The reflection of competition and coordination on organic agribusiness supply chains

Mohammadreza Nematollahi^a, Alireza Tajbakhsh^b, Alireza Tajbakhsh^c

Peter B. Gustavson School of Business, University of Victoria, Canada.

Abstract

Given the social, environmental, and economic advantages of organic products compared to their conventional counterparts, there has been a growing interest in improving agribusiness sustainability through organic farming technology. However, less attention has been paid to developing analytical models to resolve challenges observed in organic supply chains. This study analytically explores competition- and coordination-based scenarios driving conventional and organic markets under contract farming mechanisms. Motivated by real-world practices, we investigate a three-party agricultural supply chain consisting of an agribusiness enterprise, an organic farmer, and a conventional farmer, where the farmers’ products are imperfect substitutes. First, we develop analytical models to derive closed-form optimal solutions under the traditional contract farming, where the agribusiness enterprise as the Stackelberg leader offers the guaranteed wholesale price and the farmers, as the followers, set their production quantity. We examine the problem by incorporating the specific features of organic farming, including organic price premium, crop yield gap, and organic cost factor into the model. We also conduct sensitivity analyses to explore the effects of competition and main characteristics of organic farming on the farmers’ and agribusiness enterprise’s optimal strategies. Meanwhile, we analytically compare and contrast the optimal traditional contract farming strategies with those under the centralized setting as a benchmark. Finally, we propose a coordinated version of contract farming named synergistic trilateral contract farming to convince the members to move towards centralization. The proposed contract not only benefits all the members by resolving both horizontal and vertical channel conflicts but also motivates the consumption of organic produce in the market. The societal measures in the investigated framework, including consumer surplus and social welfare, also improve when the supply chain members move towards coordination. Additionally, our results highlight the impact of organic farming parameters on quantity- and pricing-based decisions across the network.

Keywords: Agricultural supply chain management, Organic farming technology, Competition, Channel coordination, Synergistic trilateral contract farming, Sustainability development.