INTERNATIONAL FOOD & AGRIBUSINESS MANAGEMENT ASSOCIATION

23rd ANNUAL WORLD SYMPOSIUM

Atlanta, Georgia
June 2013

Institutional arrangements in horticulture. Transaction costs and

measurement cost.
Authors: Sebastin Senesi; Hernn Palau; Mariano Lechardoy; Fernando
Mogni.

1. Problem statement
Even though horticultural products have a seasonal supply they are present
only in a specific season of the year, horticultural production in Argentina is
located in various regions among the country (Fernndez Lozano, 2012) and
has different types of products, resulting in stable supply all over the year.
Moreover, new technologies (hybrids and genetic advances, greenhouses,
fertilization, etc.) gave the possibilities to farmers to lengthen production in
different regions.
Generally domestic market is fully supply and frequently there is oversupply
(see figure 1; October-November), reducing prices dramatically (see figure 2).
On the other hand, weather conditions (i.e. storms, damages by frozen) would
cause reduction in production in short periods of time, impacting directly on
prices.
Figure 1. Supply of tomato in Buenos Aires Wholesale Market (in number
of packages average period 2003-2009, by month, by production region)
14.000
12.000
10.000
8.000
6.000
4.000
2.000
-

Santa Fe

Salta

Mendoza

Jujuy

Corrientes

Bs. As.

The authors, based on MCBA data

Figure 2. Price of tomato in Buenos Aires Wholesale Market (in Argentine

pesos period 1998-2009)

Source: The authors, using MCBA data

In the last 10 years, the system experimented a reduction of the area cultivated
(-2%), but an increase of production (and hence, productivity) in terms of 28%
Palau et al., 2012). This was the result of technological innovations in terms of
production (genetic, use of fertilizers, pesticides, and drip irrigation) that
increased yields. But these innovations have not been accompanied at all with
innovations in terms of selection and post-harvest protocols, distribution and
freezing capacity, traceability, quality standards. The result was a higher
production, disparate quality, lower prices in the market and lower margins.
Horticultural production experiments difficulties in terms of commercialization.
Farmers would have high amount of production (and they know how to produce
very well) but have little information about the market demand, prices,
conditions, quality standards, etc. On the other hand, in general, horticultural
products have a short life, they are delicate, they need cold facilities and
transportation, which results in higher efforts to obtain information to manage
commercialization.
The commerce of vegetables in the domestic market is the objective of this
paper. Farmers generally face a transaction problem in terms of selling its
production. Farmers with medium scale (5 to 15 has.) sell their products to
players in wholesale markets (main distribution channel, Fernndez Lozano
2012), who have higher bargaining power and market information. On the other
hand, micro and small farmers do not have volume, packing facilities or market
information in order to sell their products to wholesale markets; they sell to
intermediaries or packers who negotiate the transaction opportunistically.
Different types of institutional arrangements appear in order to coordinate
transactions. However, some of them result in high levels of transaction cost
(Williamson, 1985 among other authors) and measurement costs (Barzel,
1982). Why these transaction cost and measurement costs exist and how to
manage transactions in a better way is the purpose of this paper.

2. Objectives
The principal research question addressed in this paper is how institutional
arrangements for marketing fresh vegetables in Argentina are, trying to identify
both transaction and measurement costs.

3. Procedures
3.1.

Methodology

Goode & Hatt (1969) argue that although the case study method may not be
considered a specific technique for data collection, it is a way of organizing data
in terms of a selected unit. Several studies have shown case studies to be a
powerful agribusiness research tool in changing environments (Peterson, 1997,
Hanks, 1998 and Harling & Misser, 1998). Yin (1989), in turn, says that the case
study method attempts, in particular, to study a modern phenomenon in its real
context (where the boundaries between the phenomenon and the context are
diffuse), by means of multiple sources of evidence such as interviews, archives,
documents, observation, etc. (Lazzarini, 1997 quoting Yin, 1989).
This paper introduces different case studies of transactions between medium
scale farmers and wholesale buyers, and small farmers and intermediaries /
packers by the multicase study method (Yin, 1989). Lazzarini (1991) mentions
that instead of making a case study of a unique company (or farmer in this
case), the researcher could identify two or more agribusiness
industries/companies or unit of analysis (the transaction) and compare these
different unit of analysis. This design allows a strong research set of
comparisons, despite the small total number of unit of analysis involved in the
study.
Interviews with small and medium farmers have been performed. These
interviews were useful to analyze transactions in order to sell fresh vegetables.
Questions included aspects such us transaction practices and tradition,
negotiation practices, market power, product specifications. The paper includes
a series of prices in the main wholesale market in Argentina (MCBA) and prices
paid to farmers, due to farmers information.
3.2.

Theoretical framework

The analysis has been developed following transaction costs economics (TCE)
and measurement costs theoretical framework. Both paradigms converge in the
analysis of IA (institutional arrangements) Goldberg (1976) is referring here to
institutional arrangements as defined by Davis and North (1971) which a take
as synonymous to modes of governance. IA refers to a set of rules or
agreements governing the activities of a specific group of people pursuing a
certain objective (Eaton et al., 2008). IA thus involve agreements to exchange
or coordinate goods or services. Concluding and enforcing such agreements
entails the expenditure of resources, referred to as transaction costs (Eaton et
al., 2008).

Since TCE framework three dimensions are important when the transaction is
analyzed: frequency, uncertainty and asset specificity (Williamson, 1985; 1993).
These three attributes of transaction influence the level of transaction costs and
how players organize their governance.
Transactions costs are those incurred before (ex-ante) and after (ex-post) the
transaction itself. They are the not-always-visible costs that arise from
negotiating, designing and carrying out a transaction,ex-ante1; and the costs
that arise from a bad negotiation, adjustment and/or safeguard of the contract in
question ex-post, whether these are caused by mistakes, omissions and/or
unexpected alterations (Williamson, 1993) or opportunistic actions (Hallwood,
1990). Clearly, transaction costs are a function of the level of information (and
information asymmetry) of players: the more information the player has, the
lower risk of opportunism is (and the lower of transaction costs will have).
Uncertainty and asset specificity are also related to characteristics of products
negotiate in the transaction and how these products could be measure in
terms of quality or standards (especially when standards are not full described
or enforced). Usually performance measurement is not a problem with
vegetables, as quantity is relatively easy to determine (Eaton et al, 2008). But
some characteristics may not be easily determined, such as how the product
was produced (Eaton et al., 2008), which quality corresponds to different
standards and how these standards corresponds to different prices negotiated
in the wholesale market (Palau et al., 2012). Measurements of these
magnitudes [or attributes] are subject to error. The greater the variability of the
measurement around the true value, the lesser the information about the
commodity (Barzel, 1982 p. 28).
Transactions thus involve high measurement costs which could result in high
levels of transaction costs. Barzel (1982) introduces the concept of
Measurement Cost, which is strongly aligned with the literature on Incomplete
Contracts. Based on the notion that goods have multiple attributes, including
different functionalities and services, the economic agents engage in activities
(or safeguards) to protect the property rights of the attributes of the resources
aimed at appropriating value (Saes, 2008). Thus transaction costs are the
variable that defines the relevant space for opportunities to capture (or
dissipate) the value of the attributes of a certain good. The degree to which
attributes can be protected depends on how property rights are established
(Barzel, 1997); which institutional arrangement is performed (Mnard, 2002). In
an environment with positive transaction costs, those players with higher
information and scale would have better conditions to protect their property
rights or capture others property rights (based in Barzel, 1982). The potential
errors in weighing the commodity and in assessing its attributes permit
manipulations and therefore require safeguards (Barzel, 1982 p. 27).
As a result, mitigation of transaction costs is related to how players could have
appropriate governance structures (Williamson, 1991) or institutional
arrangements. And this will have a strong relationship with how difficult is to
1

Arruada (1998) mentions that the need to protect oneself against anothers opportunism, to
safeguard the transaction, generates transaction costs.
4

measure commodity attributes: when the variability of the commodity offered

at a given price is very low, buyers will forgo selection and will take whatever is
handiest. As variability increases, a point will be reached where selection will
begin (Barzel, 1982. P. 30). Measuring commodity attributes would be costly
because of errors in measuring, because of opportunistic actions of seller that
obey to buyers to check the shipment, among others. When the buyers cost
of measuring is increased, the net price they pay for the commodity, or for the
desire attribute, will fall (Barzel, 1982 p. 30). Trust, reputation, quality
standards are then elements that could reduce measurement costs.
4. Brief description of commerce of vegetables
Regarding the commercialization of vegetables in the domestic market, it is
worth noting that the high number of species, added to the high perishability of
vegetable products, make it imperative to distribute them quickly in the centers
for consumption, explaining the complexity of their commercialization, a fact that
sets them aside from other agricultural activities.
Table 1 shows the main vegetable supply distribution at the Mercado Central de
Buenos Aires (MCBA) (Buenos Aires Central Market) throughout the year.
Vegetables are markedly seasonal products, highly influenced by the cultivation
system (intensive or extensive) and by environmental and climatic production
conditions (SAGPyA, 2007). The colors in the table indicate volume given these
agroecological conditions, production regions or production systems.
Table 1. Vegetables entering the Mercado Central de Buenos Aires.
Prod. / Months
Garlic
Celery
Sweet potato
Eggplant
Onion
Corn
Cauliflower
Asparagus
Lettuce
Cucumber
Pepper
Beet
Tomato
Carrot
Pumpkin

References:

High
offer

Normal
Low offer
No offer
offer
Source: own elaboration by using MCBA information

On the other hand, there may be unfavorable climatic events (frost, drought,
storms, etc.) or highly favorable conditions (continued warm weather in the
winter season) which result in under or overproduction in a particular region that
impacts directly on the prices, causing excessive increases or radical drops.
Thus, it may happen that a region maintains normal conditions while another
5

goes through unfavorable circumstances; this will cause a price increase in the
market that will be beneficial to the region enjoying normal conditions. However,
this information is not always universal for all actors in the system; while the
market operators have the information, the farmers and packers do not, and this
may lead to information asymmetry by the wholesalers.
Commercialization of the production is fundamentally carried out through
different consolidating markets distributed in the great urban areas all over the
country, for a total of 60 markets (source: Ministry of Agriculture). Commercial
transactions in these markets are performed by commercial operators (market
vendors; brokers), who received vegetables on consignment and collect
between 12% and 18% commission. Other commercial operators are
intermediary companies that buy vegetables from the farmers or brokers and
sell them at the wholesale markets.
The largest wholesale commercialization center for vegetables and fruit in
Argentina is the Mercado Central de Buenos Aires (MCBA), in operation since
1983, one of the three largest in Latin America. It represents almost 10% of the
vegetables commercialized in the country: approximately 1,500,000 ton. of
produce enter the MCBA each year, 35% of which is fruit and 65% vegetables.
Approximate percentages entering the MCBA are potatoes, 40%; tomatoes,
15%; onions, 12%; carrots, 8%; and pumpkins, 6% (Source: Ministry of
Agriculture).
On the other hand, in the last few years there has been a huge development of
the supermarket chains through 4-5 leading companies, a system that allows
the farmers or packing plants access to direct commercialization with the
distribution centers. Supermarkets also obtain supplies directly from some
consolidating markets, particularly to avoid possible shortages of goods from
their suppliers or to have an impact on their price negotiations.
Beyond all this, supermarkets continue to participate with a smaller portion 25
to 30% of the retail market. Traditional produce markets and greengrocer's
shops represent 70-75% of the retail market. It may be added that in the last
few years the retail market has seen a growth of the supply of differentiated
vegetables, minimally processed, and frozen produce (Colamarino et al., 2006),
sold almost exclusively in supermarkets.
A fundamental aspect of the commercialization of agricultural products is
related to their classification. Resolution N 297/83 (SENASA), modified by RE
58/07, establishes the minimum requirements for vegetables (absence of
insects and pesticides), aspects related to their quality and ripeness, and
questions related to packing. However, there arise certain difficulties, namely:
a) it is not possible to have a controlling agent, either at the source (at farm
or packing plant level) or at the destination (at the consolidating
markets); it is not even possible to have an arbitration agency to deal
with inconsistencies in liquidations;
b) the amount of goods commercialized nationally would make it necessary
to exercise control by means of samples, which would involve errors and
deviations, as well as high measurement costs;
6

c) the size of a product determines its value or quality, and there may be
different sizes in the same package or shipment; this makes it difficult for
buyers to confirm or measure those sizes;
d) the color and texture of the product may also constitute a quality variable,
which may change during transportation and storage at a consolidating
market (in general, for the worse, due to high temperatures and
perishability of the product), while the seller of the goods is unaware of
the degradation of his product;
e) presentation, packing, weight per box, and information about the product
are also key when considering quality; frequently the small farmers do
not have the means to use good crates and labels, so the merchandise
has lower prices even though the product is of good quality.
In short, price increases and drops due to over or undersupply influence the
information that the actors of the system possess to negotiate their goods.
However, price alone is not the only fundamental element when negotiating and
commercializing the production; so are all the questions referring to quality and
classification mentioned above. If these questions are not clear and precise, or
are difficult to determine (or to measure, as established by Barzel, 1982), there
may possibly exist higher costs to determine such elements, lower prices due to
the difficulty to measure them correctly, or opportunistic actions by the actors of
the system. These aspects will be developed in the next chapter.

5. Transactions: participants, attributes, negotiation, measurement costs

and transaction costs
As it was stated before, this paper introduces different types of governance
structures, but analyzes one simple transaction: farmer-buyer transaction. As a
result, the unit of analysis (the transaction) is analyzed by using two different
forms of arrangement of this transaction in terms of cases. One case is the
commercial relation between farmer and intermediary/packer and the other is
the commercial relation between farmer and wholesale market operator. The
first case is common in small farmers and the second one is more common in
medium to big farmers.
The small farmer (also known as family farmer) has little or no knowledge of
the relation between production costs and prices at the consolidating markets;
he has very limited access to private consultants and to low-cost agricultural
inputs. In general, he obtains lower returns and has deficient market
management because he does not know the prices and because his low
production volume weakens his negotiation power when facing buyers
(intermediary agents and packers) and service suppliers (freight, packing, etc.).
The medium to large farmers (also known as "commercial farmers) are those
who have been able to make profits and have access not only to new
technologies (hybrid vegetables, ferti-irrigation, integrated plague control, etc.),
but also to packing plants, owned or leased, and who commercialize their
production at the consolidating markets. It is also common for this type of
farmer to sell to large supermarket chains.
7

Below is a description of the transactions considered, attributes of these

transactions (frequency, uncertainty and specific assets, negotiation conditions
(dominant position; bilateral dependency), measurement costs and transaction
costs.

Case: Small farmer-intermediary / packer transaction

The small farmer (0.5 to 2.,5 has.) faces each campaign under the following
conditions: a) low per hectare production volumes and low total production; b)
lower product quality (due to lack of uniformity in size and ripeness); c) high
financial costs (in general, they do not have the money to buy supplies at the
beginning of the campaign, so they need credit from suppliers or buyers); d)
operational difficulties (labor, obsolete technology, lack of agricultural tools and
equipment).
The buyers may be intermediaries who buy merchandise to process it in
packing plants their own or leased and send it to the consolidating markets.
There are also cases of integrated farmers (with their own production and
packing plants) who buy merchandise to increase their commercialization
volume. Their profit margin lies mainly in the price difference between what they
pay the farmer and what they obtain at the market, taking out logistics, packing
and commercialization expenses (see table 2). Buyers are very well informed
about the evolution of the markets, prices, volumes, qualities, etc. In addition,
they generally work with farmers with whom they have had long term
commercial relations or informal contractual relations because they have
advances money or supplies in exchange for loyalty at the time of
commercialization.
It is worth remembering that most horticultural products have high perishability
(low shelf life) and many times the quality of the product clearly depends on the
degree of ripeness. This leads to commercial difficulties, both for the buyers
(difficulty in determining quality) and for the farmers (less negotiation power and
lack of information).
Below is a detail of the transaction, its attributes and negotiation conditions.
o Transaction:
i.

Sale of vegetables in bulk, in 20 kg. crates, with little differentiation

(minimal selection), to be picked at the field with crates provided
by the intermediary/packer (the farmer does not pay freight, only
labor for the harvest and selection).

o Attributes of the transaction:

i.

Frequency: high frequency. Once a buyer has been defined, the

farmer delivers the merchandise based on trust. As for the buyers,
they find it convenient to rely on loyalty-bound farmers in order to
negotiate larger volumes with wholesale operators or packers,
thus avoiding quality problems.

ii.

Uncertainty: in spite of the high frequency, buyers may often incur

in opportunistic attitudes (postdated payments without notice, cost
8

overruns in the value of the financed supplies), increasing the

uncertainty of the transaction for the farmer. There exists
asymmetry information between the price paid to the farmer and
the price at which the product is commercialized at the market; this
may be known to the farmer, who prefers to resign the price at the
market, since commercializing "on consignment" might result in a
bigger loss.
iii.

Specific Assets: the quality offered by the small farmer is the

minimum
commercially
acceptable;
differentiation
and
classification improvement is provided by the intermediary/packer.
Specificity is also determined by the perishability of the asset,
fundamental in times of higher temperatures (faster ripening). This
is well-known by the buyers, who lower the prices paid in order to
avoid great losses at the time of packing and commercializing the
product at the consolidating markets.

o Negotiation conditions:
i.

There exists a greater negotiation power for the buyer, who knows
both the market prices and the costs of logistics, packing and
commercialization. In addition, the farmer's negotiation power is
lower because his production scale is much smaller than the
commercialization and packing scale of the buyer.

ii.

The perishability of the product plays against the farmer's

possibility of negotiation (the longer the product is in the farm, the
lower the price the intermediary will pay).

iii.

There exists bilateral dependency between farmers and buyers,

be it due to the financing of supplies or to the mutual need to
maintain the commercial relation (for the farmer it means the
certainty of selling the merchandise and collecting; and for the
buyer it is safe to rely on a continuous production volume and a
certain quality during the year).

All in all, this transaction is resolved under a typical spot market, since neither
the farmer nor the buyer has any kind of formal or informal obligation to carry
out the transaction between them (except those cases of previous financing of
supplies). In those situations in which prices in the market are high, the profit
margins for the buyers are higher (see table 2) for instance, the price
differential between market price and price paid to the farmer for August 2011,
leaving out costs and wholesaler's commission, was $0.493 per kg; while by
September 2011, this price differential was $1.823 per kg; these differentials
represented 13% and 16% of the final market price, respectively.

Table 2. Costs and prices: in farm; exwork; wholesale market (Santa

Luca, Corrientes)
Date

31/08/11

14/09/11

21/09/11

29/08/12

12/09/12

26/09/12

Farmer cost

$/kg 1.25

$/kg 1.25

$/kg 1.25

$/kg 1.75

$/kg 1.75

$/kg 1.75

Farmer margin

$/kg 0.85

$/kg 2.25

$/kg 5.75

$/kg 0.15

$/kg 2.06

$/kg 2.54

1. Price in farm (bulk 20 kg)

$/kg 2.10

$/kg 3.50

$/kg 7.00

$/kg 1.90

$/kg 3.81

$/kg 4.29

2. Short freight and packing (20 km)

$/kg 0.35

$/kg 0.35

$/kg 0.35

$/kg 0.35

$/kg 0.35

$/kg 0.35

3. Cost of bulk after packing

$/kg 2.45

$/kg 3.85

$/kg 7.35

$/kg 2.25

$/kg 4.16

$/kg 4.64

4. Long freight (1,000 km)

$/kg 0.21

$/kg 0.21

$/kg 0.21

$/kg 0.21

$/kg 0.21

$/kg 0.21

5. Unloading at the Central Market

$/kg 0.06

$/kg 0.06

$/kg 0.06

$/kg 0.06

$/kg 0.06

$/kg 0.06

6. Bulk in wholesale market (3+4+5)

$/kg 2.72

$/kg 4.12

$/kg 7.62

$/kg 2.52

$/kg 4.43

$/kg 4.91

7. Mark Up farmer/packer(8-6)

$/kg 1.06

$/kg 1.44

$/kg 3.49

$/kg 1.09

$/kg 1.68

$/kg 2.87

7.1. Mark Up farmer /packer (7/6)

39%

35%

46%

43%

38%

58%

8. Price in wholesale market

$/kg 3.78

$/kg 5.56

$/kg 11.1

$/kg 3.61

$/kg 6.11

$/kg 7.78

15% Commission market operator

$/kg 0.57

$/kg 0.83

$/kg 1.67

$/kg 0.54

$/kg 0.92

$/kg 1.17

Margin for seller (farmer/packer)

$/kg 0.49

$/kg 0.61

$/kg 1.82

$/kg 0.55

&/kg 0.76

$/kg 1.70

Source: the authors, based on personal observations

This is due to two reasons: a) the farmer has no knowledge of the

commercialization system or the infrastructure; therefore, he resigns the profit
margin (or property rights) instead of running the risk of opportunistic actions in
the commercialization due to wrongful liquidations, misrepresentation of quality
and commercial cost overruns (ex post transaction costs); b) the buyer's profit
margin is greater as prices at the market increase, but competition among
buyers leads him to raise the price he pays the farmer.
Therefore, for this case, transaction costs can be summarized in the possible
lack of compliance with payment terms for the merchandise on the part of the
buyer and for this reason the farmer prefers payment in cash and in the lack
of compliance with delivery on the part of the farmer. The buyer faces high
measurement costs, since the quality of the product is variable and the cost of
measuring that quality and the possible mistakes made are very high; the
solution lies in paying lower prices in order to counter the higher costs of rejects
and transportation.
However, the high frequency of transaction between farmer and buyer
generates a history and gives the latter a knowledge of the attributes of the
vegetable he is buying (and of the reputation of the farmer) that allows him to
select farmers that offer higher quality at prices similar to those paid for lower
quality products. In these cases, the farmer offering higher quality tries to
negotiate with it, incurring high ex ante transaction costs (search for information,
negotiation) and facing difficulties in measuring the product (due to a lack of
appropriate classification and standardization). In some cases the solution to
this problem lies in the certification of the production, which minimizes the
problem of measurement costs (Barzel, 1982), but this is difficult for small
farmers.

10

Case: Intermediary/packer/medium-large
operator transaction

farmerwholesale

market

The medium to large farmer (over 2.5 has.; average 8-10 has.) faces each
campaign under the following conditions: a) larger production volumes per
hectare and high total production; b) higher quality product (due to higher
technology levels, better fertilization and irrigation, product selection
possibilities, etc.); c) medium financial costs (suppliers and distributors who
offer discounts and lower financial costs than in the previous case based on the
volumes purchased); d) operational difficulties (especially related to labor due to
the volumes he handles). This type of farmers has packing plants because their
production volume allows them to commercialize directly with the consolidating
markets, thus capturing a higher price differential than the small farmers.
The intermediaries or packers, in turn, buy from the small farmers, as was
explained in the previous case. They buy the merchandise in bulk (defining the
quality based on their knowledge of the productive practices of the supplier;
their measurement costs are low because quality adjustments are made on the
price paid to the farmer). After a packing process (at their own plant or a leased
one), they commercialize mainly at the consolidating markets (in some cases,
over 800 km. away), making shipments on consignment to different operators at
the wholesale markets. These operators commercialize at the market with a
commission of about 15%.
o Transaction:
i.

Sale of vegetables in 20 kg. crates with selected produce, with

differentiation by color and size. The crates generally belong to the
market consignees, who send them ahead of time. The seller
(farmer/intermediary/packer) is responsible for the cost of long
freight, loading at the packing plants and unloading at the market.
The price at which the merchandise is sold will depend on the
price paid at the market, and this, in turn, will depend on the
quality of the products, the supply and demand at the market that
day, and how willing the wholesale operator is to defend the prices
for the seller (it is understood that, since the wholesale operator
receives a percentage of the sales price, he will try to get better
prices from the retail buyers at the consolidating market.)

o Attributes of the transaction:

i.

Frequency: medium frequency. The farmer/ intermediary/packer

has crates from 3 to 5 operators at the consolidating markets;
sales are agreed upon with the operator one day before harvesting
and
delivery
(Sundays,
Tuesdays
and
Thursdays).
Farmers/packers work with several wholesale operators in order to
avoid an accumulation of deliveries and liquidations and at the
same time promote competition among operators.

ii.

Uncertainty: Uncertainty is linked to:

a) on the seller's side, difficulties to know ex ante what prices
are being paid at the market; misrepresentation in the billing
11

(due to sales at prices higher than those declared, or false

statements about loss of quality of the merchandise at the
market); postdated payments without prior notice; unfulfilled
payments (ex post transaction costs). All these difficulties
arise from the fact that the seller (particularly the farmer
integrated with a packing plant) is generally far from the
consolidating markets and finds it difficult to learn about the
prices paid at the market (this is why they try to use diverse
wholesale operators).
b) on the buyer's side, different qualities from those
expected; failure to comply with delivery of volumes agreed
upon; lack of uniformity of the product in the crate (the
vegetables in sight are of better quality than those at the
bottom of the crate).
iii.

Specific assets: packaging infrastructure; knowhow and human

resources for selection and quality; and perishability of the
product. In general, no quality seals (e.g., GLOBALGAP) may be
observed, since there are no overprices that justify the investment.

o Negotiation conditions:
i.

The wholesale operator has greater negotiation power, mainly

because he is at the market and has more information about
prices, volumes and qualities than the seller has. This gives him a
chance to incur in opportunistic actions regarding liquidation of the
merchandise, as was explained before.

ii.

The perishability of the product plays against the seller's possibility

to negotiate (the higher the temperature, the faster the product will
perish and the sooner the seller will need to sell the product,
resigning price).

iii.

There exists bilateral dependency between the seller and the

operator, mainly due to the dependency on the use of the latter's
crates. If the intermediary or integrated farmer had his own crates,
he would be able to commercialize them to different operators
based on which of them offered a better price. However, this leads
to greater coordination of the transaction, with representatives in
the markets and leasing of cold storage rooms, all of which would
increase costs without a guarantee of better price.

Therefore, this transaction is resolved under the contract governance structure,

since consignment of the merchandise constitutes a contract to commercialize a
product for which the market operator gets 15% commission. However, the lack
of completeness of the contract is based on the difficulty the seller has to get
information on the prices at which the products are being commercialized and
the quality commercialized, basically due to ex post opportunistic maneuvers
(unfulfilment of payments). Therefore, it constitutes a transaction with high
transaction costs (especially ex post).

12

Measurement costs are linked to the quality of the products commercialized and
the difficulty to measure this quality ex ante. They follow a similar pattern to the
previous case: faced with dissatisfaction of the retail buyers with the quality of
the products bought, the wholesale operators give the sellers fraudulent
liquidations (paying them a lower price than the true price at which the
consigned product was commercialized) thus counteracting possible ex post
costs.

6. Conclusions
There are some characteristics in trading vegetables: a) high perishability, b)
high volumes in short time periods (due to agro ecological issues), c) farmers
generally have financial problems, d) there are no standards, e) high-medium
frequency of transaction with certain buyers (due to trust, which would result in
opportunistic actions), f) low level of information about market prices or prices in
terms of quality, resulting in an asymmetric information problem, g) high fiscal
and sanitary informality, h) lower prices and higher costs in the last 10 years. All
these issues interact and make more complex transactions, in which generally
small farmers have low bargaining power because of lack of information,
financial problems and scales. On the other hand, perishability and the absence
of standards and information lead to high measurement costs and then
transaction costs.
The formalization and the design of contracts are a central part of the
institutional arrangements. The integration of quality assurance concerns in the
design of contractual arrangements is mostly motivated by the existence of
potential opportunistic behavior by firms or their suppliers, leading to a reduction
of the promised quality level or to imperfect compliance to prescribed production
standards (Maz, 2002).
The intensity of contractual problems then depends on the type of commodities
and the ability to reduce measurement costs (Barzel, 1982; Allen, 1991). In this
case, adverse selection or moral hazard phenomena are just specific cases of a
more general problem created by measurement costs and the combination of
two attributes: their variability and their alterability (Maz, 2002). Fresh
vegetables for example may have highly variable quality attributes. This
variability reduces the ability of a farmer name to serve as a support for
reputation mechanisms (based in Klein and Leffler, 1981).
A second source of problems arises with the potential alterability of quality
attributes, and the temptation for the farmer to reduce the level of quality when
quality attributes cannot be immediately observed at the time of the exchange
(Maz, 2002) or the possibility of buyers/wholesale operators to lie about the
quality finally purchased. The gains of such alterations are potentially higher for
high quality products than low or standard-quality products, or for products that
have non-observable or non-verifiable attributes. Incentives for possible noncompliance or even fraud in disregarding contractual quality specifications are
then stronger (Maz, 2002).

13

Wholesale markets appear as the traditional distribution channel, being the

transaction a commercial relation with a wholesale consignee in the market,
who commercializes the merchandise in exchange of a commission. This is
typical in medium-big farmers who, although have higher scale and information,
there are conflicts in the transaction in terms of quality, quantity, price, payment
method, payment security, asymmetric information, etc. The consignation of
products is a contract (institutional arrangement) but suitable to opportunistic
actions by wholesale agents, especially because farmers are price taken and
mostly they cannot participate in the selling process decision at wholesale
market.
In the case of small farmers, the transaction is solved in a single transaction, in
which the problem of information is related to quality and certainty of payment.
The price paid to the farmer is lower than that which the buyer would be able to
pay because there is no certainty about the quality of the product and the
measurement costs would be higher. On the other hand, the farmer decides to
commercialize the product without paying much attention to the evolution of the
market, thus reducing possible opportunistic actions by the buyers.
The general result of the diagnosis is that the horticultural system is a typical
specialties market that should be coordinated through strict institutional
arrangements. However, the contract between medium scale farmers and
wholesale operators seems to have high levels of conflict and transaction costs,
reducing de possibilities to protect property rights. Small farmers operate
following the market coordination way, with no chances of capturing value.
These conflicts restrict the competitiveness of farmers because, in general, they
lose profits that are captured by buyers.
References
Allen, D., 1991. What are transaction Costs? Research in Law and Economics,
14, 1-18.
Arruada, B. 1998. Teora Contractual de la Empresa. Marcial Pons, Ediciones
Jurdicas y Sociales S.A. Madrid-Barcelona
Barzel, Y. 1982. Measurement cost and the organization of markets. Journal of
Law and Economics, Vol 25, N 1 (April). pp 27-48.
Barzel, Y. 1997. The Formation of Rights. In: Economic analysis of property
rights. Chapter 6. Cambridge: Cambridge University Press, 1997.
Davis, L.E. and D.C. North, (1971) Institutional Change and American
Economic Growth (Cambridge: the University Press).
Fernndez Lozano, J. 2012. Canales de comercializacin de las hortalizas
frescas. In: Manual de la horticultura periurbana. INTA, Argentina.
Goldberg, V. 1976. Toward an Expanded Economic Theory of Contracts".
Journal of Economic Issues. 10 (1): 45-61.
Goode, W.J. & P.K. Hatt. Metodos de pesquisa social. Companhia Editora
Nacional, Sao Paulo, 3rd Edition. 1969.

14

Hallwood, C.P. Transaction Costs and Trade Between Multinational

Corporations: A Study of Offshore Oil Production. Unwin Hyman, Boston.
1990.
Hanks, G. A Framework for Incorporating Case Writing Assignments in
Graduate Agribusiness Courses. 1998.
Harling, K. & Misser, E. 1998. Case Writing: An Art and A Science.
International Food and Agribusiness Management Review, 1(1), 119-138.
Klein, B. and K. Leffler, 1981. The Role of Market Forces in Assuring
Contractual Performance. Journal of Political Economy. Vol. 89, pp. 615.
Lazzarini, S.G. Estudos de caso para fins de pesquisa: aplicabilidade e
limitaoes do mtodo. En: Farina, E. et al. (Coor). Estudos de Caso em
Agribusiness. So Paulo: ed. Pionera, p. 9-23. 1997. Quoting Yin, 1989
Maz, A. 2002. Retailers branding strategies: Contract design, organisational
change and learning. In Journal on Chain and Network Science, Vol 2,
number 1.
Mnard, C. 2002. The economics of hybrid organization. Presidential Address,
International Society for New Institutional Economics.
Palau, H.; S. Senesi & R. Prez San Martn, 2012. Neither wholesale markets
nor supermarkets. The transaction problem within the horticultural system in
Argentina. Paper presented at the 22nd Symposium IAMA, Shanghai, China.
June.
Peterson, H. Christopher. The Epistemology of Agribusiness: Peers, Methods
and Rigor. Invited Paper, Agribusiness Research Forum, University of
Missouri--Columbia, MO, September 26, 1997.
Eaton, D., G. Meijerink, J. Bijman. 2008. Understanding institutional
arrangements: Fresh Fruits and Vegetable value chains in East Africa.
Markets, Chains and Sustainable Development Strategy and Policy Paper,
no.XX.
Stichting
DLO:
Wageningen.
Available
at:
http://www.boci.wur.nl/UK/Publications/
Williamson, O. 1985. The economic institutions of capitalism. New York, Free
Press.
____________ Comparative Economic Organization: The Analysis of Discrete
Structural Alternatives. Administrative Science Quarterly, 36(2): 269-296.
1991.
____________ Transaction cost economics and organizational theory. Journal
of Industrial and Corporate Change. Vol. 2, pp. 107-156. 1993.
Yin, R. 1989. Case Study Research: Design and Methods. Sage Publications,
Inc; 2nd edition, February 1st.

15