes) were included in estimation, as shown
effects on farmgate prices are driven primarily by lower transport
in Table A4 in the Online Appendix.
costs, which could be possible given that we sampled farmers in
The results in Fig. 3 suggest that selling in supermarket collec-
the vicinity of supermarket collection centers. However, also in
tion centers is associated with significantly higher farmgate prices
these specifications the supermarket effects remain positive and
for all types of vegetables, also after controlling for quality differ-
significant. Finally, in part E of Table 8, we ran the hedonic price
ences and other possible confounding factors. The estimated mar-
regressions as panel data models with farmer fixed effects, thus
ginal effect of 2.95 for tomato implies that selling to supermarket
controlling for any unobserved time-invariant heterogeneity
collection centers leads to a price that is 2.95 Rs/kg higher than if
between farmers selling to supermarkets and traditional markets.
the same tomatoes were sold in traditional markets. This price
Also here, the estimated marginal effects remain positive and sig-
effect is equivalent to a markup of 40% when compared to the
nificant. We conclude that the positive supermarket price effects
mean tomato price fetched in traditional markets. For the other
are very robust to alternative specifications of the regression
vegetables, the supermarket price effects are somewhat smaller
models.
in magnitude – ranging between 11% for cabbage and 19% for okra
and eggplant – but still quite considerable and statistically
significant. 6. Propensity score matching results

5.2. Robustness checks 6.1. Average treatment effects

We carried out several robustness checks of the estimated We now present the PSM estimates of the supermarket effects
supermarket price effects by using alternative specifications of on farmgate prices. The probit models used to calculate the
 C.S.R. Nuthalapati et al. / World Development 134 (2020) 105034
Fig. 1. Cumulative distributions of transaction costs by market channel (Rs/kg) Note: Using Kolmogorov Smirnov test statistics, the distributions for supermarkets and
traditional markets differ for all types of vegetables at the 1% level.
propensity scores are shown in Table A5 in the Online Appendix.
Based on the propensity scores, appropriate matches could be
found for most of the observations. Common support graphs are
shown in Fig. A2. For 105 observations, no matches could be found;
these were excluded from the PSM analysis. Indicators of covariate
balancing before and after matching are shown in Tables A6-A8 in
the Online Appendix. Low pseudo-R2 and insignificant likelihood
ratio tests after matching (Table A6) support the hypothesis that
treatment and control groups have the same covariate distribution
for all vegetables, except for cabbage. For cabbage, covariates still
differ after matching, so that the PSM results for cabbage should
be interpreted with caution.
Based on the comparison of farmgate prices between treated
and control groups, average treatment effects on the treated
(ATT) were calculated. Results are shown in Table 9. The ATT of
selling to supermarkets is positive and statistically significant for
all vegetable types, except for cabbage. The ATT of 1.99 Rs/kg in
9
the case of tomato implies that the imputed farmgate price is
30% higher when selling to supermarkets than when selling to tra-
ditional markets. For cauliflower, the ATT of supermarkets on far-
mgate prices is 22%, for okra it is 19%, and for eggplant it is 20%.
Note that these price effects are calculated after controlling for
product quality differences and other relevant factors. The results
are consistent with the hedonic price models discussed above
and suggest that supermarkets contribute significantly to
increased market efficiency, higher farmgate prices, and thus also
higher farm revenues.
The exception is cabbage, where the covariate balancing tests
are not satisfied and the ATT is statistically insignificant. There
are at least two possible reasons for the smaller price differences
between supermarket and traditional channels for cabbage. First,
cabbage is somewhat less popular among consumers than the
other vegetables, at least in some parts of India. Second, cabbage
is less perishable than the other vegetables, as shriveling outer
10 C.S.R. Nuthalapati et al. / World Development 134 (2020) 105034

Table 7
Output prices received by farmers by market channel.

Vegetable Market Observations Mean price (Rs/kg) SD Price difference with supermarket channel
Mean diff. (Rs/kg) SE t-value p-value
Tomato Supermarket 289 9.3*** 9.2
All traditional 1219 7.3 3.2 2.0 0.12 7.94 0.00
Wholesale (mandi) 1016 7.1 2.7 2.1 0.13 8.82 0.00
Other traditional a 126 8.5 3.9 0.8 0.32 1.35 0.18
Cauliflower Supermarket 210 10.3*** 10.1
All traditional 469 8.9 3.6 1.4 0.11 3.85 0.00
Wholesale (mandi) 364 9.0 3.4 1.3 0.09 3.53 0.00
Other traditional a 54 8.2 2.2 2.1 0.23 3.42 0.00
Okra Supermarket 125 14.7*** 8.0
All traditional 429 12.6 3.9 2.1 0.09 5.77 0.00
Wholesale (mandi) 292 12.8 3.5 2.0 0.06 5.10 0.00
Other traditional a 55 11.8 2.6 3.0 0.26 4.66 0.00
Eggplant Supermarket 94 11.4*** 10.6
All traditional 381 10.4 4.3 1.1 0.21 2.11 0.04
Wholesale (mandi) 278 10.0 4.0 1.4 0.18 2.69 0.01
Other traditional a 50 11.0 3.4 0.4 0.28 0.50 0.62
Cabbage Supermarket 126 7.8 8.5
All traditional 286 7.2 2.9 0.6 0.13 1.59 0.11
Wholesale (mandi) 255 7.2 2.7 0.6 0.13 1.50 0.13
Other traditional a 16 7.6 2.5 0.2 0.94 0.18 0.86

*** Difference between supermarket and traditional markets (all traditional combined) significant at 1% level.
a
Other traditional markets include public village markets (haats), private retail markets, Rythu Bazaars, among others.

leaves can simply be removed. Both factors mean that – also at the
retail level – the prices of cabbage differ less between supermar-
kets and traditional markets than the prices of other vegetables.
Indian consumers typically associate vegetables in supermarkets
with higher levels of quality and freshness, but for cabbage – given
the reasons mentioned – the perceived advantages of buying in
supermarkets are smaller, so the additional consumer willingness
to pay is smaller as well.
6.2. Sensitivity analysis
The ATTs in Table 9 were estimated using Haerdle’s ‘‘better”
Gaussian kernel bandwidth option in STATA. As the results can
be influenced by the choice of bandwidth, we carried out sensitiv-
ity analyses with two alternative bandwidth options, namely
Scott’s Gaussian kernel over-smoothed bandwidth and Silverman’s
Gaussian kernel bandwidth. The alternative results are shown in
Tables A9 and A10 in the Online Appendix. The ATTs are very sim-
ilar to those in Table 9, in terms of both their magnitudes and sig-
nificance levels, so that we conclude that the price effects are not
driven by the bandwidth choice.
Other sensitivity analyses that we carried out relate to possible
hidden bias due to unobserved factors (e.g., reporting bias by tradi-
tional channel farmers due to lower familiarity with quality grad-
ing). As explained, PSM controls for observed but not for possible
unobserved heterogeneity between supermarket and traditional
farmers and transactions. We use the Mantel-Haenszel test follow-
ing the bounding approach of Rosenbaum (2002) to estimate how
large hidden bias would have to be in order to invalidate our find-
ing of significant price effects of supermarkets. The same testing
approach was also used by Rao et al. (2012) in a study on the
effects of supermarkets on production efficiency in Kenya. When
treatment and control groups are properly matched using observed
covariates, the matched observations will only differ in terms of
unobserved variables, if any. In the Mantel-Haenszel test, this dif-
ference can be assessed by gamma (C), which is the log odds of dif-
ferential assignment due to unobserved covariates. More precisely,
the values of gamma indicate critical levels at which the ATT would
turn insignificant.
The gamma values obtained are summarized in the last column
of Table 9. The gamma value of 4.5 for tomato implies that treat-
ment and control groups matched on observable covariates would
have to differ by 350% in terms of unobservables that influence
supermarket sales in order to render the ATT on farmgate prices
insignificant. Such a large gamma value provides confidence in
the findings’ validity (Becker & Caliendo, 2007; Rao et al., 2012).
In other words, a significant treatment effect can be expected even
if some reasonable level of hidden bias would exist. For the other
vegetable types, the gamma values are lower, but still in a range
that underlines the robustness of significant ATTs. For cauliflower,
okra, and eggplant, matched observations would have to differ by
125%, 75%, and 175%, respectively, in terms of unobserved factors
that influence supermarket sales in order to render the ATTs
insignificant. For cabbage, the gamma value is one, because the
ATT was not statistically significant anyway.
6.3. Discussion
We found that supermarkets in India pay farmers more for their
vegetables than traditional market buyers. To some extent, this is
due to higher product quality in the supermarket channel. But even
after controlling for quality and other relevant factors, significant
price differences between supermarket and traditional channels
remain for most of the vegetable types. What may be the reasons?
In many cases, supermarket collection centers in the study
areas are located closer to the villages than traditional wholesale
markets, meaning that transportation costs are lower when selling
to supermarkets. In addition, we found that commission charges
and other transaction costs that farmers face are also lower when
selling in supermarket collection centers than when selling in tra-
ditional markets. This explains at least part of the observed differ-
ences in the imputed farmgate prices, because we deducted
farmers’ transport and transaction costs from the prices received
at the point of first sale. But also the buyers in supermarket collec-
tion centers face lower transaction costs than in traditional whole-
sale markets, because they save the commission fee that buyers are
typically charged in public mandis. In addition, supermarket supply
chains further downstream are also shorter, with fewer intermedi-
aries who want to make some profit. While this latter aspect was
 C.S.R. Nuthalapati et al. / World Development 134 (2020) 105034 11

Fig. 2. Cumulative distributions of imputed farmgate prices by market channel (Rs/kg) Note: Imputed farmgate prices were calculated by subtracting farmers’ transaction
costs from the prices received in supermarket collection centers and traditional markets. Using Kolmogorov Smirnov test statistics, the distributions for supermarkets and
traditional markets differ for all types of vegetables at the 1% level.

not analyzed here, lower transaction costs for supermarkets would
mean that they are able to pay somewhat higher prices to farmers,
even if the retail price at the end of the supply chain were the same
as in traditional markets.
Paying higher prices is important for supermarkets to incen-
tivize farmers to deliver high-quality produce consistently
(Reardon et al., 2009). This is especially true in India, where super-
markets do not have any contracts with farmers that could other-
wise ensure timely and consistent supply. As was shown in
Nicaragua, contracts with fixed prices are a mechanism for farmers
to hedge against price risk (Michelson et al., 2012). Such a hedging
mechanism does not exist in India. Nor do supermarkets in India
provide any inputs or extension services to farmers that could
act as alternative incentives to supply to supermarket channels
(Gow, Streeter, & Swinnen, 2000; Key & Runsten, 1999). In the
absence of such alternative incentives, the main reason for farmers
to sell in supermarket collection centers is a higher mean price.
Without this price incentive, too few farmers might decide to sell
in supermarket collection centers, which would jeopardize regular
supplies.
7. Conclusion
In this article, we tested the hypothesis that supermarkets pay
farmers higher prices for their produce than traditional markets,
using comprehensive data from smallholder vegetable growers in
India. This hypothesis was confirmed. Even after controlling for dif-
ferences in quality and other relevant factors, we found that
imputed farmgate prices that farmers receive in supermarket
channels are around 20% higher than the prices received in tradi-
tional channels for most of the vegetables considered. For some
12 C.S.R. Nuthalapati et al. / World Development 134 (2020) 105034

of the vegetables, price differences are even higher. We also found

Fig. 3. Effect of supermarkets on farmgate prices Notes: Marginal effects are shown
with standard error bars. Results from hedonic price models with vegetable
transactions as the unit of observation and imputed farmgate prices (price received
minus farmers’ transaction costs) of each vegetable as dependent variables. The
explanatory variable of interest is a supermarket dummy that takes a value of one if
the transaction was made in a supermarket collection center, and zero if the
transaction was made in traditional markets. Control variables were included in
estimation, as shown in Table A4 in the Online Appendix. The number of observed
transactions is 1508 for tomato, 679 for cauliflower, 554 for okra, 475 for eggplant,
and 412 for cabbage.
that selling to supermarkets involves lower transaction costs for
farmers than selling in traditional markets, as supermarket collec-
tion centers are located closer to the villages and involve lower
commission fees.
Higher prices seem to be needed as an incentive for farmers to
deliver to supermarket collection centers, because supermarkets
do not offer any other incentives to farmers. In other countries,
where supermarkets often procure vegetables from farmers
through contracts, farmers benefit from lower price risk or from
inputs and extension provided as part of the contracts
(Michelson et al., 2012; Rao et al., 2012). In India, supermarkets
procure vegetables without contracts, so that higher mean prices
are important to ensure regular supplies. We found significant
price incentives for comparable qualities. In addition, higher qual-
ity grades are rewarded in supermarket channels, which is often
not the case in traditional channels. Our data showed that farmers
who supply supermarkets typically sell their highest-quality
vegetables in supermarket collection centers, whereas they sell
lower-quality produce in traditional markets. One concern may
be that supermarkets would pay higher prices only in the
beginning and would then lower their prices when farmers are
locked in. However, this could only occur if farmers either
committed to long-term supply contracts or if supermarkets

Table 8
Effect of supermarkets on farmgate prices (robustness checks).

Tomato Cauliflower Okra Eggplant Cabbage

A) Main models (original results)
Supermarket effect 2.95*** (0.25) 1.40*** (0.35) 2.40*** (0.49) 1.91*** (0.53) 0.77** (0.39)
Observations 1508 679 554 475 412
B) Additionally controlling for non-mandi traditional markets
Supermarket effect 2.99*** (0.25) 1.35*** (0.35) 2.22*** (0.50) 1.74*** (0.54) 0.73* (0.40)
Observations 1508 679 554 475 412
C) Only considering the last two transactions
Supermarket effect 1.99*** (0.38) 1.35*** (0.48) 1.78*** (0.69) 1.59** (0.77) 1.43***(0.53)
Observations 655 389 291 256 241
D) Excluding transport costs
Supermarket effect 2.56*** (0.26) 1.20*** (0.36) 1.88*** (0.51) 1.77*** (0.59) 0.92** (0.42)
Observations 1508 679 553 475 412
E) Panel models with farmer fixed effects
Supermarket effect 2.11*** (0.23) 1.47*** (0.23) 1.70*** (0.51) 2.04*** (0.53) 1.96*** (0.40)
Observations 1508 679 554 475 412

Notes: Effects are based on hedonic price models with different specifications. Marginal effect estimates are shown with standard errors in parentheses. The same control
variables as those shown in Table A4 in the Online Appendix were included in estimation. Only for the panel data models with farmer fixed effects, time-invariant controls
were excluded. * Significant at the 10% level. ** Significant at the 5% level. *** Significant at the 1% level.

Table 9
Effects of supermarkets on farmgate prices (propensity score matching results).

Treated Control Average treatment effect on the treated Standard error Critical level for hidden bias (C) a

Tomato
Price (Rs/kg) 8.60 6.61 1.99*** 0.31 4.50
Observations 289 1198
Cauliflower
Price (Rs/kg) 10.07 8.24 1.83*** 0.39 2.25
Observations 210 462
Okra
Price (Rs/kg) 14.11 11.88 2.23*** 0.53 1.75
Observations 125 422
Eggplant
Price (Rs/kg) 11.03 9.19 1.84*** 0.08 2.75
Observations 94 365
Cabbage
Price (Rs/kg) 7.40 6.46 0.94 0.54 1.00
Observations 126 232

Notes: aThe critical level for hidden bias (gamma, C) is the log odds of differential assignment due to unobserved covariates.
***Significant at the 1% level.
 C.S.R. Nuthalapati et al. / World Development 134 (2020) 105034
became monopsonist buyers for vegetables in the local context.
Both scenarios are unlikely, as vegetable supply chains in India
are quite diverse, with many different types of buyers, and will
likely remain so for the foreseeable future.
Our findings contribute to the existing literature on supermar-
kets and smallholder farmers. Previous studies with data from var-
ious developing countries showed that smallholders often benefit
in terms of higher incomes when selling to supermarkets. How-
ever, the mechanisms of these income gains were rarely analyzed.
While price advantages are one of the possible mechanisms, previ-
ous studies that compared prices between market channels did not
control for differences in product quality and transaction costs, as
we did here. Our results clearly confirm that higher farmgate prices
are one of the mechanisms to explain smallholder income gains
associated with the supermarket revolution.
Our results also have important policy implications. They
clearly show that supermarkets can help to modernize vegetable
supply chains by improving market efficiency and incentivizing
higher-quality production. In India, the policy debate about agri-
cultural markets largely focuses on reforming public-sector regu-
lated markets (i.e., mandis). While public mandis may continue to
play an important role, liberalizing markets and providing more
leeway for private-sector actors can help to reduce transaction
costs and other market inefficiencies. Our findings suggest that
reducing policy constraints for modern retail investments could
be beneficial for smallholder farmers. Of course, promoting effi-
ciency gains in public markets (e.g., relaxing obligations to sell
through commission agents) and traditional supply chains (e.g.,
promoting cooperatives) could also help to reduce transaction
costs and raise farmgate prices for smallholders. Public and private
actions should not be seen as substitutes but as complements in
broader policy strategies to improve the functioning of agricultural
markets and promote rural development.
In closing, one aspect worth discussing is the issue of external
validity. While we collected data in four different states of India,
the sampling framework focused on villages that are relatively
near to large cities and thus in the catchment areas of supermarket
collection centers. These are the regions where supermarkets in
India so far procure most of the vegetables. Our results are proba-
bly representative for the effects of supermarkets as currently
observed in India, but they cannot necessarily be used to project
how the effects might look like in remoter regions if supermarket
developments further expand.
CRediT authorship contribution statement
Chandra S.R. Nuthalapati: Conceptualization, Methodology,
Investigation, Formal analysis, Project administration, Writing -
original draft. Rajib Sutradhar: Investigation, Formal analysis.
Thomas Reardon: Conceptualization, Writing - review & editing.
Matin Qaim: Conceptualization, Validation, Writing - review &
editing.
Declaration of Competing Interest
The authors declare that they have no known competing finan-
cial interests or personal relationships that could have appeared
to influence the work reported in this paper.
Acknowledgments
The survey data used in this research were collected as part of
the project ‘‘Post-Liberalisation Rural Transformation” funded by
the Indian Council of Social Science Research (ICSSR), New Delhi,
under Sponsored Projects Category Theme 5(2). The authors are
13
grateful for constructive comments received on earlier versions
of the manuscript from three anonymous reviewers of this journal.
Appendix A. Supplementary data
Supplementary data to this article can be found online at
https://doi.org/10.1016/j.worlddev.2020.105034.
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