Final Report Summary - PRODORG&FOODSUPPLY (Producer Organizations in Food Supply Chains)
The project “Producer Organizations In Food Supply Chains” carried out at the Toulouse School of Economics (TSE) by Angelo Zago had two main objectives, training and research investigation.
I) TRAINING ACTIVITIES
In terms of training, the researcher has benefited from the following activities:
- Attending courses at the Master and PhD level, such as Advanced Economic Theory (Prof. T. Yamashita and L. Maestri), Advanced Microeconomics (Prof. L. Maestri), Advanced Topics in Theoretical Industrial Organization (Prof. A. Rhodes), Business Strategy (Prof. A. Rhodes and M. Reguant), Corporate Finance (Prof. A. Landier), Game Theory (Prof. A. Renault), Microeconomics II (Prof. P. Rey), Optimization (Prof. J. Bolte), Topics in Industrial Organization (Prof. B. Jullien, P. Rey, and D.-S. Jeon), Topics in Organizations and Markets (Prof. J. Tirole).
- Participation to the TSE seminars on Applied Food Industrial Organization, Industrial Organization, Competition Policy, Economic Theory.
- Participation to research project meetings organized by the members of the Food-Farms-Firms group at TSE.
- Organizing a TSE discussion group on “Quality and cooperatives”;
- Organizing an international workshop on “Producer’s Organizations in Agricultural Markets” at TSE (4-5 September 2014), with researchers, policy-makers, and industry representatives (see the website http://www.tse-fr.eu/index.php?option=com_wrapper&Itemid=164(s’ouvre dans une nouvelle fenêtre) for presented papers plus the video of the Round-Table with policy-makers and industry representatives posted on the following link http://www.dailymotion.com/video/k6bF6ZyTNHhbEe8ZTnP)(s’ouvre dans une nouvelle fenêtre);
- And also by learning French by attending courses at the University of Toulouse Capitole and at Alliance Française (passed DELF B2).
II) RESEARCH ACTIVITIES
The research investigation focuses on Producer Organizations (POs), which are collective endeavors common in agricultural markets, where they have been recently empowered by the European Union as a transversal tool for the Common Market Organization. The project has studied the working of these organizations and their interaction with other actors in the food (processing and retailing) sector. In particular, together with TSE colleagues, the researcher has worked on the following three topics.
1. Quality choices in cooperatives (COOP) and investor-owned-firms (IOF). With Philippe Bontems, the researcher has investigated optimal productive choices, in terms of output and quality levels, when there is private information between the farmers (agents) and the firm (principal). Extending a model by Bontems & Fulton (J. Ec. Behav. & Org., 2009), Bontems & Zago consider a model of mechanism design where farmers are heterogeneous in terms of innate quality ability. The firm can offer contracts that determine payments and production schedules, as a function of farmers’ ability. Farmers’ private information on their innate ability generates an agency problem between the firm and the farmers, but the conflict of interest is further exacerbated in the case of the IOF by the objective of the firm. As a result, while farmers produce the efficient aggregate quantity in both cases, the quality is reduced in order to limit information rents, and more so in the case of the IOF. This can change when the COOP has strong redistributive concerns, as the COOP choices then become as distorted as those of the IOF. The design of the optimal contracts depends critically on the nature of the private information. Work in progress shows for instance that the optimal contracts are somewhat different in the case of private information about productive efficiency rather than quality ability. This has led the authors to start exploring the case where there is private information about both quality ability and productive efficiency. The authors are developing a model of sequential contracting – first the firm screens for productive efficiency, then it needs to induce the optimal effort for quality provision - which fits many contractual situations. The results of this part of the project (which is still ongoing and will continue after the Marie Curie grant ends) will provide guidance to policy-makers for the design of contracts in many agricultural sectors, and help business practitioners consider and exploit different contractual approaches – e.g. when is it better to screen on quality, on quantity, or on both dimensions.
2. The formation and participation to Producer Organizations. According to policy-makers, collective action in agriculture can have positive effects, since the organizations of producers may foster common investments, increase productivity by exploiting economies of scale and reducing transactions costs, and so forth. Moreover, besides increasing efficiency, collective action can help the farming sector retain a fair share of the surplus created in food chains. Yet, in some settings collective action does not emerge. This has led the researcher, together with Zohra Bouamra-Mechemache, to investigate the participation of farmers into POs. Building on the literature on agricultural cooperatives, they have developed an original theoretical model that incorporates the benefits of sharing the cost of a common investment into a model of group formation, accounting for the opportunity cost of giving-up alternative market opportunities. They first considered the case where these alternative opportunities are homogeneous, and have established the existence of different types of equilibria: an equilibrium with group formation is possible, but in some instances farmers may find it optimal not to join and thus the group does not form. This constitutes a first step in studying the effects of downstream concentration (in processing or retailing) on the scope for collective organization (measured in terms of participation to POs) in the upstream farming sector. Few studies have considered explicitly these effects (see, e.g. Comanor & Rey, Rev. Ind. Org., 2000), even though in vertical chains (such as the food chain) what happens downstream may affect things upstream, and conversely. In the current version of the model, the market opportunities generated by the downstream sector are considered as exogenous, but in an extension they will be made endogenous, so as to study consider explicitly how downstream concentration can affect the organization of the upstream agricultural sector.
Another extension considers the case where farmers have heterogeneous market alternatives; this allows testing empirically the model predictions, so as to identify the factors that induce the equilibria found in the different settings. This is particularly interesting, as ascertaining which of the economic, regional, industry or PO’s internal specific factors can explain the success or failure of POs formation, will provide key insight to better tailor economic policies towards POs.
3. Private labels and collective reputation
In Europe, the most well-known examples of collective reputations in agriculture are the protected designations of origins (PDO) which concerns not only wines (formerly known as AOC wines), but also cheeses, hams, vegetables, and so forth. Together with the protected geographical indications (PGIs), PDOs are the backbone of the system of geographical indications (GIs) which the EU has put in place to institutionalize the link between the quality attributes of a good and the geographic location in which production takes place. Geographic indications have attracted consumers for a long time, which has led some retailers to launch private label versions of the more successful PDO products. The creation of these private label versions has sparked controversies, as documented in this part of the project. Producing for the private label is an instance of the more general problem in which a group decides on whether seizing a market opportunity available for the collective brand. Indeed, PDO are owned and managed by groups of firms on a democratic basis, and since these firms can be heterogeneous, they have different incentives and payoffs. The research has focused on some of the major problems that the industry and policy-makers face in this area, such as how to design the governance or the hierarchical structure of the collective reputation system so as to reduce conflicts among diverging interests.
Overall, the research project has paved the ground for the economic analysis of POs in agricultural markets. The first results are promising, and together with the foreseeable ones will help increase the productivity and possibly improve welfare distribution in food chains. They will provide policy-makers and industry representatives with a better understanding of these organizations, of their choices, and of their impact on economic efficiency and welfare distribution in vertical food chains.
I) TRAINING ACTIVITIES
In terms of training, the researcher has benefited from the following activities:
- Attending courses at the Master and PhD level, such as Advanced Economic Theory (Prof. T. Yamashita and L. Maestri), Advanced Microeconomics (Prof. L. Maestri), Advanced Topics in Theoretical Industrial Organization (Prof. A. Rhodes), Business Strategy (Prof. A. Rhodes and M. Reguant), Corporate Finance (Prof. A. Landier), Game Theory (Prof. A. Renault), Microeconomics II (Prof. P. Rey), Optimization (Prof. J. Bolte), Topics in Industrial Organization (Prof. B. Jullien, P. Rey, and D.-S. Jeon), Topics in Organizations and Markets (Prof. J. Tirole).
- Participation to the TSE seminars on Applied Food Industrial Organization, Industrial Organization, Competition Policy, Economic Theory.
- Participation to research project meetings organized by the members of the Food-Farms-Firms group at TSE.
- Organizing a TSE discussion group on “Quality and cooperatives”;
- Organizing an international workshop on “Producer’s Organizations in Agricultural Markets” at TSE (4-5 September 2014), with researchers, policy-makers, and industry representatives (see the website http://www.tse-fr.eu/index.php?option=com_wrapper&Itemid=164(s’ouvre dans une nouvelle fenêtre) for presented papers plus the video of the Round-Table with policy-makers and industry representatives posted on the following link http://www.dailymotion.com/video/k6bF6ZyTNHhbEe8ZTnP)(s’ouvre dans une nouvelle fenêtre);
- And also by learning French by attending courses at the University of Toulouse Capitole and at Alliance Française (passed DELF B2).
II) RESEARCH ACTIVITIES
The research investigation focuses on Producer Organizations (POs), which are collective endeavors common in agricultural markets, where they have been recently empowered by the European Union as a transversal tool for the Common Market Organization. The project has studied the working of these organizations and their interaction with other actors in the food (processing and retailing) sector. In particular, together with TSE colleagues, the researcher has worked on the following three topics.
1. Quality choices in cooperatives (COOP) and investor-owned-firms (IOF). With Philippe Bontems, the researcher has investigated optimal productive choices, in terms of output and quality levels, when there is private information between the farmers (agents) and the firm (principal). Extending a model by Bontems & Fulton (J. Ec. Behav. & Org., 2009), Bontems & Zago consider a model of mechanism design where farmers are heterogeneous in terms of innate quality ability. The firm can offer contracts that determine payments and production schedules, as a function of farmers’ ability. Farmers’ private information on their innate ability generates an agency problem between the firm and the farmers, but the conflict of interest is further exacerbated in the case of the IOF by the objective of the firm. As a result, while farmers produce the efficient aggregate quantity in both cases, the quality is reduced in order to limit information rents, and more so in the case of the IOF. This can change when the COOP has strong redistributive concerns, as the COOP choices then become as distorted as those of the IOF. The design of the optimal contracts depends critically on the nature of the private information. Work in progress shows for instance that the optimal contracts are somewhat different in the case of private information about productive efficiency rather than quality ability. This has led the authors to start exploring the case where there is private information about both quality ability and productive efficiency. The authors are developing a model of sequential contracting – first the firm screens for productive efficiency, then it needs to induce the optimal effort for quality provision - which fits many contractual situations. The results of this part of the project (which is still ongoing and will continue after the Marie Curie grant ends) will provide guidance to policy-makers for the design of contracts in many agricultural sectors, and help business practitioners consider and exploit different contractual approaches – e.g. when is it better to screen on quality, on quantity, or on both dimensions.
2. The formation and participation to Producer Organizations. According to policy-makers, collective action in agriculture can have positive effects, since the organizations of producers may foster common investments, increase productivity by exploiting economies of scale and reducing transactions costs, and so forth. Moreover, besides increasing efficiency, collective action can help the farming sector retain a fair share of the surplus created in food chains. Yet, in some settings collective action does not emerge. This has led the researcher, together with Zohra Bouamra-Mechemache, to investigate the participation of farmers into POs. Building on the literature on agricultural cooperatives, they have developed an original theoretical model that incorporates the benefits of sharing the cost of a common investment into a model of group formation, accounting for the opportunity cost of giving-up alternative market opportunities. They first considered the case where these alternative opportunities are homogeneous, and have established the existence of different types of equilibria: an equilibrium with group formation is possible, but in some instances farmers may find it optimal not to join and thus the group does not form. This constitutes a first step in studying the effects of downstream concentration (in processing or retailing) on the scope for collective organization (measured in terms of participation to POs) in the upstream farming sector. Few studies have considered explicitly these effects (see, e.g. Comanor & Rey, Rev. Ind. Org., 2000), even though in vertical chains (such as the food chain) what happens downstream may affect things upstream, and conversely. In the current version of the model, the market opportunities generated by the downstream sector are considered as exogenous, but in an extension they will be made endogenous, so as to study consider explicitly how downstream concentration can affect the organization of the upstream agricultural sector.
Another extension considers the case where farmers have heterogeneous market alternatives; this allows testing empirically the model predictions, so as to identify the factors that induce the equilibria found in the different settings. This is particularly interesting, as ascertaining which of the economic, regional, industry or PO’s internal specific factors can explain the success or failure of POs formation, will provide key insight to better tailor economic policies towards POs.
3. Private labels and collective reputation
In Europe, the most well-known examples of collective reputations in agriculture are the protected designations of origins (PDO) which concerns not only wines (formerly known as AOC wines), but also cheeses, hams, vegetables, and so forth. Together with the protected geographical indications (PGIs), PDOs are the backbone of the system of geographical indications (GIs) which the EU has put in place to institutionalize the link between the quality attributes of a good and the geographic location in which production takes place. Geographic indications have attracted consumers for a long time, which has led some retailers to launch private label versions of the more successful PDO products. The creation of these private label versions has sparked controversies, as documented in this part of the project. Producing for the private label is an instance of the more general problem in which a group decides on whether seizing a market opportunity available for the collective brand. Indeed, PDO are owned and managed by groups of firms on a democratic basis, and since these firms can be heterogeneous, they have different incentives and payoffs. The research has focused on some of the major problems that the industry and policy-makers face in this area, such as how to design the governance or the hierarchical structure of the collective reputation system so as to reduce conflicts among diverging interests.
Overall, the research project has paved the ground for the economic analysis of POs in agricultural markets. The first results are promising, and together with the foreseeable ones will help increase the productivity and possibly improve welfare distribution in food chains. They will provide policy-makers and industry representatives with a better understanding of these organizations, of their choices, and of their impact on economic efficiency and welfare distribution in vertical food chains.