Components of the wholesale bid-ask spread and the structure of grain markets: The case of rice in India

We investigate the market microstructure of the wholesale markets for rice in India. We propose a general method of splitting the wholesale bid-ask spread into its three constituent components: the order processing costs, the adverse information costs and the inventory holding costs. The bid-ask spread reflects the extent of information asymmetry and order imbalance in the market place. However, the dynamics of the bid-ask spread can only be understood in terms of the movement of its components; hence the importance of isolating these components. We use Zellner's seemingly unrelated regressions to split the bid-ask spread into the three components in the rice markets of 14 major centers in India. The results are then linked to the production and consumption patterns in the market areas covered by these centers.