Regional Markets

2 Inclusion of smallholder farmers
Aspects of the spot market type of coordination
Roles of traders
Traders link subsequent market stages in the value chain, in most market types (spot,
hierarchy, network or cooperative). These traders can be the owners of the commodities
traded at various stages, but also can act as brokers, especially in the early stages of the
chain. Only in a hierarchical value chain this function performed the main actor in the
value chain, usually a large company. In case there is no group action by primary producers,
collecting traders (also called petty traders, itinerant traders, or rural merchants)
perform the vital function of linking the individual farmer with the market at a level
of turnover that is generally unattractive to a large-scale merchant. Wholesalers buy in
bulk from collecting traders and sell in bulk to retailers further down the chain.
Contracts
Subsequent stages in the value chain are linked by contracts. A contract is a written or
spoken agreement representing a transaction between seller and buyer. It is embedded
and strongly dependent on a specific environment of formal and informal institutions.
The stages in the contract process are contract preparation, contract conclusion and
contract enforcement (Table 2.3).
Table 2.3 Stages in realising a contract
Stage in the process Action Type of transaction costs
Contract preparation Information search Search costs
Contract conclusion
Negotiation on the terms of
contract
Negotiation costs
Contract enforcement Enforcement of contract conditions Enforcement costs
Source: Van Tilburg (2010)
Transaction costs in concluding a contract tend to be high in developing countries
because of a lack of standardisation, market information, market transparency, horizontal
and vertical coordination, access to trade credit and economies of scale. 3 Search
costs can be reduced by improving market transparency, which may reduce the ability
of actors to monopolise market information (information–rent seeking behaviour).
Negotiation costs can be reduced by standardising weights, measures, procedures and
contracts. However, in many situations access to market knowledge and know-how
is skewed, and this tends to be exploited by market actors to secure additional gain.
3 Please consult Rindfleish and Heide (1997) and Fafchamps (2004) for more information. Also Williamson
and Eggertson provide useful insight into ex ante and ex post transaction costs, especially emphasising the point that
information costs are not identical to transaction costs (in Kirsten et al. 2007).
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