Training, production, and channel separation in ITC’s e-Choupal network∗

In recent years, I.T.C. Limited (hereafter ITC) developed the “e-Choupals” to the rural areas of India. In this new business model, ITC reaches implicit agreements with some farmers (inside the network) that they can sell the products directly to ITC at the market price in the local market, but allow the farmers, both inside and outside the network, to access valuable information through the e-Choupals such as price updating, weather forecast, best practice, etc., free of charge. In this paper, we investigate ITC’s incentive of offering such opportunities, especially to those farmers outside the network, and analyze the farmers’ strategic quantity decisions. We show that the implicit agreement behaves as a formal contract, regardless of the price elasticity of the local market: Once reaching an agreement with ITC, the farmers always give priority to delivering directly to ITC. The e-Choupal network leads naturally to the complete separation of selling channels, provided that ITC’s capacity constraint is not tight. Surprisingly, in a variety of scenarios, ITC finds it optimal to provide the best available training to the farmers outside the network. This is because it may reduce the transaction price and provide an additional source for the procurement. We further show that our results are not prone to the potential cheating in the mandi system, the possible exploitation via postponed payments, ∗We thank Ananth Iyer, Hau Lee, the associate editor, and the reviewers for very constructive and insightful suggestions that significantly improved the quality of the paper. All remaining errors are our own. †Department of Industrial Engineering & Operations Research, University of California, Berkeley, CA 94720; e-mail: [email protected] ‡Krannert School of Management, Purdue University, West Lafayette, IN 47907; email: [email protected] §Department of Industrial Engineering & Operations Research, University of California, Berkeley, CA 94720; e-mail: [email protected]