Profit allocation in agricultural supply chains: exploring the nexus of cooperation and compensation

TL;DR

This paper analyzes profit sharing in decentralized agricultural supply chains using cooperative game theory, demonstrating stable cooperation and fair profit distribution among farmers and distributors.

Contribution

It introduces multidistributor-farmer games and characterizes stable, fair profit allocations, highlighting incentives for cooperation in agricultural supply chains.

Findings

Agents have incentives to cooperate.

Stable profit allocations exist.

Farmer compensation can maximize revenues.

Abstract

In this paper, we focus on decentralized agricultural supply chains consisting of multiple non-competing distributors satisfying the demand of their respective markets. These distributors source a single product from a farmer through an agricultural cooperative, operating in a single period. The agents have the ability to coordinate their actions to maximize their profits, and we use cooperative game theory to analyze cooperation among them. The distributors can engage in joint ordering, increasing their order size, which leads to a decrease in the price per kilogram. Additionally, distributors have the opportunity to cooperate with the farmer, securing a reduced price per kilogram at the cost price, while compensating the farmer for any kilograms not acquired in the cooperation agreement. We introduce multidistributor-farmer games and we prove that all the agents have incentives to cooperate. We demonstrate the existence of stable allocations, where no subgroup of agents can be better off by separating. Moreover, we propose and characterize a distribution of the total profit that justly compensates the contribution of the farmer in any group of distributors. Finally, we explore the conditions under which the farmer can be compensated in order to maximize their revenues when cooperating with all players.