11/11/2025
Fresh supply chain research!
TITLE
Pricing Strategies for Processing Intermediaries in Agri-chains with Side Markets for Harvested Crops: Paradox of Ex-Post Pricing Flexibility
AUTHORS
Panos Kouvelis, Jian Li, & Guang Xiao
JOURNAL
Production and Operations Management
ABSTRACT
We study an agricultural supply chain in an emerging economy, where farmers make land allocation decisions among alternative crops and have the option to sell their harvest either in a side market or directly to a processing facility, and where a government-mandated minimum price guarantee (MPG) is in place. Our study examines a range of pricing strategies that the processing plant can employ to favor a protected crop and the utilization of the processing plant. We begin by considering the Benchmark strategy, in which the plant strictly adheres to the MPG. Subsequently, we investigate two distinct pricing strategies: the Ex-ante strategy, in which the plant commits to an optimal predetermined final price at the start of the growing season; and the Responsive strategy, in which the optimal final price is determined at the end of the season after yield and side-market uncertainties have resolved. Additionally, we propose the Hybrid strategy, which integrates both ex-ante pricing as a preseason commitment and ex-post price adjustments in response to realized uncertainties. We develop two-stage stochastic program models to analyze these farmer allocation and plant pricing decisions. Among other results, our study suggests that the ex-post pricing flexibility inherent in the Responsive approach may leave the processing plant worse off, even though price adjustments are plant-profit optimizing. We refer to this phenomenon as the ex-post pricing flexibility paradox. Furthermore, the Hybrid strategy does not always outperform the Ex-ante approach, which is another manifestation of the pricing flexibility paradox. The Hybrid strategy performs consistently better than the Responsive approach. We do suggest that a randomized ex*****on of the Hybrid strategy, in which the plant credibly and selectively applies ex-post pricing, may prove preferable for both the farmers and the plant in the long run. Our findings urge caution when the plant considers adjusting prices. Specifically, it is crucial to collectively consider the MPG, the processing margin, and the uncertainty on side-market price and crop yield. Neglecting any of these factors may result in an incorrect processor pricing approach and suboptimal outcomes. Long-term and stable relationships in these chains allow effective ex*****on of two-price strategies that align incentives and optimize profits for all involved parties.
KEYWORDS
LINK
https://dx.doi.org/10.2139/ssrn.5107673
BUSINESS INSIGHTS
This paper looks at how farmers and a processing plant in a developing agricultural market decide on prices and crop choices when the government guarantees a minimum price. The plant can either stick to the minimum price, set a price before the season begins, or wait until after harvest to adjust the price based on market conditions. While waiting to set the price sounds flexible, the study finds that this flexibility can actually hurt the processor because farmers react in ways that reduce the plant’s advantage. A mixed approach, where the plant commits to a base price early and only sometimes adjusts it later, often works better, but even that is not always superior to simply committing upfront. The key lesson is that changing prices after the fact is risky, and the best results come when the processor, farmers, and government policies are aligned and stable, with clear expectations that support long-term cooperation.
