A game theory model for stabilizing price of chili: A case study

Ari Wardayanti, Afgan Suffan Aviv, Wahyudi Sutopo, and Muh. Hisjam

Citation: AIP Conference Proceedings 1902, 020018 (2017);

View online: https://doi.org/10.1063/1.5010635
View Table of Contents: http://aip.scitation.org/toc/apc/1902/1
Published by the American Institute of Physics

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A Game Theory Model for Stabilizing Price of Chili: A Case
Study

Ari Wardayanti1, a), Afgan Suffan Aviv2, Wahyudi Sutopo3, and Muh. Hisjam3
1
Laboratory of Logistics System and Business, Industrial Engineering Department, Sebelas Maret University,
Surakarta, Indonesia
2
Industrial Engineering Dept., Sebelas Maret University, Surakarta, Indonesia
3.
Industrial Engineering Dept., Fac. of Engineering, Sebelas Maret University, Surakarta, Indonesia
a)
Corresponding author: ariwardayanti@gmail.com

Abstract. Chili is one of the important agricultural commodity in Indonesia because of its widely consumption by the
Indonesian. Chili becomes one of the commodities that experience price fluctuations and important cause of yearly
inflation in Indonesia. The unstable price of chili is affected by the scarcity of the commodity in some months and the
difference of the harvest season. This study proposes a model to solve the problem by considering the substitution of
fresh chilies with dried chili. We propose the cooperative of chili’s farmer as entities that process fresh chili into dry
ones. The existence of substitution products is expected to maintain the price stability chili. This research was conducted
by taking a case study on chili commodity markets in Surakarta which consists of 19 traditional markets. This study aims
to create a price stabilization scheme with product substitution using a game theory model. There are 4 strategies
proposed in game theory model to describe the relationship between producers and consumers. In this case, the producers
are the farmers and the consumers are the trade market. A mixed strategy of was chosen to determine the optimal value
among 4 strategies. From the calculation results obtained optimal value when doing a mixed strategy of IDR
201,188,829,000.

INTRODUCTION
Chili is a vegetable commodity which has an important role for agriculture in Indonesia, which is used by the
public for its distinctive spicy flavor. Chili is also a potential commodity that has a high economic value and social
impacts. Chili occupies an important position in the Indonesian food menu. Although needed in small amounts, but
every day is consumed by almost the entire population of Indonesia [1]. On the other hand chili has a perishable
nature or easily damaged. The problem is easily breakdown endurance chili that occurs during the process of the
supply chain from farmers to small traders and consumers as a result is still less well-organized post-harvest
handling process from the level of farmers, wholesalers and small traders. In addition to this, the number of levels of
disability is also caused due to the incompatibility chili with national standards that have been established [2].
Chili can be grouped into two types: (1) big chili (Capsicum annuum) which consists of a red chili and chili
curls, (2) small chili known as cayenne pepper (Capsicum frustescens, Capsicum pendulum, Capsicum baccatum,
and Capsicum chinense) [3]. Chili that is produced by agro industry has salient supply disparity during the harvest
and planting season. This situation can cause both chili scarcity and price fluctuation. Elicit disadvantages to the
stakeholders such as producer, wholesaler, consumer, and government [4],[5]. In particular season (the rainy season
and the season celebration/festivities) usually chili prices risen sharply and could affect the inflation rate [6].
Seasonal chili price fluctuations occur almost every year. The increase of price is caused by reducing supply, while
the demand is constant and continuously every day [7]. The price fluctuations occur because the chili production is
seasonal, rain factor, costs of production, and distribution channel length [8].

3rd International Materials, Industrial and Manufacturing Engineering Conference (MIMEC2017)

AIP Conf. Proc. 1902, 020018-1–020018-9; https://doi.org/10.1063/1.5010635
Published by AIP Publishing. 978-0-7354-1590-4 /$30.00

020018-1
 Surakarta needs a supply of chili from other areas such Wonosobo, Brebes, Banyuwangi, Jember, Boyolali,
Tawangmangu, and Karanganyar as well as other chili production regions. Supply of chili for Surakarta initially
enters Legi market then distributed to some retail markets, among others to Gede market, Nusukan market, Rejosari
market, Purwosari market, Kleco market, Kadipolo market, Penumping market, Nongko market, Hardjodaksino
market, Gading market, Tanggul market, Joglo market, Ngemplak market, Bangunharjo market and Sangkrah
market.
In Surakarta, Legi market means a terminal procurement and distribution of agricultural production from another
area that produce chili and it is the beginning of the formation of prices of agricultural products. In other words,
Legi market is the barometer of market retailers located in the city of Surakarta, in this case Gede market and
Nusukan market, and other markets show that price formation in the market retailer considered a relevant response
of prices on the Legi market [9]. Problems often occur on chili in Surakarta commodity markets that supply chain is
too long, chili in lower quality (rotten, dry, or damaged), and the main problem is price fluctuations. Based interview
with a trader in 1 day price of chili in the market could change into 3 times. This condition could make a loss for the
traders and the buyers.
In previous literature which discusses theories and concepts related games. Classification of games based on the
information, rules, moves and rationality has been discussed. Two games are known in the game theory, literature,
the Prisoner's Dilemma and the Battle Sex have examined in detail with the related concepts of pure and mixed
strategy. Nash Equilibrium along with Pareto efficiency has been discussed in detail along with their properties.
And, this article gives an insight to the use of game theory in Network Communication problem from the
perspective of the cooperative and non-cooperative [10].
In other literature discusses the application of game theory to model the stabilization of prices on basic
commodities distribution. The game theory model has to simplify the model due to lack of constraint is required so
that it can be used more easily. This model is used to describe the transactions between producers and government
agencies. The results show that in the same condition in game theory can simulate the model is built in to stabilize
the price of staple food [11].
Based on literature studies conducted, we have not found any application of game theory to stabilize prices by
using substitute commodity. Nowadays, many policies made by some parties and cause data evaluation methods and
approaches [12].
This research tries to address the gap that currently exists between the available literature and the real problems
in the price stabilization of commodities. This study aims to solve the problems in the supply chain of chili with case
study were used in commodity markets in Surakarta using a game theory model. Because of the perishable
characteristics of chili, it is proposed to offer substitute commodity complementary such as dried chili that will be
distributed to the market to increase the availability of chili. Dried chili can be distributed to consumers who need
chili, but not fresh condition, and it will help to stabilize the price of chili. Dried chili is typically marketed and
further processed into powder or oleoresin chili [13].
Game theory provides an alternative strategy and to choose a strategy that most optimal for price stabilization.
When the chili in the harvest season, producers can determine the strategies to make chili prices are not too low and
to minimize wasted chili that make low quality. When the growing season with chili, consumers may choose a
strategy that makes chili prices are not too high and no scarcity of chili in the market.

METHODOLOGY
The case study was conducted in Surakarta, Indonesia. The method used in this research is direct observation to
identify the problem and model of game theory to completion problems. Observations made on 19 commodity
markets in Surakarta to map market conditions and identify problems. Observations found that problem regarding
fluctuations in the price of chili in the market. The problem, then modeled with linear regression and game theory.
Modeling was made with consideration of market conditions in order to achieve price stability through product
substitution. So that was obtained from modeling the optimal decision. Balanced price occurs when the intersection
of the demand curve and the supply curve. Balanced price (equilibrium price) happens when the number of requests
is equal to the number of deals. In this case with the substitution products such as dried chili to replace fresh chili,
price stability can be achieved.

020018-2
 FIGURE 1. Approach of the Stduy

Game theory is used in this case study because it can describe the price system stability. Game theory is a
mathematical theory of science that can be used to determine, formulate, and study the situation of conflict or
competition involving two or more interests in order to obtain a decision that is best for every player.
Payoff matrix is one of the advantages to be had by players if they choose one of the options strategy in existing
strategies. Methods completion of the payoff matrix 2x2 is with pure strategy and mixed strategies. To finish the
pure strategy at a value in the payoff matrix A, it must have a saddle point. If it does not have a saddle point, the
completion of the payoff matrix of 2x2 is done by mixed strategy.
The model uses game theory payoff matrix to solve the problem between the two entities. Each entity has some
strategic purpose. Each strategy will affect the other entities’ opposite strategy. Minimax and maximin criterion is
the main way used to determine the best strategy for each entity [11].

RESULTS AND DISCUSSION

Chili is a horticulture commodity that is included in the annual thermal plants [14]. Age of chili plants is 3
months of starting early planting to harvest. Assumptions used in this research are the planning horizon is divided
into twelve periods for one year and the twelve months were grouped into three groups and because of the age of
chili plants of three months: the planting season in the first period, period of growth in the second period, and the
harvest in the third period, as well as the period of four re-entry into the growing season, so that each of the three
dates will be repeated again. Assumption of market conditions is shown in Table 1.
TABLE 1. Assuming Market Consumption
Period
t1 t2 t3 t4 t5 t6
Planning Horizon Planting Growth Harvest Planting Growth Harvest
Over Over
Production Normal None Normal None
Abundance Abundance
Consumption Stable Stable Stable Stable Stable Stable
Over Over
Availability Sufficient Minus Sufficient Minus
Abundance Abundance
Period
t7 t8 t9 t10 t11 t12
Planning Horizon Planting Growth Harvest Planting Growth Harvest
Over Over
Production Normal None Normal None
Abundance Abundance
Consumption Stable Stable Stable Stable Stable Stable
Over Over
Availability Sufficient Minus Sufficient Minus
Abundance Abundance

020018-3
 FIGURE 2. Flowchart of Game Theory

While the strategies applied to producers and consumers aimed at the following Table 2.
TABLE 2. Strategies Producers - Consumers
P1 Producers sell fresh chili to consumers and to the cooperative
Producers
P2 Producers sell fresh chili to cooperative
Strategy
C1 Consumers buy fresh chili directly to the producers
Consumers
C2 Consumers buy dried chili into cooperative

Producers in this research are farmers and consumers are the traders in the market. While cooperatives are parties
to process fresh chili become dried chili.
In the payoff matrix for producers and consumers are shown in Table 3.

020018-4
 TABLE 3. Payoff Matrix Producers - Consumers
Consumers
Producers
C1 C2
P1 A11 A12
P2 A21 A22

On the condition A11 strategy implemented by the producers are P1 (producers sell fresh chili to consumers and
to the cooperative) and strategy for consumers are C1 (consumers buy fresh chili directly to the producers). On
condition A12, strategy implemented by the producers are P1 (producers sell fresh chili to consumers and to the
cooperative) and strategy for consumers are C2 (consumers buy dried chili into cooperatives). On condition A21,
strategy implemented by the manufacturer are P2 (producers sell fresh chili to cooperatives) and its strategy is the
consumers are C1 (consumers buy fresh chili directly to the producers). On condition A22 strategy implemented by
the producers are P2 (producers sell fresh chili to cooperatives) and its strategy is the consumers are C2 (consumers
buy dried chili into cooperatives).
The notations used in the development model of game theory are as in Table 4.
TABLE 4. Notation of the Model
Notation Meaning Notation Meaning
C d
TC total cost consumers qt the amount of consumers demand in period t
Pplt market prices at the producers qst the amount of supply to the market in period t
level in period t
Pslt market prices at the consumers Q ct the amount of dried chili commodities in period t
level in period t
Pmax sale price upper limit on the P1 strategy of the first producers
level of consumer
cd rate distribution costs per unit P2 strategy of the second producers
B Constants curve logarithms on C1 strategy of the first consumers
function price ratio
C constants function of market C2 strategy of the second consumers
price at the producers level
D constants function of market A11 The result of implementation strategy P1C1
price at the consumers level
CIC indicators of crisis the market A12 The result of implementation strategy P1C2
price at the consumers level
Pp0 market prices at the producers A21 The result of implementation strategy P2C1
level per unit on the free market
tj the commencement of the A22 The result of implementation strategy P2C2
period of price stabilization
program
T time period

Formulation of the model refers to a model of game theory. Reference [15] is presented in the following
equations:
12

¦q p
d sl
TC c (1)
t t
t 1

¦ ¦ q p
d sl d Max
TC c q p
t t

t
(2)
t 1, 3, 4 , 6, 7 , 9 ,10,12 t 2 ,5,8,11

020018-5
 T

¦ q p  ¦q p
c d sl d Max
TC (3)
t t t
tj 2 ,5,8,11 t 1

Then limits - limits on the model as follows:

ª ( p po  Cd )  d ln( qd ), jika psl d CLc, t 1......tj
p
sl
« t t t
(4)
« max sl

¬ p
, if d p ! CLc, t 1..............................T
t
t
max pl C
p ( p  cd )  b ln(Q )
t t
(5)
pl po s*
p t
p 0
 c ln( q )
l
(6)
max
t j
{2,5,8,11},T 12, p t0 (7)

For the condition A11 and A21 uses the formula (1). As for the condition of the A12, we use the formula (2). On
the condition A22, we use formulation (3).
Presented data used in this article, namely as in Tables 5 and 6:

TABLE 5. Data Supply and Demand of 201X

Period t1 t2 t3 t4 t5 t6
qs (ton) 877 0 742 940 0 1,210
qd (ton) 575 575 575 575 575 575
Period t7 t8 t9 t10 t11 t12
qs (ton) 1,209 0 1,209 1,209 0 1,209
qd (ton) 575 575 575 575 575 575

TABLE 6. Data Constants and Parameters of the Cost of 201X

cd Ppo Clc B c D
1000 6,000 47,000 0,043 9 6.275421

Results from the model of game theory show the value of A11, A12, A21, A22 which is presented in the form of
a payoff matrix in the following table.
TABLE 7. The Result of Game Theory Producers – Consumers (thousand)
Consumers
Producers
C1 C2
P1 205,562,500 198,662,500
P2 0 317,400,000

From the calculation results found solutions from a game theory model using the criteria of maximin and
minimax. Players line (maximizing players) identify optimal strategies through the application of the criteria of
maximin. While the column players (minimizing players) are using the minimax criterion to identify the optimal
strategy. In this case the value that achieved should be a maximum of minimax lines and a minimum of maximin
columns at once. The solution of the model will provide a total of optimum benefits to consumers as in the following
table.

020018-6
 TABLE 8. Maximin and Minimax of the Producers – Consumers (in thousand IDR)
Producers Consumers Maximin
C1 C2 Value
P1 205,562,500
198,662,500 198,662,500*
P2 0 0
317,400,000
Minimax
Value 205,562,500* 317,400,000

Table 8 describes the selection of maximum value in selected minimum values on the player line, and selecting a
minimum value of the values of the maximum selected in the player column. Based on the calculations that there is
no saddle point, because the value of line criteria is IDR 198,662,500,000 and IDR 205,562,500,000 in column
criteria. Then use a mixed strategy to obtain the optimal solution of all the existing strategy. To complete the game,
this theory uses a mixed strategy as in Table 9.
From the calculation of mixed strategy, probability that can be taken on a strategy of producers P1 is
0.9787234043 and P2 is 0.021276597. While the probability that can be taken by consumers at strategy C1 is
0.3661347518 and strategy C2 is 0.6338652482. The results of probabilities are used as a reference by the producers
and consumers to implement a strategy based on the magnitude of probability. Based on all the probability strategy,
the optimal value obtained when doing a mixed strategy is IDR 201,188,829,000.

TABLE 9. Calculation of Optimal Value in Mixed Strategy (in thousand IDR)

Strategy P (P1 = p, P2 = 1- p)
Equation 1 : 205,562,500p = p = 0.9787234043 Equation 1 :
317,400,000 – 201,188,829
A11p + A21(1-p) 1-p = 0.021276597 205,562,500
118,737,500p
(0.9787234043)
Equation 2 : Equation 2 : 201,188,829
A12p + A22(1-p) 317,400,000 –
118,737,500
(0.9787234043)

Strategy Q (Q1 = q, Q2 = 1- q)
Equation 1 : 6,900,000q + q = 0.3661347518 Equation 1 :
198,662,500 = 201,188,829
A11q + A12(1-q) 1-q = 6,900,000
317,400,000 –
0.6338652482 (0.3661347518) +
317,400,000q
198,662,500
Equation 2 : Equation 2 : 201,188,829
A21q + A22(1-q) 317,400,000 –
317,400,000
(0.3661347518)

Based on the results obtained before using a mixed strategy on the conditions applied A11 by producers namely
P1 (producers sell fresh chili to consumers and to the cooperative) and strategy for consumers is C1 (consumers buy
fresh chili directly to producers) have a total the consumer cost of IDR 205,562,500,000, but after use a mixed
strategy total consumer cost A11 strategy can be decreased to IDR 201,188,829,000. Meanwhile, on condition A22
strategy implemented by the producers is P2 (producers sell fresh chili to cooperatives) and strategy applied
consumers are C2 (consumers buy dried chili into cooperatives) which initially have consumers total cost of IDR
317,400,000,000, but after use a mixed strategy total consumer costs decreased to IDR 201,188,829,000. The
magnitude of the total cost of consumers on C1 and C2 has decreased while the use of game theory mixed strategy

020018-7
and it can maintain price stability of chili because the supply are increased in form of fresh and dried chili and
demand from the market and consumers can be fulfilled then the balanced price of chili can be achieve. Game
theory can be used to describe the relationship between the producers and consumers transactions and also provide a
broader picture of the relationship of producers and consumers through developing strategy in one process.

CONCLUSION
In this paper, we propose a model of game theory that can be used to describe some of the conditions outlined in
strategies between producers-consumers. Model of game theory can demonstrate strategies that can be developed in
basic commodity price stabilization scheme.
In this study, a game theory model by using mix strategy has been developed in accordance with substitute
commodity. The complementary product is production of chili by the farmers who are members of cooperatives that
would process chili into dried and sell it to market traders. Mixed strategy was used to determine the decision
variable in the price stabilization scheme because based on the calculation there is not saddle point. In the case the
optimal value from the calculation in mixed strategy of all strategies is IDR 201,188,829,000.
For further research on game theory modeling process to be considered the external factors affecting for instance
as their volatility in the existing market realities and the effects of inflation on the price determination. So that the
results obtained are more accurate and closer to the actual situation.

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