Contractual arrangements and commitment in the Indonesian supermarket channel

Abstract

Purpose – The aim of this paper is to examine the nature of contractual relationships between farmers and buyers in the traditional and supermarket channels, and to explore determinants of farmers' commitment in the two channels. Design/methodology/approach – The paper reports the results of a field study of 602 chili farmers in the largest chilli production area in Indonesia, West Java Province. The contractual arrangements were analyzed using descriptive statistics, while determinants of farmers' commitment were examined using factor analysis and Ordinary Least square (OLS) regression. Findings – The contractual arrangements between farmers and traders in both traditional and supermarket channels are characterized by verbal agreements. Price is the main aspect of the contract in the traditional channel, while grading aspects are the most important aspects in the supermarket channel. Trust and satisfaction have significant influence on farmers' commitment in the two channels, while the actual price has no influence. Practical implications – To improve farmers' commitment, traders should not only focus on absolute price, but also on building trust and satisfaction. Trust can be improved by providing payments on time and following through with their promises. Satisfaction can be improved by offering fair prices for farmers' products and providing quicker responses in handling farmers' concerns. Originality/value – This study compares the trade relationships between traditional and supermarket channels. It incorporates actual price and behaviour variables in the analysis of farmers' commitment.