Quality Improvement through Contract Design and Competition in Agricultural Suppply Chains

Abstract

Quality emerges as a pivotal competitive factor for agricultural products. Recently, retailers within agricultural supply chains have begun investing in technologies to improve quality and designing contracts to incentivize farmers to enhance their labor inputs. The farmers and the retailers incur different quality investment costs, with this cost increasing in the quality they provide. Simultaneously, retailers have embraced the farmer-competition strategy, employing competition to stimulate improved agricultural product quality among farmers. We construct a Stackelberg game model to analyze how farmers’ quality investment, retailer’s contract design, and profits are affected by the retailer’s farmer-competition strategy. We show that the farmer competition introduced by the retailer is not always effective in improving the farmer’s quality investment. Similarly, the competition cannot always lead to additional profits for the retailer. Moreover, the supply chain profit suffers from the retailer’s farmer-competition strategy when the competition intensity between farmers is relatively large. Our results offer insights for retailers by identifying how should the retailer design the contract to improve the farmer’s quality effort given the existence of the farmer competition and under what conditions the retailer should adopt the farmer-competition strategy.

Keywords

Quality management / farmer competition / agricultural supply chain / contract farming