Provision of quality attributes in the food marketing chain: an optimization approach

Abstract

The Danish food industry faces pressures to increase value-added and to improve efficiency. At the same time, policy increasingly targets industry conduct and the attributes of food products such as their safety, and ethical issues of their raw material production. Recognizing that food quality attributes are delivered by co-ordinated action amongst food industry firms, the research presented here examines relationships and incentives within the food marketing chain. <br/> This research is part of the 3-year project "Perspectives for Development of the Danish Food Sector". The project targets the policy environment surrounding the Danish food marketing chain, and has objectives to: <br/> 1. measure changes in function, structure and commercial practice in the Danish food industry, and compare and contrast these with developments in other countries; <br/> 2. characterize vertical and horizontal relationships in the Danish food chain, and their role in efficiency; <br/> 3. evaluate the efficiency and competitiveness of the Danish food system at each stage of the marketing chain; <br/> 4. review and evaluate instruments of Danish, EU and foreign public policy in the development of the food marketing chain; and <br/> 5. communicate research results in a number of media. <br/> The research reported here is associated with objectives 2, 3 and 4. Efficiency in the provision of food quality attributes by the Danish food marketing chain is examined. A mathematical program is used to model incentives for provision, which include firms' free-riding behaviour within the food chain. Scenarios presented include a range of technological conditions; the allocation of retail price premia amongst stages; and the implications of mandatory provision of an unprofitable attribute. Results list provision outcomes, profitability and its distribution amongst chain participants, and the implications of non-provision by firms. <br/> Commercial applications of the research include its focus on within-chain compensation. Notably, the model generates measures of profits and loss that can be applied in designing new compensation regimes. Desirable extensions to the research include it use of more detailed and accurate input data, and comparison of its output to commercial profitability and compensation patterns. Policy applications include its treatment of options for design of mandatory provision, and interactions between market power and the allocation of benefits within the food marketing chain. <br/> The project is partially funded by the Innovations Law of the Danish Ministry of Food and Agriculture. Early versions of the models and early drafts of the report were reviewed by Jørgen Dejgaard Jensen.