Design of Matching Markets in Agriculture & Food Systems for Sustainable Prosperity
Our research group strives to bring the state of the art research to solve the challenges faced by the industry. Specifically, we are focusing on the supply side business process in the agriculture sector to identify opportunities to improve the transaction efficiencies, design and develop appropriate technology enabled market mechanism to facilitate business-to-business transactions.
Though a large number of small and medium enterprises (SMEs) in Canada have adopted Internet based business solutions and have realized substantial returns in terms of financial, operational and strategic benefits, many SMEs, especially the ones in agricultural industry, have yet to adopt such technology enabled solutions that results in Canadian economy forgoing a major source of economic growth. A recent report by the Standing Committee on Industry, Science and Technology 2012 (Parliament of Canada) also highlights that in spite of the many proven benefits of technology adoption and e-commerce such as lower operating costs, access to larger markets, better supply and customer-value chain management, many Canadian SMEs have yet to embrace such technology enabled solutions. Further, though the use of Internet for procuring goods and services lead to $31.4 billion business to business transactions in 2006, the share of e-procurement varies across sectors of economy, with manufacturing and wholesale sectors leading the utilization rate.
Among the sectors that are lagging behind in the use of technology enabled procurement process, agriculture is a very important sector where technology based e-business solutions can enable farmers to access new markets and achieve sustainable growth by overcoming geographical constraints. Within the agriculture sector, we will initially focus on Canada’s wine industry that offers the highest valued-added contribution to agricultural production in six provinces across Canada, and is growing significantly.
According to the Canadian Vintners Association, the wine industry in Canada is expanding in the traditional wine regions of British Columbia and Ontario and is also emerging in provinces such as Nova Scotia and Quebec. New wineries and grape growers are entering the market to compete in an industry that currently has more than 400 grape-based wineries and around 1,000 grape growers. Though some large grape growers (GG) operate a small winery, they sell most of their grapes to wineries. Similarly, the wine producers (WP), especially large wineries grow grapes but mostly buy the grapes they use from grape growers (Anderson 2004). Given the wide variety of wine grapes grown and high uncertainty in the quality and quantity of the grapes produced due to the variability in weather conditions, combined with the specific needs of the wineries in terms of the variety, quantity, and quality of the grapes, it is a complex and costly process for both grape growers and wine producers to find appropriate match for completing a transaction.
The current mechanism to match buyers and sellers of grapes and wine is very primitive where both the parties in the transaction have limited information about the alternatives available in the market. The search costs for finding potential buyers and sellers as well as getting information about their attributes and preferences are very high. Therefore, generally, grape growers and wineries enter into yearly contracts which require, subject to some quality rules, a winery to accept all of the grapes produced on the designated farm and the farmer to deliver all of their grapes to the winery (Goodhue et al. 2001). Given that Information technology based solutions can reduce the search cost (Bakos 1997), we propose to develop a mobile application that matches buyer preferences and seller offerings to create more efficient, “friction-free” markets (Bakos 1998).
Specifically, in order to mitigate the growing divide between local consumers and local products as well as to coordinate the variable supply and demand that arises due to large product heterogeneity in both demand and supply side, we will develop a mobile application that connects buyers and suppliers through real time communication and facilitates local transactions by employing a wide variety of matching algorithm which also take into account and optimizes given the transportation and other distribution related constraints.
The prototype will elicit the preferences of the buyers and sellers that will be used by the matching algorithm to generate a set of matches that improve the resource allocation. To the best of our knowledge, the industry relies on online classifieds to find potential matches (See Figure 4 in Appendix). These classifieds not only have high search cost as information cannot be easily searched and filtered but also high transaction cost as a grape grower or a winery needs to contact the other party offline. Our proposed mobile app, in addition to making it easier to provide and search for relevant information, will enable algorithm driven matching to maximize the surplus from the overall trade. Though we will implement various auction mechanisms to facilitate efficient allocation of resources, we believe that matching algorithms (Roth and Sotomayor, 1990; Shoham and Leyton-Brown, 2009) would be most effective as they will ensure the system level optimization.