The International Consortium on Agricultural Biotechnology Research (ICABR)
Transaction Costs Theory in Relation to the Theory of Intermediary Firms in the Agri-Biotech Markets Product
Department of Agricultural Economics
University of Saskatchewan, Canada
The adoption of modern biotechnological processes in the agri-food sector promises great benefits but poses serious challenges for the industry. So far biotechnological processes and products have had the greatest impact on plant-based agriculture but they are poised to begin to influence the livestock industry. The fundamental problem is that the biotechnology industry has relied upon decentralized markets to commercialize their products contains with considerable transaction costs. While there has been increasing vertical integration from the research sector through to the farmgate, most of the genetically modified products leaving the farmgate and entering the processing and food chain have been left to find their own markets. This approach to market making can work when the quantities supplied and demanded, consumers willingness to pay and sellers opportunity costs are known. The biotechnology sector does not exhibit those traits. The credence-like attributes of biotechnology products result in uncertain demand and widely varying estimates of consumers willingness to pay. Furthermore, high fixed costs (due to search and R & D costs) and low variable costs yield decreasing returns to scale to the industry, which complicates the discovery of quantities and the opportunity costs of supply.
The theory of transaction cost economics (TCE) have been widely used both theoretically and empirically mostly after the efforts of two Nobel Prize winners, i.e., Ronald Coase and Douglas North. Four key points contain transaction cost economics theory. These are bounded rationality, opportunism, asset specificity; and incomplete and asymmetry information. Agricultural biotechnological companies can avoid paying high transaction costs in their business by forming or dealing with intermediary firms. An intermediary is an economic agent who purchases from suppliers for resale to buyers or helps buyers and sellers to meet and transact with each other. Intermediary firms play important roles in markets by reducing search costs and facilitating transactions. They can initially seek suppliers, then find buyers and encourage them to purchase from suppliers. Intermediaries firms can also select buy and sell prices, define terms of transaction, manage payments, record keeping for transactions, hold inventories to provide liquidity or availability of goods and services. However, the main function of intermediary firms is to discover ways of clearing markets, meaning to set output and input prices somehow to match purchases to sales. In summary, we can outline the intermediary features as below:
· By centralization of exchange one is able to reduce transaction costs,
· Intermediaries help to remove the impacts of adverse selection,
· By changing direct exchange to indirect exchange, we can decrease search and bargain costs,
· Monitoring costs are decreased by centralization of exchange,
· Economic agents (buyers and sellers) find more opportunity to make credible commitment in their performance, and
· In the presence of intermediary firms opportunism and moral hazard will be reduced.
Currently, agricultural biotechnological companies will determine types of goods and services to produce and, given the market circumstances, the quantity of output that must be produced. What we suggest here is that in the future, some of them will act as their own intermediaries so that they are able to make decisions about the mix of products they will purchase from suppliers, type of suppliers they will contact with, and the allocation of goods and services to be offered to their consumers all in the direction of reducing transaction costs. We also anticipate that for such biotechnological companies it is not necessary to distinguish between merchants and manufacturers. In combination with managing transaction costs, intermediaries even play important roles by transforming products to add value in different ways such as transporting, storing, repackaging, assembling, preparing for final use, and adding information and guarantees.
We conclude that the biotechnological company would prefer to act in intermediated markets rather doing in decentralized markets-exchange where transaction costs are usually higher than the centralized one. We believe that the intermediary will make progress the communication between buyers and sellers, reducing transaction costs, and lessening asymmetrical information.