Reardon_et_al_Supermarkets_august_2005.doc

3 investment in institutional capital establishment

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investment to “produce.” (3) investment in institutional capital (establishment of implicit contracts or preferred supplier lists, which implies derivative investments in monitoring mechanisms, technical assistance and credit provision mechanisms, product collection or reception 7
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infrastructure, or alternatively, passing costs to suppliers); “institutional capital” can be thought of as “embodied” in contracts and property rights which require investment to “produce.” (4) investment in institutional capital (establishment of private standards, which implies establishment of testing or monitoring systems and equipment, possibly investment in certification systems or relationships with third-party certification systems). The Objective Function of the Supermarket Chain’s Procurement Officer. The typical first-tier supermarket chain in a developing country tends to be either a multinational or a large domestic firm that is under intense competition with global or regional multinationals. In the supermarket sector, there is the constant threat of new entries or attempts at entry by chains from the region or around the world. Supermarkets are also competing with the small shops and informal wetmarkets that come with an advantage of long-habit, of freshness and variety, and of lack of need of paying taxes (but which have the disadvantages of lack of economies of scale in procurement and lack of coordination or traceability in supply chain). The chains are competing with each other and with the traditional retailers on the basis of quality differentiation for the relatively small segment of middle and upper income urban consumers, and on the basis of food price for the broad mass of lower middle and working poor urban consumers. We assume they maximize profit subject to a “market-share first” strategy to occupy commercial territory in order to build inter-temporal economies of early entry, competing for scarce real estate locations. They are assumed then to seek to do the following: (1) minimize intermediate input cost (i.e., the net price they pay the wholesaler or farmer for procured products) (2) minimize transaction costs (plus minimizing risk by preventing episodes of “shorts”) (3) maximize product quality (such as taste and cosmetic appearance) while minimizing quality instability over time (4) maximize product diversity to seek or counter spatial monopolistic competition Demand side: The Adoption Decision of the Procurement System by the Retailer. The choice vector we focus on here is (1) continue to buy from the traditional wholesale market, hence spot market; (2) buy direct from farmers; (3) buy from specialized/dedicated wholesaler who (mainly) buys direct from farmers (imposing the standards of the chain, and using implicit contract/preferred supplier system). Here we abstract from the choice of the specific supplier, an issue taken up below.
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