Analysis of Transaction between Famers and Agents in Agricultural Market
Yuan-yuan Yu1, Li-wei Bao2
1
School of Management, Zhejiang University, Hangzhou, P. R. China
School of Business, Zhejiang University City College, Hangzhou, P. R. China
(yuanyuanyu3861@126.com, baolw@zucc.edu.cn)
2
Abstract- The transaction between farmers and agents
is in the upstream of the agricultural supply chain. In the
current economic environment, farmers have limited
understanding of agricultural market trend, while agents
can control marketing information correctly and roundly.
Given the supply-demand relationship, trading between
farmers and agents exists in many cases. This paper takes
the price of wholesale market in producing area for
reference, and analyses the trade in the fields between
farmers and agents. It is concluded that information
asymmetries benefit the agents in the aspect of transaction
price.
Keywords- agent, agricultural market, farmer,
transaction analysis
Ⅰ. INTRODUCTION
Agricultural products are different from industrial
products, for example, different agricultural products
have different planting area, growth cycle, picking time,
storage condition and packaging requirements [1]. Those
properties yield different circulation channels and
transaction styles.
The transaction between farmers and agents is in the
upstream of the agricultural supply chain [2]. The fact that
transaction subjects who are mainly farmers are scattered
over the nation, and information asymmetries, various
transaction locations, time, environment and mentality
give rise to the different results including whether closing
a deal and the final price, which means different
“transaction scene” leading to different trading results.
Urbanization is speeding up throughout China, while
many rural areas still cannot put an end to backwardness.
A substantial portion of farmers work on the farm all day
long and they are ignorant of what is happening outside.
Contrary to those farmers, agents are sensitive to the
changes of agricultural markets, especially the fluctuation
of trading price. Asymmetric information makes the
trading results different [3-5]. Many researchers employ
game theory [6-7] to analyze the transaction in agricultural
market [8-15]. In the immediately following sections we
shall apply static game model with incomplete
information to analyze the trading results in the fields
between farmers and agents who are players in this game
theory.
This material is based upon work funded by Zhejiang Provincial Natural
Science Foundation of China under Grant No.Y6110555 and the
Humane Social Science Fund Project No.10YJA790004 of Education
Ministry of China.
Ⅱ. HYPOTHESES
In general terms, we idealize the transaction by
assuming that there are two players, a farmer and an agent.
For convenience we introduce the substitution F and A
respectively to stand for farmer and agent. One of the
fundamental assumptions in the study of economy has
been that players are highly rational, that each can
accurately compare his desires for various things. The
equilibrium point is the determination of the final
transaction price, or, rather, a determination of how much
it should be worth to each of them to engage in this deal.
Moreover, we hold the view that if they cannot make a
deal or F produces any remaining products, F will take
the price of wholesale market in producing area for
reference and sell the products in the wholesale market.
In this situation, the profit of A is zero.
Ⅲ. VARIABLES
In the trade between F and A, the most important is
to determine the transaction price and costs. We intended
to illustrate the meanings of the variables we defined.
P1: the final transaction price after bargaining
between F and A.
P2: purchasing price in wholesale market or A’s
selling price.
C1: per unit production costs including land costs,
labor costs, intermediate inputs (seeds, chemical, fertilizer
or pesticide) and so on.
C2: per unit logistics costs including loading and
unloading costs, packaging and processing costs, storage
costs and so on.
C: the fixed costs from field to wholesale market
which will be paid by transporter.
Q1: the amount of agricultural products F planted.
Q2: the amount of agricultural products A will
purchase.
R1: revenue of F.
R2: revenue of A.
Ⅳ. ANALYSIS
In order to explain the real situation we abstract from
the “transaction scene” to form a mathematical model.
There are four cases which we will illustrate in proper
sequence.
A. Symmetric information and supply over demand, that
is Q1>Q2
We have assumed that if the two players cannot
make a deal or F produces any remaining products, F will
take the price of wholesale market in producing area for
reference and sell the products in the wholesale market.
We write R1=Q2(P1-C1)+(Q1-Q2)(P2-C1-C2)-C to
represent the revenue of F when F and A make a deal.
However, R1=Q1(P2-C1-C2)-C represents the revenue of
F when a deal doesn’t be reached. A’s corresponding
revenue is R2=Q2(P2-P1-C2)-C and R2=0.
It is obvious that F prefers to make a deal with A if
Q2(P1-C1)+(Q1-Q2)(P2-C1-C2)-C≥Q1(P2-C1-C2)-C is
satisfied. Therefore, we have P1≥P2-C2.
Similarly, for A, the requirement to deal with F is
Q2(P2-P1-C2)-C≥0. Then we know that P1≤P2-C2-C/Q2.
When the information is symmetric and supply
exceeds demand, F knows that A will decide the price
according to P1≤P2-C2-C/Q2. As a corollary we may
conclude that A must think that F will decide whether to
close a deal with him according to P1≥P2-C2. F hopes the
price is no less than P2-C2, and A regards P2-C2-C/Q2 as
a ceiling price. It is clear that P2-C2>P2-C2-C/Q2,
provided C>0, so that they cannot reach an agreement.
B. Symmetric information and demand over supply, that
is Q1<Q2
In this case, F will sell all the agricultural products to
A once they strike a bargain.
The revenue of F is R1=Q1(P1-C1) when the deal is
done, and R1=Q1(P2-C1-C2)-C while not done. We think
that F is likely to deal with A if Q1(P1-C1)≥Q1(P2-C1C2)-C, which means P1≥P2-C2-C/Q1. The condition for
A is the same as situation A. F knows what A is
considering and A knows what F is thinking about, so the
equilibrium point exists when P1=P2-C2-C/Q1. Both
sides’ revenue are R1=Q1(P2-C2-C1-C/Q1) and R2=0
respectively.
In reality, the equilibrium is non-existent. There are
three reasons to explain it. One reason is that R2=0 is not
A’s expectation who definitely is a profitable individual,
and it is not enough to meet the basic physiological needs.
The second lies in that symmetric information is hard to
realize in reality. The last is that the model is very simple
and the analysis of a more realistic model should be an
interesting affair.
C. Asymmetric information and supply over demand, that
is Q1>Q2
Urbanization is speeding up throughout China, while
many farmers in rural areas still cannot rid themselves of
backwardness. A substantial portion of farmers work on
the farm all day long and they are unaware of what is
happening outside. Or construction of public
infrastructure is poor in rural areas so that it’s costly for
farmers to access information. Contrary to those farmers,
agents are sensitive to the changes of agricultural markets,
especially the fluctuation of trading price.
Let P2H and P2L be high price and low price in the
wholesale market. F has no idea the real price and A
knows it exactly. However, F knows the probability for
high price is μ, and 1-μ stands for probability of low price,
provided P2H>P2L. We may also regard the real price as
private information for A.
It is quite clear for F that supply exceeds demand at
present. Nevertheless, F agrees a deal on the basis of
prospective payoff. So the prospective payoff is
R1=Q2(P1-C1)+(Q1-Q2)((μP2H+(1-μ)P2L)-C1-C2)-C,
and R1=Q1((μP2H+(1-μ)P2L)-C1-C2)-C is the payoff of
a failing trade.
Transaction price shall conform to the following
condition if F is glad to deal with A: Q2(P1-C1)+(Q1Q2)((μP2H+(1-μ)P2L)-C1-C2)-C≥Q1((μP2H+(1-μ)P2L)C1-C2)-C. We obtain P1≥μP2H+(1-μ)P2L-C2. For A,
when the real price is high, A expects P1≤P2H-C2-C/Q2,
and when price is low, A expects P1≤P2L-C2-C/Q2.
When the purchasing price is high, μP2H+(1-μ)P2LC2≤P2H-C2-C/Q2 is required if the two players are
willing to reach agreement. So we have μ≤1-C⁄((Q2(P2HP2L))). The final trading price is between μP2H+(1μ)P2L-C2 and P2H-C2-C/Q2. The exact figure is heavily
depending on bargaining power of F and A. The
maximum expectation disparity is (P2H-C2-C/Q2)(μP2H+(1-μ)P2L-C2)=(1-μ)(P2H-P2L)-C/Q2,
which
implies that it’s easier to bargain when the difference
between P2H and P2L is small. Or we may conclude that
smaller the difference, smaller fluctuations, easier to close
a deal.
In contrast, when the purchasing price is low,
μP2H+(1-μ)P2L-C2≤P2L-C2-C/Q2 can never be true, for
μ(P2H-P2L)≤-C/Q2 is false (we cannot ignore the fact of
P2H>P2L and μ>0).
D. Asymmetric information and demand over supply, that
is Q1<Q2
F still doesn’t know the real price but the probability.
The final trading price is determined by anticipation. We
use R1=Q1(P1-C1) to express F’s revenue when it’s done,
while R1=Q1((μP2H+(1-μ)P2L)-C1-C2)-C to express
revenue when it’s not. So Q1(P1-C1)≥Q1((μP2H+(1μ)P2L)-C1-C2)-C or P1≥μP2H+(1-μ)P2L-C2-C/Q1 is
desirable. Just like situation C, P1≤P2H-C2-C/Q2 and
P2L-C2-C/Q2 must be satisfied.
If price is high, μP2H+(1-μ)P2L-C2-C/Q1≤P2H-C2C/Q1 can hold water for P2H>P2L is obvious. Since A
knows F doesn’t know the environment of market, A
offers μP2H+(1-μ)P2L-C2-C/Q1 on his own terms.
Although F has no idea of market quotation, F knows the
probability of high and low. F may respond to A’s offer
as μP2H+(1-μ)P2L-C2-C/Q1 in the bargaining in terms of
A’s anticipation. In the end, equilibrium maintained when
transaction price reaches μP2H+(1-μ)P2L-C2-C/Q1. At
this point, we write Q1(μP2H+(1-μ)P2L-C2-C/Q1-C1) to
represent F’s revenue and Q1(1-μ)(P2H-P2L)>0 to refer
to A’s. We now show that asymmetric information is in
favor of A from analysis above.
If the price is low, the situation is more or less like
situation C. That is, μP2H+(1-μ)P2L-C2-C/Q2≤P2L-C2C/Q2 does not hold.
[9]
Ⅴ. CONCLUSIONS
We employ game theory to analyze the transaction
between famers and agents. The model is simple even
though we make attempt to come closer to reality.
However, we still come to some conclusions. When
information is asymmetric, demand exceeds supply and
real price is high, both sides can make a deal at price
μP2H+(1-μ)P2L-C2-C/Q1. While the deal can be secured
once asymmetric information, supply exceeding demand
and high price are satisfied at the same time. The ultimate
trading price may not be determined until after tough
bargaining.
In order to make the transaction smooth in the
agricultural markets, government should standardize
market order, promote fair competition, and set up
corresponding operation rules with expectation of
reducing wide price fluctuation. In the end, agricultural
markets can offer higher transparency and reduce
transaction cost.
[10]
ACKNOWLEDGMENT
[15]
This material is based upon work funded by
Zhejiang Provincial Natural Science Foundation of China
under Grant No.Y6110555 and the Humane Social
Science Fund Project No.10YJA790004 of Education
Ministry of China.
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