The International Consortium on Agricultural Biotechnology Research (ICABR)


"Transaction Costs Theory in Relation to the Theory of Intermediary Firms in the Agro-Biotech Market Products"

Department of Agricultural Economics
University of Saskatchewan,

Agricultural biotechnology has recently changed the process of agricultural production. Many new alterations that can be easily seen have come from changes in agricultural systems, which are producing or using various series of crops, animal products, and microbes that have been developed using new biotechnology methods or involve input and output attributes, which use genetic modifications. However, it has posed serious challenges for the industry by changing the process of agricultural production in the agro-food sector. The fundamental problem is that the biotechnology industry, with tremendous vertical integration from the research sector through to farmgate, has still relied upon decentralized markets to commercialize their products. This means, transaction costs are very high in the agro-biotech market products that lead to lower the productivity of economic market factors.

Gradually, with the expansion of agricultural biotechnology markets, new theories have been proposed to find the appropriate solution for the problems being faced by economic agents. One of these theories, introduced by Daniel Spulber is the Market Microstructure and the Theory of Intermediary Firms. This theory, generally, addresses the two questions of Why are there firms and How do markets work by providing explanations for the formation of firms and showing how firms arise in market equilibrium. In addition, the theory helps to explain the mechanism of market functions by showing how firms select market-clearing prices. The analysis of firms begins with the observation that firms act as intermediaries between their customers and their suppliers. Without firms, consumers acting as buyers and sellers would engage in direct exchange, searching for each other and bargaining over the terms of trade leads to increasing transaction costs. The intermediation theory of the firm can then be summarized: "Firms are formed when the gains from intermediated exchange exceed the gains from direct exchange".

Intermediated exchange can have advantages over direct exchange for many reasons such as:

There is no doubt that the market microstructure issue and the theory of intermediary firms will play a great role in agricultural biotechnological markets in future as the biotechnological companies try to reduce their transaction costs. This concern may even lead to establish new structural frameworks and market institutions among agro-biotech companies by acting as intermediate firms thereby departing the neo-classical mechanism of market functions.

Many studies have been conducted to explain the roles of transaction costs in economics. However, this paper tries to look at the issue in a different view by explaining the relationship between the theory of intermediary firms with the transaction costs theory in the agro-biotech market products. To do so, four main sections have been considered. The first section broadly explains the role of agricultural biotechnology products in the market. Section two discusses the issue of market microstructure and the theory of intermediary firms. Section three discovers the relationship between transaction costs and market microstructure by emphasizing on the roles of intermediary firms. Finally, section four concludes the remarkable points.

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