Entry mode selection and its impact on the competition between organic and conventional agricultural products

Abstract

As the global organic food market continues to grow, so too will the challenges associated with managing organic food supply chains. We consider an entry mode selection problem facing an organic farmer. Specifically, an incumbent conventional farmer is selling its product through an independent retailer on the market. An organic farmer aiming to enter the market faces the problem of selecting between the conventional farmer’s retailer and an organic-only retailer. Consumers are heterogeneous in their purchasing valuation of the conventional agricultural product and its organic alternative. Horizontal competition between the two competing farmers is considered under different scenarios. Multiple-stage games are analyzed to study the impact of different cases on the pricing decision and profit of each player. The results show that when the organic agricultural product enters the market through the incumbent conventional retailer, two types of products are sold through a common retailer, the competition between the two farmers will be intensified, and the profit at the retail end will increase. It is always better for the organic farmer to sell an organic agricultural product through an independent organic-only retailer than to sell it through the incumbent conventional retailer. The paper makes two contributions. First, we derive the explicit equilibrium under chain-to-chain competition with piecewise linear demand functions. Second, we link the analytical marketing literature on channel structures with the supply chain literature on chain-to-chain competition and apply them to the food supply chain.