Buyer-Driven
Endogenous Adoption
of Improved
Technologies
Anneleen Vandeplas
Postdoctoral researcher, LICOS, KULeuven
16th ICABR Conference – 128th EAAE Seminar
Main focus of the paper
• Technology adoption
– Increased productivity
• Direct income effects on farm households
• Indirect income effects (labour markets, food prices)
• Economic growth
• How do new (improved) technologies reach
smallholders?
• How can local policymakers in developing countries
encourage the transfer of technology to local farms
(in a cost-efficient manner)?
• What role does the private sector play?
Vertical coordination
• Definition
• Important channel of technology adoption
– Dairy sector in India (Vandeplas et al., 2012)
– Sugar, dairy, barley in Eastern Europe (Gow et al., 2000; Dries
and Swinnen, 2004; Swinnen, 2006)
– Broilers in Philippines and Thailand (Gulati et al., 2005)
– Hog sector in the US (Key and McBride, 2003)
– Horticultural crops for export in SSA
• Drivers?
Relevance
• Thorough understanding of conditions under which VC
emerges important to policymakers
– Competition policy in Indian dairy sector, in SSA cotton, in
Central Asian cotton: support for regional monopsonies
– Agricultural & food policies to increase productivity and ensure
food security
– Ensure food safety and quality
Related literature
• Why do firms want to produce HQ goods?
– Monopoly firms can ‘skim off’ consumer surplus through quality
differentiation (e.g. Mussa & Rosen, 1978)
– Even with identical preferences, consumers choose different
products based on differences in income level (Gabszewicz and
Thisse, 1979)
– Price competition between firms can be ‘relaxed’ through
product differentiation; HQ firm will earn higher profits
• If quality production costs are zero (Shaked & Sutton, 1982)
• If quality production costs are positive (Motta, 1993)
– If quality choice is sequential, first mover will always choose
high quality (Lehman-Grube, 1997)
Related literature
• How do firms produce HQ?
– If consumers are prepared to pay for quality (income growth 
price premium)…
– but farmers are capital-constrained …
– and buyers of agricultural products (agrifood processors or
retailers) are labour-constrained or land-constrained …
– Buyers will vertically coordinate with farmers, investing in
technology transfer to farmers through interlinked contracts
(input & output markets)
– E.g. World Bank 2006; Dries and Swinnen 2004; Swinnen and
Vandeplas 2011;
Contracting in dairy vs GDP
Source: Swinnen et al. (2011)
But VC may break down…
• Competition increases producer prices, but:
– Price competition may remove incentive to produce quality
(Kranton, 2003)
– Price competition and lacking quality premium lead VC to break
down (Swinnen and Vandeplas, 2011; Poulton et al., 2004)
• With too much competition and/or too low quality
premium:
– Diversion of cotton inputs in Ghana (Poulton, 1998)
– Sideselling of horticultural products in Kenya and Zambia
(Ruotsi, 2003)
– Input diversion and sideselling of barley under contract in SSA
(Wangwe &Lwakatare, 2004; Jaffee, 1994)
– …
• Trade off between equity and efficiency
Motivation of the paper
• Observations: Indian dairy sector
– Price competition
– No quality differentiation/premium (no WTP for HQ)
– Still … some firms (the big ones!) engage in VC programs;
others don’t
• Does this conflict with theory?
• How can VC programs persist in competitive
equilibrium?
– No guarantee on credit recovery
– VC = increased production cost – these firms should be driven
out of the market by more ‘efficient’ firms
• What are the conditions for VC to emerge?
Main argument
• Argue that VC can emerge/be sustained under
– High competition
– Lack of price premium
• if
– Dynamic view:
• quality upgrading with time lag
• promise of quality premium in future (high income growth)
– Large market size (sales volume)
– Firm sufficiently forward-looking & patient
– Facilitated by firm strategic advantage in HQ provision (access
to technology; HQ reputation-facilitating characteristics)
Model: consumer side
• Utility increasing in quality; concave in remaining
income (Tirole, 1988: 97)
• Demand for HQ products increasing in income
Model: processor side
• Two-period model
• Period 1:
– Sales volume q
– No rewards to quality (Homogeneous producer price pP and
consumer price pC)
– Constant or increasing returns to scale
– Competitive equilibrium: pC = pP + MC(q)
– Firm chooses whether or not to invest in HQ potential for next
period at fixed cost 𝐹𝐶1 𝑠2 , 𝑋
• With X: relevant firm characteristics: international reputation, access to
technology, branding, ...
– Weak contract enforcement: firms cannot recover fixed costs
VC from milk procurement price
Model
• Period 2:
– Consumer price premium for quality 𝑠2
– Marginal costs of producing: 𝑀𝐶 𝑠2 , 𝑞2
– Fixed costs of procuring quality: 𝐹𝐶2 𝑠2 , 𝑋
• With X: relevant firm characteristics: international reputation, access to
technology
Decision process
• Period 1:
Π1 = 𝑞1 𝑋 ∙ 𝑃𝐶 − 𝑀𝐶 𝑞1 − 𝑃𝑃 − 𝐹𝐶1 𝑠2 , 𝑋
• Period 2:
Π2 = 𝑞2 𝑠2 , 𝑋 ∙ 𝑃𝐶 𝑠2 − 𝑀𝐶 𝑠2 , 𝑞2 − 𝑃𝑃 𝑠2
• Objective function:
max Π1 + 𝛿Π2
𝑠2
− 𝐹𝐶2 𝑠2 , 𝑋
Decision process
𝜕 𝛱1 + 𝛿Π2
= −𝐹𝐶1 𝑠2 , 𝑋
𝜕𝑠2
𝜕𝑞2 𝑋
+𝛿
𝑃𝐶 𝑠2 − 𝑀𝐶 𝑠2 , 𝑞2 − 𝑃𝑃 𝑠2
𝜕𝑠2
+ 𝛿𝑞2 𝑠2 , 𝑋
𝜕𝑃𝐶 𝑠2
𝜕𝑀𝐶 𝑠2 , 𝑞2
𝜕𝑃𝑃 𝑠2
−
−
𝜕𝑠2
𝜕𝑠2
𝜕𝑠2
− 𝛿𝐹𝐶2 𝑠2 , 𝑋
If > O  increase quality
If < O  reduce quality
Decision process
• Firm invests in HQ if
–
–
–
–
–
Expected price premium HQ larger (higher income growth)
Expected demand shift to HQ larger
Market size larger (sales volume)
Marginal costs of procuring quality lower
Fixed costs of quality production lower (access to knowledge,
technology, international reputation)
• Firm heterogeneity:
– Sales volume
– Fixed costs of quality production
Policy recommendations
• If not market power but market size matters:
– Allow for market size expansion rather than local concentration
(e.g. removing barriers between markets)
– Efficiency does not need to be traded off against equity
• With weak contract enforcement, rents from
investments are not fully appropriable by investor
– Recognize positive spillovers & public good characteristics from
VC investments
Generalization
• Same model can be applied to other sectors with
– Time lag between fixed cost investment and returns to
investment
– Weak enforcement institutions (developing country context)
• Sector-wide relevance for bio-economy