Noisy Vertical Markets

In vertical markets volatility at one level of the market may transmit itself to another level.
This paper examines the linkages that exist between spreads at different levels of the market
hierarchy in Indian rice markets. It highlights the behavior of spreads in the presence of
information asymmetry. This causes spreads to overshoot their equilibrium values. Second,
we model possible differences between the reaction to an upward revision of the spread from
that to a downward revision. We also propose policy prescriptions such that the policy maker
can target specific levels of the market verticality given an understanding of the process of
transmission and the magnitude of noise trading.