Quality Grading in the Supply Chain

Abstract

This paper examines the role of quality grades or standards in the supply chain using the case of the vegetable industry in Southern Philippines. A model is employed which shows that grading provides information that lower search cost of buyers. When standards are inadequate, information is distorted which results to asymmetric price transmission. Data show that majority of farmers surveyed grade their vegetables to get better prices and minimize transaction cost. Primary data analysis was supplemented with secondary data analysis by estimating a price asymmetry model. Results show that price transmission is symmetric for cabbage and asymmetric for onion. Asymmetry in price transmission implies that marketing information are not effectively transmitted in the food chain and that establishing quality grades is necessary to improve efficiency in the supply chain.