We analyze transaction data from a recently set up electronic exchange in India that trades in various grades of coffee. Such electronic exchanges have important implications for the supply chain of agricultural commodities and have generated significant interest in the trade press because of their potential to generate higher commodity prices for producers and reduced chances of unfair trading practices by middlemen. Policy makers view such exchanges as an important tool for extending the benefits of the information age to rural communities. We model the exchange from the perspective of a risk-averse buyer and we estimate the parameters of the model by comparing the prices in the electronic exchange with those of the same grade of coffee at physical auctions held weekly. We find that electronic auction prices are 4% higher and the difference is statistically significant. Further, we find that the price differential is higher for coffee grades that have higher price volatility and that are tradedless frequently in the physical exchange. We also find that the price differential increases over time as buyers become more familiar with the benefits of the electronic trading format. We discuss the implications of our results for policy makers and providers of the electronic platform.
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