Components of the Wholesale Bid-Ask Spread and the Structure of Grain Markets : The Case of Rice in India

In this paper we propose a new method of splitting up the Bid-Ask Spread of the wholesalers in grain markets into its three constituent components: the order processing costs, the adverse information cost and the inventory holding cost. It is argued that the extant methods of splitting up this spread are peculiar to stock markets and cannot be applied to grain markets. The proposed method is shown to be more general than the extant approaches. This new method is used to examine the constituents of the bid-ask spread in the grain markets of twelve major centers in India. The results are then linked to the production and consumption patterns in these centers