Analysis of upstream pricing regulation and contract structure in an agriculture supply chain

Governments in developing countries tend to assess the contracting mechanisms in the agricultural sector to maximize farmer welfare. We analyze the impacts of certain contract structures (wholesale price and revenue sharing) in the setting where the upstream pricing is regulated for farmer welfare. We develop an analytical model in which farmers sell inputs to firms competing in the downstream market. Our model embraces such features as (i) Cournot competition, (ii) regulated pricing of inputs, and (iii) total welfare maximization. We first characterize the market output and input pricing decisions. We then compare the pricing and players’ payoffs in our setting with those in the setting where the upstream pricing is deregulated. We ascertain the impacts of the degree of market competition on players’ payoffs and contracting decisions. We find farmer’s payoff is higher if it strategically decides the input price. Interestingly, under the revenue sharing contract, the value of strategic pricing to the farmer decreases with an increase in market competition. However, under the wholesale contract, the value of strategic pricing to the farmer may increase or decrease in the market competition. In addition, we analyze the setting where the farmers are located in distinct geographies with different pricing regulations and derive interesting findings.