Is the Auction System flawed for Small Holder Centric Markets?

In Assam’s tea economy, STGs do not engage directly in the marketplace where their product is priced and sold. Instead, their role is limited to cultivating raw green tea leaves, which must be processed within 6-8 hours of plucking to preserve quality and market viability (Harney & Sons, 2019). Pertaining to the highly perishable nature of green leaf and the high costs of setting up their own processing units, most STGs depend on Bought Leaf Factories (BLFs), which are privately owned processing centres that convert green leaf into made tea, the final form to be auctioned or sold. 

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The transactional model is deceptively simple: STGs deliver fresh green leaf to a BLF, often conveniently located within a 20-30 km radius. The transaction that takes place between the two is a pre negotiated rate per kilogram, set unilaterally by the factory. This rate is loosely based on perceived quality, internal cost and seasonal demand, but remains entirely detached from the real-time auction prices or demand indicators (Paul & Mondal, 2019). Once processed, the made tea is sent to auction centres, such as the one at Guwahati or Kolkata, where it is purchased by wholesalers, exporters, or retailers through competitive bidding. STGs, however, have no access to the auction floor and therefore remain unaware of the actual value their green leaf ultimately commands.

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Green leaf refers to fresh, unprocessed leaves that are plucked directly from tea bushes. These are the raw agricultural inputs that must be processed to become the made tea that consumers buy.

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This process creates a two-tiered market: 

1. There is a primary market where STGs accept prices and are not involved in valuation. 

   2. In contrast, there is a secondary formal market, which includes auctions, where brokers, BLFs, and bulk buyers work on setting prices and making profits from price differences.

From a rational standpoint, the system promises an efficient delivery, green leaves are processed quickly and there exists a continuous supply chain. But the conceptual ideal directs our attention away from the distributional and institutional flaws that the system carries with itself. This creates an intermediary centric exploitation, where it extracts labor and value from the margins while confirming power and decision making in the hands of a few intermediaries who ultimately determine the price of their produce.

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The direct impact of STGs lacking their own processing infrastructure is that they are compelled to sell their produce immediately to BLFs, under terms which are usually non-negotiable that strip them of both agency and authority over price determination. A comprehensive study by Deka and Goswami observed that STGs, in isolation, suffer from a fragmented presence in the supply chain. STGs have minimal role in assessment of the quality of leaf, a factor immensely crucial for determining market value at auctions. As the assessment is briefly done by the BLFs, their role is rendered even more negligible due to the lack of infrastructural mechanisms, such as digital pricing dashboards, real-time access to auction data, centralised quality grading systems, and cooperative platforms, that would otherwise allow them to collectively bargain or access real time auction prices. In essence, the very biological urgency of tea leaf processing, the one that forces them to immediately process it in the following 6-8 hours becomes a mechanism that reinforces imbalance of power: BLFs enjoy temporal and informational advantages, potentially accruing a disproportionate share of the value leaving the STGs trapped in a cycle of high input effort and low returns (Deka & Goswami, 2022).

BLFs enjoy temporal and informational advantages, potentially accruing a disproportionate share of the value leaving the STGs trapped in a cycle of high input effort and low returns (Deka & Goswami, 2022).

What the authors point to is a structural inconsistency in the current auction-based model: while the market is designed for rational pricing and fair distribution of value, the combination of biological constraints and infrastructural dependence curtails any real possibility of equitable participation for smallholders. Unless the challenge of perishability is addressed at an institutional level, STGs will remain confined to the lowest rung of the system.

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Rethinking the Architecture of Markets

The failure of Assam’s tea auctions  to uplift small tea growers invites a deeper inquiry through the lens of Market Design, a theory given by Nobel Laureate Alvin Roth. Roth challenges the classical assumption that markets are natural, self-correcting mechanisms, strictly governed by the impersonal forces of supply and demand. Instead, he poses the argument that markets are engineered systems, frameworks that require intentional design to function effectively(Roth, 2024). For a market to be successful, Roth identifies three important aspects: 

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1. Thickness: the market must attract enough participants on both sides.

2. Uncongestion: the market allows procedural smoothness.

3. Safety: the market ensures participants operate without the threat of harm or distortions caused by ill intentions.

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A brief analysis of Assam's auction system through Roth's framework  reveals shortcomings across all three dimensions. The market, despite its digitised infrastructure and formal procedures, struggles with regards to all aforementioned factors. 

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Firstly, it lacks thickness. The current Bharat auction model does not permit lot division,  which discourages small buyers entry to the auction who might offer more competitive prices (The Economic Times, 2023). It inadvertently pushes competition down, potentially leading to skewed price outcomes. 

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Secondly, it suffers from congestion. Here, congestion does not refer to physical bottlenecks, but to informational and procedural complexities within the system: STGs remain excluded from direct participation in the auction process and are thus shut out of the very platform that determines the value of their produce. Most of all, it is unsafe for smallholders: the system’s structure has no provisions that protect STGs from exploitative pricing by Bought Leaf Factories. Additionally, there is not enough transparency about final auction prices. This leaves them with no control over when and how they sell their green leaf.

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​The drawbacks of Assam's tea auction system are not incidental but reflect deeper institutional failures in market design. In view of Alvin Roth’s theory of market design, emphasising markets to be of the nature that actively ensure participation, safety and efficiency, the assam tea auction system emerges as a paradigmatic example of exclusionary architecture. A system generally lauded for transparency and efficiency, it stands as a prime example of why these features alone do not guarantee fairness. A system struggling with information asymmetry has its transaction costs high, social trust is eroded, and market power is concentrated, and is bound to produce skewed outcomes. Small tea growers, the community constituting the backbone of Assam's tea economy, operate in a kind of market that represents a selective trading arena that perpetuates existing hierarchies rather than challenging them. As pointed out by Roth, such factors are not mere glitches but in an otherwise functioning system; they reflect poor design. The critical question here isn’t whether the market optimally functions or not, rather it’s for who are they designed to function? In a system where inclusivity is lost sight of within the structural fabric of market mechanisms, even the most technologically advanced systems risk producing inequalities.

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Division Lots refers to the practice of breaking down a large consignment (or "lot") of tea into smaller, more manageable units so that smaller buyers can participate in the bidding process.