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8112058

CHRISTY, RALPH DEAN

THE MICHIGAN PROCESSED POTATO INDUSTRY:
SYSTEM CASE STUDY

Michigan State University

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AN INFORMATION

1980

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THE MICHIGAN PROCESSED POTATO INDUSTRY:
AN INFORMATION SYSTEM CASE STUDY
By
Ralph Dean C hristy

A DISSERTATION

Subm itted to
Michigan State University
in partial fulfillment of the requirem ents
for th e degree of

DOCTOR OF PHILOSOPHY

Departm ent of A gricultural Economics

1980

ABSTRACT
THE MICHIGAN PROCESSED POTATO INDUSTRY:
AN INFORMATION SYSTEM CASE STUDY
By
Ralph Dean C h risty

In recen t y ears problem s rela tin g to public a g ric u ltu ra l information
system s have been a concern of m arket p a rtic ip a n ts , econom ists, and
governm ent officials.

T his stu d y identifies two fundam ental problem s

th a t confront rese a rc h on d ata and inform ation sy ste m s:

(1) various

forms o f sta tistica l obsolescence, and (2) th e lack of a p ro v en th eo ry
and m ethodology.
The Michigan processed potato in d u stry is u sed as a case s tu d y .
Personal interview s w ere conducted with each plant m anager.

T he

interview s w ere designed to obtain inform ation on s tru c tu ra l c h a ra c ­
te ris tic s of th e in d u stry and to ev aluate th e u sefu ln ess of v ario u s
ty p e s and so u rces of p rice inform ation in th e firm 's m arketing decisions.
The rese a rc h is based on an inform ation system paradigm which
a s s e r ts th a t information obtain s its value in th e co n tex t o f a specific
decision.

T he th eoretical basis for th e rese a rc h was ex p an d ed by

in te g ra tin g th is intellectual fram ew ork with th e following bodies of
th e o ry :

neoclassical economics, in d u stria l o rg an izatio n (I/O ) th e o ry ,

th e behavioral th eo ry of firm decision m aking and a limited c o n s tru c t,
th e cost and b en efits of inform ation o v e r various m arket s tr u c tu r e s .
T aken to g e th e r, th e above fram ew orks formed a sy n th e s is which cast
th is rese a rc h in an inductive mold.

C entral q u e stio n s included:

What

is th e relationship betw een m arket s tr u c tu r e and inform ation? How

does firm procurem ent beh av io r impact th e p ro d u ctio n , d istrib u tio n
and use of m arket inform ation? What is th e value (m easured in term s
o f a scale of usefulness) of v a rio u s ty p e s and so u rces of p rice infor­
mation in th e context of specific firm m arketing decisions? What a re
th e firm 's risk management and sta n d a rd o p e ra tin g p ro ce d u res and
how do th ey impact m arket inform ation?
M arket s tru c tu re impacts inform ation in th e Michigan p ro cessed
potato in d u stry in th re e fundam ental w ays:

(1) it c o n trib u te s to

statistical obsolescence; (2) it determ ines in p a rt th e value of p rice
inform ation, and (3) it d is trib u te s th e public and p riv a te c o sts and
b en efits of inform ation.
S tatistical system s become obsolete when major ch an g es occur in
m arket s tr u c tu r e , such as have been ex p erien ced in most v egetable
m arkets o ver th e p ast two d e ca d es.

T h ese s tru c tu ra l ch an g es make

it more difficu lt for a public sta tistic a l agency to collect m arket
inform ation.

S tatistical obsolescence also o c cu rs when th e re a re

changes in th e decision ag en d a o f th e u s e rs o f inform ation.

Decision

related obsolescence does not ap p ea r to be a major so u rce of d ifficulty
in th e Michigan processed potato in d u s try .
T his stu d y illu stra te s how selected elem ents of m arket s tr u c tu r e ,
firm size and firm ty p e affe ct th e value o f inform ation.

For th e most

p a rt, la rg e r firms ten d to realize th e need fo r, and hence th e value
o f, price inform ation.

With re sp e c t to firm ty p e , fre e z e rs ten d ed to

value procurem ent ty p es and so u rc es of inform ation h ig h er th an
c h ip p e rs.

On th e o th e r h a n d , c h ip p e rs ra te d inform ation on th e firm 's

p ro d u ct side h ig h er.

T h e d is trib u tio n o f public and p riv a te c o sts an d b e n e fits of
inform ation in an oligopoly m arket is d ifficu lt to a s s ig n .

T h is stu d y

a rg u e s th a t th e cost of inform ation for th e firm is relativ ely low an d
th e p u blic cost o f inform ation is rela tiv e ly high in such a s tr u c tu r e .
T he p u blic b e n e fits o f m arket inform ation sh ift from r e tu r n s to
facilitation of m arket coordination to r e tu r n s to p u blic policy and
re g u la to ry program s a s one moves from p u re ly com petitive m arkets
tow ard m onopoly.

Within th e M ichigan p ro ce ssed potato in d u s tr y ,

sim ply p ro v id in g more inform ation will not su b sta n tia lly im prove
m arket perform ance nor facilitate public policy in th e se n se th a t
larg e b e n efits would r e s u lt.
Elem ents o f m arket procurem ent c o n d u ct, risk m anagem ent p ra c ­
tic es and s ta n d a rd o p e ra tin g p ro c e d u re s impact m arket inform ation.
G en erally, th e firm attem p ts to red u c e its ris k by em ploying any
num ber o f th e above elem ents of b e h av io r.

W henever a m arketing

p ra c tic e becomes "too r is k y ," th e firm avoids th is a c tiv ity by sh iftin g
it to a n o th e r m arket p a rtic ip a n t.
T h is s tu d y concluded w ith im plications to th e following a re a s of
c o n c e rn :

recom m endations to public sta tistic a l a g en cies, th e u se fu l­

n e ss an d lim itations o f th e inform ation system paradigm a s a fram ew ork
in te g ra te d w ith o th e r bodies o f th e o ry , and th e re s e a rc h agenda fo r
a g ric u ltu ra l econom ists.

I, d o n 't, feel no, way, tire d —
Come too far from where I sta rte d from.
Nobody told me, the road would be easy.
I don't believe, he brought me th is fa r, to leave me.

ii

ACKNOWLEDGEMENTS

In completing th is stu d y , I have benefited immensely from th e
experience and knowledge of m any.

P rofessors John F e rris, Anthony

Koo, Tom P ierson, and Don Ricks serv ed on my g rad u a te committee
and provided invaluable in sig h ts and guidance d u rin g both th e
w riting of th e d isse rtatio n and th ro u g h o u t my g rad u a te s tu d y .

I

wish to thank D rs. L arry C onnor, Les M anderscheid and Harold Riley,
of th e D epartm ent o f A gricultural Economics, for th e ir unw avering
su p p o rt th ro u g h o u t my g ra d u a te stu d y .
Dr. James B onnen, my major p ro fesso r, d e serv e s a special recog­
nition for his u n tirin g th o ro u g h n ess, th o u g h tfu ln e ss, and devotion
to scholarly w ork.

D uring th e y e a rs of my g ra d u a te stu d y , he has

always maintained an open door. More im portantly, he m aintained an
open mind; many of my problem s became his problem s.

His warmth

and flexibility made my g ra d u a te stu d y a pleasu re as well as an
intellectual experience.
Several governm ental agencies a re also due recognition.

The

Economics and S ta tistics Service of th e U .S . D epartm ent of A g ricu ltu re
provided financial su p p o rt for th is stu d y .

I would like to th an k th e

Michigan A gricultural R eporting S ervice for th e ir cooperation in
supplying information a t several critical points in th is stu d y .
The stu d y would not have been possible without th e help of
th e Michigan potato in d u s try .

Special th an k s a re due Mr. Roy K aschyk,

Executive D irector of th e Michigan Potato In d u stry Commission, who

in tro d u ced me to many members o f th e in d u s try , and got o u r work
o ff to a g re a t s t a r t.

I would also like to acknow ledge th e gracious

a ssista n c e o f M r. L arry Je n se n , Sales M anager o f th e C hief Wabasis
Potato Grower C ooperative, who also introduced me to many in d u stry
p a rtic ip a n ts .

I am especially indebted for th e p a tien t cooperation of

M ichigan's p ro ce ssin g potato p lan t m anagers, b u y e rs , and b ro k e rs
who gave g en ero u sly of th e ir time for personal in terv iew s. Many of
them w ere gracious enough to p a rtic ip a te in a second interview session
when I found it n e c e ssa ry to obtain a c le a re r u n d e rsta n d in g and
additional inform ation.
Special th a n k s a re due th o se who provided clerical a ssista n ce for
th is re s e a rc h .

My g ra titu d e goes to Debbie A ndrew s and Lucy Wells

who ty p e d th e firs t d ra ft of th e d isse rta tio n .

1 would like especially

to th a n k C athy Cooke who ch eerfu lly and carefu lly ty p e d th e final
d r a f t.
To th e late D r. Hezekiah Jack so n , form er Dean o f th e College of
A g ric u ltu re a t S o u th ern U n iv e rsity , I wish to e x p re ss my appreciation
fo r his unfailing s u p p o rt and encouragem ent.
Finally, I wish to e x te n d a sin c ere th a n k s to my fam ily.
wife, B e rn ita , who provided th e su p p o rt and u n d e rs ta n d in g .

To my
To my

p a re n ts , R uth and S h eliy , who gave th e ir a ll. And to my b ro th e rs
and s is te r whose guidance and su p p o rt were a so u rce of s tre n g th and
in sp iratio n .

iv

TABLE OF CONTENTS
C hapter

Page

LIST OF TABLES

vii

LIST OF FIGURES

viii

I. INTRODUCTION
A.
B.
C.
D.
E.
F.
C.
H.
II.

III.

1

Background
Statistical Obsolescence
T he Potato Processing In d u stry
The Processed Potato In d u stry :
Implications for Research
Problem Statem ent
Objectives
Design of Study and Data Collection
Plan of Study

1
2
3
7
11
13
14
19

INFORMATION SYSTEMS ANDTHE ECONOMICS OF
INFORMATION: CONCEPTUAL FRAMEWORK
AND THEORY

21

A. Introduction
B. Information System s Paradigm
C. Theoretical C oncerns in th e Economics
of Information
D. Market S tru c tu re E ffects on th e C osts
and Benefits of Information
E. Market S tru c tu re Analysis and
Information—A S ynthesis
F. A Research Framework

21
21
24

A REVIEW OF THE METHODOLOGICAL APPROACHES

44

A. Introduction
B. Net Social Benefit
C. Pragmatic U ser's Approach
D. Market S tru c tu re , Pricing Institu tio n s,
and Information
E. Market Performance and Information
F. Summary

44
44
46
50

v

28
34
40

58
61

C hapter

Page

IV. THE MICHIGAN PROCESSED POTATO INDUSTRY, THE
FIRM'S DECISION ENVIRONMENT, AND SUPPORTING
INFORMATION SYSTEMS: DESCRIPTIVE RESULTS

62

A. Introduction
B. The
Michigan Processed Potato In d u stry
1. Market S tru c tu re
2. Procurem ent Conduct
C. The
S upporting Information Systems
D. The
Firm Decision Environment
E. T he
Behavior of th e Firm as an
A daptive Institution

62
62
62
75
87
91
97

V. AN EVALUATION OFINFORMATION AGAINST
PROCESSOR'S DECISIONS, MARKET STRUCTURE
AND FIRM BEHAVIOR

104

A.
B.

Introduction
T ypes of Information Used by Potato Processors
in Making M arketing Decisions
C. Sources of information in Decision Making
D. U sefulness of Price Information in Specific
Decisions Made by Potato Processors
E. Information and Market S tru c tu re
1. T ypes of Information Across Firm Type
2. Sources of Information A cross Firm Type
3. Specific Decisions A cross Firm T ype
4. Size o f Firm and M arket Information
5. Firm Size and Source of Information
6. Size of Firms and Specific Decision
F. Implications of Firm Behavior for Market
Information System s
1. C ontracting
2. Pricing Behavior and S trateg y
3. Quality Control Rules
4. Risk Management Practices

VI. SUMMARY, CONCLUSIONS ANDRECOMMENDATIONS
FOR FUTURE RESEARCH
A.
B.
C.
D.
E.
F.

General Conclusions
Market S tru c tu re , Procurem ent Behavior
and Information: The R esults
Implication for Public Reporting System
A ppraisal of th e Information System
Paradigm : Methodological Implications
Implications for A gricultural Economists
F u rth e r R esearch

104
106
109
112
115
116
118
120
120
123
125
125
128
130
133
135
139
139
147
152
154
159
161

APPENDICES

163

BIBLIOGRAPHY

177
vi

LIST OF TABLES

T able
1.1

Potato P rocessing Plant Locations in th e U nited S ta te s
By R egions, 1972

4.1 Number of Potato Processing
P lants in Michigan
4.2 A verage O u tp u t p e r P rocessing
P lan t, 1980
4.3 Number of P roducts P rocessed p e r P lant, 1980
4 .4 S h a re of Total Raw P roduct P rocured Within
Specified D istances from Michigan Potato
Processing P la n ts, 1980
4.5 O perational A sp ects of E xchange
4.6 T y p e o f B u y e rs for P ro c esso r's O u tp u t, 1980
4.7 Kinds of P rices C o n tracted fo r by P ro cesso rs
4 .8 P ro c esso rs' A ttitu d e s Tow ard Inform ation
5.1

U sefulness of V arious T y p es o f Information

5.2 U sefulness of S ources of P rice Inform ation
in Decision M aking, All P ro cesso rs
5.3 U sefulness of P rice Data fo r V arious
D ecisions, All P ro cesso rs
5 .4 A verage R anking of V arious T ypes of
Inform ation A cross Firm T ype
5.5 A verage R anking of S o u rces of
Price Data A cross Firm T y p e
5.6 A verage R anking o f Price Data for
V arious Decisions A cross Firm T y p e
5.7 A verage R anking o f V arious T y p es
of Inform ation A cross Firm Size
5.8 A verage R anking o f S o u rces of
P rice Data by Firm Size
5 .9 A verage R anking of Price Data fo r
V arious Decisions A cross Firm Size

L IST OF FIGURES

F ig u re
1.1 Major M arketing C hannels fo r
Potatoes and Potato P ro d u c ts
2.1 An Inform ation System
2.2 M arket Inform ation and th e I/O Paradigm
2.3 M arket S tr u c tu r e A nalysis and Inform ation
4.1 T h e S u p p o rtin g Inform ation S y stem s in th e
M ichigan P ro cessed Potato In d u s try
5.1 T h e Firm 's Decision P ro cess an d E xpected
P robability D istrib u tio n of F u tu re
Commodity P ric es

CHAPTER I
INTRODUCTION

A.

Background
In recent y ears problems have engendered growing concerns

about various aspects of publicly provided sta tistic s. T hese con­
c ern s a re ex p ressed by m arket p articip an ts, re se a rc h e rs, and
governm ent officials who use or provide these sta tistic s. Who do
o u r statistical program s benefit? What are th e relevant aspects
of the economy o r a particu lar m arket which should be monitored?
How should th e statistical program s be supported and managed given
th e n a tu re o f th e beneficiaries and the value which the statistics
produce?
Several developments have led to an u p su rg e of in te rest in
data and information system s: a) costs of information and information
system s have risen g re a tly ; b) income distributional impacts of
differently stru c tu re d information system s have begun to be recog­
nized; c) th e re is a growing realization th at o u r ability to con­
ceptualize often is limited by d a ta ; and d) related to th e above, th ere
is an expanding aw areness th at d uring the past decade our profession
may have relied too heavily on deductive analysis without proper
concern for th e relevance of the data base (E isg ru b e r). Two funda­
mental problems confront research on data and information system s:
(1) various forms of statistical obsolescence, and (2) th e lack of a
proven theory and methodology.

2

B. S tatistical Obsolescence
In a changing world, th e revision of data and o f information
system s is not a one-tim e or occasional adjustm ent; it must become
a continuous ongoing process (D unn).

Dunn d e scrib es th e demands

on th e system as increasingly for information in a "learning or
developmental m ode." T his is especially c h arac teristic of policy
information system s.
T he notion of statistical obsolescence is also germ ane to the
public a g ricu ltu ral information system . T he AAEA Economic
S ta tistics Committee observed th a t a major c u rre n t problem of o u r
ag ric u ltu ral d ata system is one of conceptual obsolescence.

But

e rr o r s in data production a re not limited to conceptual problem s;
operationalization and m easurem ent problems also have implications
for th e reliability of data (B onnen, 1975, p. 754; and Riem enschneider,
p . 27-36).

T h u s, a major inherent problem o f o u r a g ric u ltu ral

information system is one of obsolescence, and it stems from two
so u rc es:

1) changes in th e reality being trac k ed by th e information

system , and 2) changes in th e policy agenda.
Obsolescence in a data system a rise s when th e re is a failure
to conceptualize, operationalize and m easure a concept accurately
a fte r a fundam ental change occurs in th e economic s tru c tu r e and
organization of th e food system . T he same failures can affect th e
analytical fram eworks in which th a t d ata a re u se d .

T hese s tru c ­

tu ral changes a re responsible for some of th e c u rre n t criticism
and p re s s u re on a g ricu ltu ral data system s.

O bsolescence in an inform ation system also a rise s when th e
n a tu re of th e public and p riv a te policy agenda changes (B onnen, 1975,
p . 754).

For exam ple, th e a g ric u ltu ra l policy agenda has continued

to ch ange and ex p an d to a d d re s s such problem s as ru ra l developm ent,
a g rib u sin e ss in te r e s ts , environm ental d eg ra d atio n , n u tritio n
policy and world h u n g e r.

T hese broad a re a s of public policy

affecting a g ric u ltu re hav e not only c re ate d new dem ands for d ata
and inform ation system s b u t th e policy conflicts have also ex erted
p re s s u re on o u r a g ric u ltu ra l sta tistic a l agencies to maintain objec­
tiv ity in th e m idst of com peting social and political e n d s.
H istorically, th e e a rlie st governm ent investm ents in a g ric u ltu ral
inform ation a ro se o u t of a national a g ric u ltu ra l m arketing policy which
attem pted to im prove m icro-efficiency th ro u g h im proving p riv ate
m arket decision m aking.

Today many would a g re e th a t th e rationale

by which m arket re p o rtin g was added as a governm ent function has been
o b sc u red by th e p a ssa g e of tim e.

While some of th e a p p a re n t deficiencies

in th e p re s e n t m arket inform ation system a p p ea r to be rea l, th ey do
not invalidate th e public policy need for m arket information so much
a s th e s e deficiencies s u g g e st th a t d iffe re n t roles for public infor­
mation system s a re evo lv in g .

Many problem s of th e public informa­

tion can be b e s t exam ined w ithin m arkets th a t have undergone rapid
s tru c tu ra l c h a n g e s.

T he p ro cessed potato in d u stry is a prime

exam ple w here many o f th e new er problem s for a g ric u ltu ra l d a ta
and within inform ation system s a re clearly illu stra te d .
C.

T he Potato P ro cessin g In d u stry
T his section d e sc rib e s some of th e economic c h a ra c te ristic s of

th e U .S . potato in d u s try .

T h e d iscussion includes th e following

to p ic s:

p ro d u ctio n an d consum ption tr e n d s , common m ark e tin g

c h a n n e ls , economic c o n c e n tra tio n , a n d ex ch a n g e m echanism s.
To place th e po tato p ro c e ssin g in d u s try into p e rs p e c tiv e , it is
h elp ful to b eg in by b rie fly d e sc rib in g th e e n tir e p otato m ark etin g
sy ste m .

S in ce p e r a c re y ie ld s have in c re a se d o v e r th e la st few

d e c a d e s, and p e r cap ita consum ption rem ained fa irly c o n s ta n t, th e
to ta l a c re a g e n eeded to p ro d u ce th e n a tio n 's p o tato su p p ly has
fallen from 2 .8 million in 1940 to 1.4 million in 1976 (S u lliv a n ).

When

ta k e n on an o u tp u t b a s is , in 1979 U nited S ta te s g ro w e rs p ro d u ce d
348.4 million h u n d re d w e ig h t o f p o tato es com pared to 226.2 million
h u n d re d w e ig h t p ro d u ce d in 1940.
A tr e n d tow ard regional specializatio n a n d , s u b s e q u e n tly , economic
co n c e n tra tio n is em erging in commercial potato p ro d u c tio n .

The

W estern R egion— Idaho, W ashington, O reg o n , an d C alifo rn ia—a c c o u n ts
fo r n e a rly h alf o f an n u al to tal po tato p ro d u c tio n .

T h e N o rth e a s te rn

R egion, w hich in clu d es th e "p ro c e ssin g s ta te s " —M aine, New Y ork
a n d P e n n sy lv a n ia —a c c o u n ts fo r n e a rly 25 p e rc e n t o f th e an n u al
p o tato s u p p ly .

T h e West N o rth C e n tra l re g io n , in w hich N orth

D akota a n d M innesota lead in p ro d u c tio n , ra n k s th ir d in commercial
im p o rtan ce.

M ichigan is in th e E ast N orth C e n tra l region a n d ra n k s

te n th among th e s ta te s in p o tato p ro d u c tio n .
T h e regio n alizatio n in p ro d u ctio n c o rre la te s in p a r t w ith re c e n t
in d u s try tr e n d s in c o n su m p tio n .

With p e r c ap ita consum ption o f

f r e s h p o tato es d e c lin in g , f u tu r e in d u s try e x p an sio n is likely to
ta k e place in th e p ro c e ss e d p ro d u c t.

In 1978 fro ze n p o tato p ro ­

d u c ts acc o u n te d fo r a p p ro x im ately 58 p e rc e n t o f th e m ark e t fo r
p ro c e sse d p o ta to e s , c h ip s fo r 23 p e rc e n t, d e h y d ra te d p ro d u c ts for
a b o u t 15 p e rc e n t an d c an n e d p ro d u c ts fo r a b o u t th r e e p e rc e n t (U SD A ).

T he potato in d u stry has two major m arketing com ponents:
and p rocessed.

fresh

Potatoes re p re se n t th e larg e st fre sh vegetable

cro p grown in th e United S ta te s.

The significant grow th in th e

potato in d u stry which has taken place since 1970 has come prim arily
in th e expanded m arketing oppo rtu n ities for processed potato
p ro d u ct. Figure 1.1 illu stra te s th e common m arketing channels
which potato p ro d u cers freq u en tly u se .
Potatoes grown for fre sh m arket a re delivered d irectly from th e
field to th e retail m arket by th e grow er.

T he grow ers freq u en tly

perform th e functions of w ashing, g ra d in g , packing, and shipping
th e potatoes to retail o u tlets o r altern ativ ely th e grow er may
d eliv er his produce to sh ip p e rs who in tu rn perform th e m arketing
fu n ctions.

The grow er or sh ip p e r may deliv er potatoes to rem anu­

fa c tu re rs in u rb an m arkets who tra d e with reta ile rs and institutional
food establishm ents via b ro k e rs.
C o n tracts p resen tly facilitate a small p ercen tag e of th e exchange
between p ro d u cers and reta ile rs (especially th e large chain s to r e s ) .
From th e p ersp ectiv e o f both p a rtie s, co n tractin g can have a t least
two d esirab le fe a tu re s:

1) it establish es a p ric e , and 2) it

specifies a stab le q u a n tity .
Potatoes for processing a re grown in many a reas of th e United
S ta te s bu t prim arily in th e N ortheast and West reg io n s.

T he pro­

cessing in d u stry is reso u rce oriented so th a t p lan ts a re sc attere d
th ro u g h o u t production a re a s with p lant concentration closely
c o rrelated with a reas of high crop d e n sity .

G enerally, plan ts

obtain th e ir supplies from local a reas in o rd e r to minimize p ro cu re ­
ment c o sts.

G row ers deal with five ty p e s of p ro cesso r firm s:

1) flour and sta rc h p ro ce sso rs, 2) d e h y d ra to rs, 3) frozen produce

Industrial
Users

_Z c
Shippers
PRIMARY

Repacker

Flour and Starch
Processors

PRODUCERS

Wholesalers

Retailers
(Institutional
and
Food
Stores)

CONSUMERS

Dehydrators
Frozen Product
Processors
Chippers
Source:

Food
Manufacturers

K.H. Harrison, “The Michigan Potato Industry:

A Market Analysis.11

April 1976.

Figure 1.1 Major Marketing Channels for
Potatoes and Potato Products

p ro c e ss o rs, 4) c h ip p e rs , and 5) c a n n e rs .

D epending on th e region

and th e ty p e of firm , one of fo u r m ethods a re u sed in e x c h a n g e:
1) c o n tra c t, 2) g ro u p b a rg a in in g , 3) ex clu siv e ag en c y b a rg a in in g ,
and 4) v e rtic a l in te rac tio n .
Beyond th e p ro ce sso r level, p ro cessed p o tato es flow into th e
bro ad and complex m arket channels for food.

In stitu tio n a l b u y e rs

an d o th e r food m anufacturing com panies a re p ro c e s s o rs ' c u sto m e rs,
b u t th e dom inant o u tle t is th e g ro c e ry re ta ile r who may b u y d ire c tly
( i . e . , th e targ e food chain) from th e p ro c e sso r firm o r in d ire ctly
th ro u g h w holesalers.
T he num ber and location o f potato p ro ce ssin g p la n ts a re stro n g ly
influenced by p roduction a re a s and population c e n te r s .
has th e la rg e st num ber of potato p ro c e ssin g p la n ts .
o f p la n t, th e West leads in p lan ts for fro zen

T h e West

Also by ty p e

p ro d u c t, d e h y d ra te d

p ro d u c ts , and has a slig h t lead on th e Midwest in num ber o f can n in g
p la n ts .

(See T able 1 .1 ).

Potato c h ip p e rs show a somewhat d iffe re n t g eo g ra p h ica l d is p e r­
sion th a n o th e r p ro cessin g firm s.

T h e N o rth ea st a c c o u n ts fo r th e

la rg e s t num ber of c h ip p e rs a lth o u g h c h ip p e rs a r e d is p e rs e d fairly
ev en ly in all reg io n s.

B ecause of d istrib u tio n c o s t, c h ip p e rs te n d

to locate n e a r th e final m ark et—larg e consum er a re a s .
D.

T h e P rocessed Potato In d u s try :
Im plications fo r R esearch
T h is section o f th e p a p e r will a d d re s s th e q u e stio n s o f why

th is s u b s e c to r and m arket level a re th e focus of th e re s e a rc h an d
w hat a re th e implications o f th e s tru c tu r a l c h a n g e s in th e p ro ce ssed
p o tato in d u s try fo r public inform ation sy ste m s.

Table 1.1 Potato Processing Plant Locations in the United States
By Regions, 1972

Region1

Freezers

D ehydrators

Chippers

Canners

Starch
and
Flour

Total

Northeast

11

3

43

11

11

79

West

34

27

36

14

15

126

South

0

0

33

11

1

45

Midwest

7

3

28

13

2

53

52

33

140

49

29

303

TOTAL

Source: K.M. H arrison, The Michigan Potato In d u stry : A Market A nalysis. A gricultural
Economics Report No. 294, Department of A gricultural Economics Michigan
State U niversity, April 1976.
The N ortheast region includes Maine, New Je rse y , New York, Pennsylvania.
The West includes California, Colorado, Idaho, North Dakota, Oregon, Washington.
The South includes Alabama, Florida, North Carolina, T exas, Virginia. The Midwest
includes Michigan, Minnesota, Wisconsin.

T his stu d y focuses on the Michigan processed potato in d u stry
for several reasons.

F irst, previous research done a t Michigan

S tate (Klein) will allow th is stu d y to expand o u r knowledge on data
and information system s in vegetable m arkets. Second, unlike many
vegetables, th e single product (main commodity) c h ara c te ristic of
th e processed potato in d u stry allows one to follow th e pro d u ct
th ro u g h its m arket channels a n d , to th e e x te n t m arket information
is co rrelated with product flow, th e re se a rc h e r can more readily
examine th e relationships between m arket c h a ra c te ristic s and
information.

L astly, given time and resource c o n stra in ts and the

complexity in defining a p p ro p riate research objectives for th is stu d y ,
th e re is an advantage in an in-d ep th case stu d y th a t implements and
te s ts a problem definition and methodology before try in g to apply
it on a broader scale ( e .g ., regional o r national m ark e t).
Beyond th e above cited reasons for th is research lies a more
fundam ental one—th e need to maintain viable and com petitive
exchange mechanisms in ag ricu ltu ral m ark ets. T he questio n a ris e s ,
what can public statistical agencies c o n trib u te to th is end? H eretofore,
th e open exchange mechanism has g en erated adequate information
fo r th e system 's p a rtic ip a n ts.

B ut th e displacem ent o f traditional

"open m arket" tran sac tio n s, usually auction ty p e m ark ets, by o th er
exchange arrangem ents req u ire s more than th e usual amount of e ffo rt,
if not a new focus in our research and data collection in stitu tio n s,
if ad equate information is to be available for m onitoring m arket
developm ents and meeting public and p riv ate decision needs in the
food and fib er secto r.

10

At th is level in th e p ro cessed potato in d u s try , s tru c tu ra l c h a ra c ­
te ris tic s play an im portant role in d is trib u tin g tra d e inform ation.
S tru c tu ra l c h a ra c te ristic s of a m arket can be e x p re sse d in several
dim ensions.

For th e p u rp o se o f th is s tu d y , th re e elem ents of m arket

s tr u c tu re a re o f in te re s t:

1) size and num ber of firm s, 2) economic

c o n ce n tra tio n , and 3) exchange m echanism s.

T hey wilt be discu ssed

in th e c o n tex t of th e p ro cessed potato in d u s try with implications
fo r d ata and for inform ation sy stem s.
The size and num ber of firm s a re im portant elem ents to co n sid er
in evaluating th e inform ational n eed s of an in d u s try .

Potato p ro ­

cessin g firm s ran g e in size from su b sid ia rie s of large d iv ersified
food c o rp o ratio n s to small local p riv a te firm s.

Also th e num ber and

location of p ro ce ssin g p lan ts a re stro n g ly influenced by th e location
of produ ction a re a s and th e location and d istrib u tio n of th e consum ing
population c e n te rs .

From th e d iscu ssio n o f th e economics of infor­

mation one can ded u ce th a t th e dem and fo r inform ation wilt v ary
a cro ss firm size.
Definition o f th e d e g re e o f c o n ce n tra tio n w ithin an in d u stry is
always in tu r n d e p e n d e n t upon a d efinition of th e re le v an t m arket.
Since a sem i-p erish ab ie p ro d u c t like potatoes is capable of national
d istrib u tio n , p lan ts an d firm s located in an y region a re potential
com petitors and local m arket concentration has little applicability
to sales of p ro cessed p o tato es.

For th e most p a rt, concentration

in th e p ro cessed potato in d u s try has relev an ce for regional and
national m ark ets.

B ut fo r th e p rocurem ent of raw m aterials, th e

local m arket is re le v a n t.

B ecause of th e lack of d a ta and th e con­

ceptual problem of th e n a tu re of c o n cen tratio n in th e local p ro ce sso r

11

p ro c u re m e n t m a rk e t, it is d iffic u lt to m ake a firm estim ate of m ark et
c o n c e n tra tio n .

It is , h o w ev er, g e n e ra lly a cc ep ted w ithin th e

in d u s tr y th a t c o n c e n tra tio n in th e p ro c u re m e n t o f raw p ro d u c t is
h ig h .
E x ch an g e betw een p ro c e sse d p otato g ro w e rs and p ro c e ss in g firm s
is , fo r th e m ost p a r t , accom plished by some form o f w ritte n c o n tr a c t.
E stim ates by in d u s try p erso n n el in d ic a te th a t c o n tra c t p ro d u ctio n
a c c o u n ts fo r betw een 40 a n d 50 p e rc e n t o f p ro c e ss e d p otato p ro d u c ­
tion th ro u g h o u t th e U nited S ta te s .

M ighell a n d H oofnagle estim ated

th a t 40 p e rc e n t o f p ro c e sse d p o ta to e s w ere p ro d u ce d u n d e r p ro d u c tio n
c o n tr a c ts in 1960 while by 1970 45 p e rc e n t of p ro c e sse d p o tato es
w ere e x c h a n g e d u n d e r c o n tr a c t.
P a rtly in re s p o n se to th e e ffe c ts o f th e h ig h c o n c e n tra tio n in
p ro c e s s o r p ro c u re m e n t o f raw p ro d u c t, p o tato g ro w e rs h a v e tu r n e d
to w ard a lte rn a tiv e e x c h a n g e m echanism s.

C ro u p b a rg a in in g by

v o lu n ta ry c o o p e ra tiv e s an d e x c lu siv e a g e n t c o o p e ra tiv e s h av e been
o rg a n iz e d a s a m eans to c o u n te rb a la n c e w hat seem s to g ro w e rs to be
th e s u b s ta n tia l m ark e t pow er o f p r o c e s s o r - b u y e r s .

A n o th e r fa c e t o f

p o tato p ro c e s s o r p ro cu re m en t m ethods c o n c e rn s th e e x te n t to w hich
p ro c e s s o rs h a v e in te g ra te d v e rtic a lly w ith g ro w e rs (a n d v ice v e r s a ) .
E stim ates by in d u s try p e rso n n el in d ic ate th a t v e rtic a l in te g ra tio n
a cc o u n te d fo r 30 p e rc e n t o f th e p o ta to o u tp u t in 1960 a n d 25 p e rc e n t
in 1970 (Migheil a n d H oofnagle).
E.

Problem S tatem en t
A m ajor issu e re la te d to th e d e sig n o f m arket inform ation sy ste m s

is th e c o n c e rn r e g is te re d by p u b lic a d m in istra tio n an d s ta tis tic ia n s
fo r th e gro w in g problem s o f co llectin g d a ta a t th e p r o d u c e r - f ir s t

12

handler level in most fru it and vegetable m arkets.

It is believed

th a t many o f th e problems in data used for public and p riv ate
decision making a re caused by changes in m arket s tru c tu re and
exchange mechanisms a t th is m arket level. T h is is especially tru e of
price d a ta .

T hese changes in th e vegetable m arkets have frequently

forced th e locus of decisions and hence, p rice and o th er transaction
information to th e nex t m arket level, th e processed m arket level,
w here q uestions o f p ro p erty rig h ts to information become most
acu te.

This resea rch has a prim ary b u t not exclusive in te re st in

price information problem s.
T he concern of th is resea rch is not so much with specific problems
within th e processed potato in d u stry as much as with th e general
issue of statistical obsolescence, an in h eren t problem o f all informa­
tion system s, and th e implications it has for th e n a tu re and design
of m arket related public information In a g ric u ltu re —in th is case for
th e Michigan processed potato in d u s try .

Given th e changing s tr u c ­

tu ral c h a rac teristics of th e processed potato in d u stry and th e changing
agenda of policy and management issu e s, th e f irs t problem is one of
obsolescence as it now impacts th e data system and related an aly sis.
While we do not s ta r t with any specific evidence of failures in
decision within th e processed potato in d u s try , th e basic prem ise of
th is stu d y is th a t all failures in decision making have th e ir origins
in some ty p e of information e rro rs .

T his follows from th e information

system paradigm in which th e decision m aker and his preconceptions
and behavior in using d ata and analysis a re internal to th e informa­
tion system .

As a general m atter, it a p p ea rs th a t a hig h er proportion

of e rro rs a rise out of m istakes in th e analytical process than in data

13

collection and even a h ig h er proportion of information failure in any
system is a ttrib u ta b le to decision m akers (B onnen, 1979, p . 16).
T h ere fo re , a n o th e r ran g e of problem s a rise o u t of th e behavior of
decision m akers.
A g ricu ltu ral commodity m arkets have grow n in com plexity and
become more c o n c e n tra te d —i . e . , less atom istic.

T he difficulties in

m arkets a re more fre q u e n tly "ill s tru c tu re d " issues of change w here
o n e 's g re a te s t difficu lty lies in defining th e problem .

In approaching

such problem s, inform ation needs continue to ch an g e as learning about
th e problem tak e s place.
in q u iry .

T his involves a developm ental mode of

T h e re fo re , em phasis has to be placed on developing and

implementing a m ethodology for exam ining and evaluating th e p ro cessed
potato information sy stem s.

T he fin d in g s h e re may have implications

fo r d ata and inform ation system s o p e ra tin g in o th e r vegetable m arkets
as well as for inform ation system s in g en eral.
F.

O bjectives
T h is stu d y has two broad goals.

T he f ir s t is to d e scrib e one

ty p e of problem , obsolescence, as It rela te s to th e d ata system s and
as It im pacts th e decision making p ro ce sses of p lan t m anagers in th e
Michigan p ro cessed potato in d u s try .

T he second major goal is to

implement and develop a m ethodology for evaluating information s y s ­
tems o p e ra tin g in th e Michigan p ro cessed potato in d u s try .
Several objectives a re related to th e above s tu d y 's two goals:
1.

To d e sc rib e th e m arket s tru c tu re s and operational a sp e c ts

of ex ch an g e at th e g ro w e r-p ro c e sso r level in th e Michigan p ro cessed
potato in d u s try .

14

2. To describe the publicly supported information services,
th e private information services and the informal information system
o perating within th e Michigan processed potato in d u stry .
3. To identify important m arketing decisions made by potato
processing firms.
4. To evaluate the information system supporting these decisions
by relating specific marketing decisions to specific ty p es and sources
of d a ta.
5. To suggest improvements in th e publicly supported sta tis­
tical services provided by the Michigan processed potato in d u stry .
6. To te s t th e applicability of th e information system paradigm
and to revise or extend it where possible.
From objectives 1 and 2, it should be possible to reach conclusions
about th e n a tu re of obsolescence, if any, in th e data system . The
n a tu re of obsolescence impacting th e m anager's decision process can
be described from objectives 3 and 4. Taken to g e th e r, suggestions
on improving th e public data system can be made.
C.

Design of Study and Data Collection
The design o f.th is study grows logically out of th e information

system paradigm . The Michigan potato processing in d u stry will be
used as a case stu d y .

Because of th e general n a tu re of th e problem,

most of the study will be d escrip tiv e.
The stu d y is broken down into th re e phases.

The firs t phase of

the stu dy describes the stru c tu ra l ch aracteristics and procurem ent
conduct of the Michigan processed potato in d u stry .

Given th e premise

15

th a t th e n a tu re of information and of th e decision m aker's needs for
information changes over d ifferen t m arket s tr u c tu re s , a description
of th e m arket s tru c tu re may su g g est something about d istrib u tio n of
co sts and needs for d ifferen t kinds of information among various
m arket p a rtic ip a n ts. S tru c tu ra l ch arac teristics may also be related
to th e question of what a re public v e rsu s p riv ate needs for and
rig h ts to various ty p es of information in a m arket.

Dimensions of

procurem ent conduct may also have implications for m arket infor­
mation.
S u b seq u en t phases of th e stu d y ad h ere more closely with th e
information system paradigm . T he second phase identified m anagers of
Michigan processed potato plants as a set of im portant decision m akers,
th e ir u ses of inform ation, and th e ir sources o f inform ation. T he
decision m akers a n d , in some cases o th e r members of th e firm ( i .e .,
a n a ly sts, b u y e rs ), were asked to evaluate th e so u rce of information
with resp ect to a specific decision use.

Note th a t th is p ro ced u re

s ta r ts with th e decision m aker. A lternatively, one might have sta rte d
with th e developm ent of specific concepts, th e ir operationalization and
m easurem ent, and th e n , pose th e question of th e ir use and implication
for th e design o f the inform ation.

Here th e norm ative position is

taken allowing th e decision m akers to identify a data se ries o r con­
cep t th a t is useful to his decision making p ro cess.

T his approach

has th e merit of covering alt sources of information fo r decision making
while, at th e same time, allowing for evaluation.

Also, th is phase of

th e stu d y included questions involving a preselected set of d ata
sources for th e decision maker to evaluate in th e context of a p re ­
selected se t of m arketing decisions.

As a re s u lt, d e sp ite its open

ended n a tu re , some g re a te r s tru c tu re can be provided to th is phase
of th e s tu d y .

16

Phase th re e of th e stu d y identified and d e scrib e d th e d ata s y s ­
tems in th e m ark et.

An a p rio ri classification of d ata system s would

include th e public d a ta so u rc e s, p riv a te m arket d ata so u rc e s, and th e
informal communication system m aintained by m arket p a rtic ip a n ts .

By

sta rtin g with th e decision m aker, a more co n crete and complete
specification o f th e d a ta system s can be m ade.
T h e ta r g e t g ro u p identified in th is stu d y is Michigan potato p ro ­
cessin g firm s.

H arrison re p o rte d in 1974 th a t th e re w ere tw e n ty -th re e

firm s in th e s ta te .

A c u r r e n t listin g of p ro cessin g firm s in th e s ta te

was obtained from th e M ichigan Potato Commission.
Potato p ro cessin g firm s ra n g e in size from su b sid ia rie s of larg e
d iv ersified food co rp o ratio n s to small local p riv a te firm s.

T he economic

th eo ry of inform ation su g g e sts th a t la rg e r firm s have an informational
a d v an tag e rela tiv e to sm aller firm s since la rg e firm s can oftentim es
re c a p tu re a r e tu r n on th e ir in v estm en ts in information when small
firms c an n o t.

M oreover, th e la rg e r firm s may p o ssess a more sophis­

ticated analytical capability an d th u s have more ability to u se and
u n d e rsta n d th e same inform ation th a n sm aller firm s.

T h e re fo re , size

of firm may be an im portant c h a ra c te ris tic to co n sid er in evalu atin g
th e inform ational needs of th e in d u s try .
A nother c h a ra c te ris tic o f th e ta r g e t population is ty p e of firm .
The 1976 in d u stry s u rv e y conducted by H arrison indicated th a t
Michigan potato p ro ce ssin g firm s w ere d is trib u te d by ty p e as follows:
th re e fre e z e rs , fifteen c h ip p e rs , fo u r c a n n e rs , and one d e h y d ra to r.
One can ex p ect d iffe re n t p rio ritie s to be given to v ario u s so u rces and
u ses o f inform ation a c ro ss firm ty p e since th e most im portant decisions
made by d iffe re n t ty p e s of firm s may v a ry co n sid erab ly .

17

T h e m ajor d a ta n e e d s o f th e s tu d y a re :

1) s tr u c tu r a l c h a ra c ­

t e r i s t i c s , an d o p e ra tio n a l a s p e c ts o f e x c h a n g e a t th e g ro w e r-p ro c e s s o r
le v e l, a n d p ro c u re m e n t b e h a v io r of firm s in th e p ro c e sse d p o tato
in d u s tr y , 2) d e cisio n s m ade b y p ro c e ss in g firm m an ag ers a n d th e ir
u s e s o f sp e cific d a ta s e r ie s , an d 3) ty p e s of inform ation.
T h e f i r s t d a ta n eed can be o b ta in e d from se c o n d a ry s o u rc e s .

S ince

m uch o f th e lite ra tu r e on M ichigan is d a te d , se v e ra l q u e stio n s c o n c e rn in g
p r e s e n t s tr u c tu r a l an d b eh av io ral c h a r a c te r is tic s o f th e m ark e t w ere
also d ire c te d to w ard each m an a g er d u rin g th e interview p ro c e s s .
To fa c ilita te th e second an d th ir d ty p e s of d a ta n e e d s , p erso n al
in te rv ie w s w ith m an ag ers o f p ro c e ss in g p la n ts w ere c o n d u c te d .

L azer

(1971) s ta te s th a t m a rk e tin g d e cisio n s can b e cla ssified in m any w ay s.
T h ey form a sp e c tru m from th e program m ed o r h ig h ly r ig id ; ro u tin e ,
r e p e titio u s , sp e cific ty p e o f decisio n a t o n e ex tre m e to th e nonprogram m ed ,
less d e fin ite , u n k n o w n , u n c e r ta in , loosely c o n s tru c te d ty p e a t th e
o th e r.

He p o in ts o u t th a t a common c la ssific a tio n d is tin g u is h e s betw een

d e c isio n s re la te d to b ro a d o b je c tiv e s a n d th o s e th a t p e rta in to more
sp e cific g o a ls .

M ark etin g d e cisio n s may also b e c la ssifie d a c c o rd in g

to m an ag em en t's d e g re e o f c e r ta in ty o r inform ation a b o u t c h o ic es.

T h e re

a r e a t le a st two w ays o f fo rm u la tin g a n a p rio ri s e t of d e c isio n s:
1.

P re se le c t on th e b a sis o f a d e fin e d s e t o f c r ite r ia , o r

2.

O b tain th e decisio n s e t from a pilot s tu d y o f firm m an a g ers.

T h isstu d y relied p rim arily on th e fo rm er m ethod a n d v a lid a te d th is
lis t w ith e x te n sio n econom ists a n d in d u s tr y p a rtic ip a n ts .

U sing th is

d ecisio n s e t in te rv ie w s w ere d e s ig n e d to o b ta in a n ev alu atio n o f sp ecific
d a ta s o u rc e s in te rm s o f th e sp e cific d e cisio n s m ade by th e p la n t
m a n a g e rs .

18

In th is research endeavor, th e process became a learning experience.
This is particularly tru e of th e interview process. The personal in ter­
views conducted with th e various in d u stry participants ultimately
shaped and transform ed much of my thinking on both th e theoretical
asp ects of market information system s and on th e method(s) of con­
ducting th is ty p e of research .
in two se ttin g s.

The interview process was conducted

F irst, interview s with m anagers of processed potato

plants were initiated to obtain information about the stru c tu ra l charac­
teristics of the in d u stry and about th e firm 's evaluation of various
ty p es and sources of m arket information against selected m arketing
decisions.

On average, the interview s lasted about one hour. A fter

the first round of interview s were completed, it became ap p aren t that
an important aspect with direct implications for market information
was om itted—specific dimensions of firm behavior. T hanks to the
patience of my interview ees, a second round of interview s,each
lasting about fo rty -fiv e m inutes, were conducted emphasizing elements
of firm behavior as they relate to procurem ent activities of potato
p ro cessors.
The approach taken in th is stu d y is far from orthodox.

This

arises out of the n a tu re of th e problem and th e lack of a proven
theoretical framework—in effect, one is sailing in uncharted methodo­
logical w aters.
The problem of statistical obsolescence in its various forms is
difficult to analyze.

T here is no tested methodology from which to

analyze th is problem. T h u s, we approached th is study with a broad
intellectual fram ework, th e information system paradigm , as a guide
in refining the problem and developing o r identifying o th er concepts

19

and fram eworks th a t might be applicable to problems of information in
a g ric u ltu ral m arkets. T he following ch ap ter lays out th e synth esized
framework used in th is stu d y .
T his stu d y grew out of th e realization th at th e trem endous changes
in th e s tru c tu re of most fru it and vegetable m arkets have d ire c t
implications for o u r public statistical system .

It did not evolve from

any felt need e x p ressed by th e ta rg e t group in th is s tu d y , potato
p ro c e sso rs.

As a re s u lt, th e question of accessibility and cooperation

from th e m anagers of processing firms was initially a c o n ce rn .

However,

all firm m anagers and o th e r in d u stry people were most p atien t and
gen erous in giving th e ir time and cooperation.

T his stu d y would not

have been possible without th e ir help.
Ihe outcome o f th is stu d y will attem pt to say som ething about
how one goes about conducting research on a m arket information
system .

Given th e c u rre n t sta te of our knowledge, it was th o u g h t

b est to firs t focus on a ta rg e t of limited scope and with th is e x p e r­
ience su g g e st an approach th a t may be applied on a la rg e r scale.
T h ere fo re , a case stu d y of th e procurem ent side of th e Michigan
p ro cessed potato in d u stry was th e focus of th is stu d y .
H.

Plan of Study
T he rem ainder of th is stu d y is divided into five c h a p te rs .

C h ap ter II p re se n ts th e conceptual framework and th eo ries useful in
analyzing m arket information problem s.

In th is c h a p te r, several

th eo ries, including an information system paradigm , neoclassical
economic th eo ry and institutional economics a re c ritiq u e d .

T heories

o f in d u stria l organization a re incorporated and expanded into an

20

eclectic fram ew ork th a t Is applied to th e s tu d y o f inform ation u se s
in th e M ichigan p ro ce ssed potato in d u s try .
C h a p te r III s e rv e s a s review o f lite ra tu re by laying o u t fo u r
major m ethodological ap p ro a ch e s th a t h av e been u se d in analyzing
m arket inform ation sy stem s.
C h a p te r IV p re s e n ts d a ta which d e sc rib e th e th r e e c e n tra l com­
p o n en ts o f th e stu d y fram ew ork:

(1) elem ents of th e Michigan

p o tato m arket s tr u c tu r e and p ro cu rem en t c o n d u c t, (2) th e su p p o rtin g
inform ation s y s te m s ,, and (3) th e decision environm ent in which
M ichigan p otato p ro c e sso rs o p e ra te .

Most o f th e inform ation p r e ­

sen ted in th is c h a p te r was o b tain ed th ro u g h p erso n al interview s
w ith Michigan p ro ce ssed p o tato firm m an a g ers, b u y e r s , and b r o k e rs .
C h a p te r V is an an aly sis and evaluation of ty p e s a n d so u rc e s of
m arket inform ation a g ain st specific decision n e ed s of th e firm .

T h is

an aly sis is p re s e n te d a c ro ss se lec te d elem ents of m arket s tr u c tu r e .
A lso, th e c h a p te r links th e firm 's p ro cu rem en t b eh av io r (m arket
co n d u ct) w ith m arket inform ation and d ra w s im plications for th e
firm , o th e r firm s in th e m arket a n d public sta tistic a l a g en c ie s.
T he final c h a p te r sum s up th e d is s e rta tio n a n d d is c u s s e s th e
im plications fo r m arket an d nonm arket p a rtic ip a n ts and s u g g e s ts
po ssib le fu tu r e re s e a rc h .

CHAPTER II
INFORMATION SYSTEMS AND THE ECONOMICS OF INFORMATION:
CONCEPTUAL FRAMEWORK AND THEORY
A.

Introduction
T his chapter p resen ts several theories th at a re useful in

analyzing m arket information problems.
a re c ritiq u e d :

Four theoretical frameworks

(1) the information system paradigm , (2) neoclassical

economic th eo ry , (3) institutional economics, and (4) a theory of
information cost over various market stru c tu re s .

Theories of

industrial organization are integrated with concepts obtained from
th e above theoretical fram eworks, then applied to the stu d y of
information in th e Michigan processed potato in d u stry .
B.

Information Systems Paradigm
Bonnen (1975) p resen ts an information system paradigm th at

will serve as th e sta rtin g point for th is stu d y .

Although his paradigm

does not constitute a full theory of information, it does co ntribute
significantly to identification of the issues, to th e use and clarifica­
tion of terminology and perhaps more im portantly to establishing the
epistemological n a tu re of data and of information system s.

The p a ra ­

digm posits an interactive relationship between th e deductive analytic
mode of inquiry commencing from th eo ry , and th e inductive empirical
mode of inquiry based on observation.
The information system is composed of five components
rep resen tin g th e logical steps or processes by which data about
21

22

th e real world a re processed for decision making (F ig u re 2 .1 ).
a re :

T hese

1) conceptualization, 2) operationalization of concepts, 3) mea­

surem ent, 4) analysis and in te rp re ta tio n , and 5) decision making.
Within an information system a subsystem can be identified, th e
d ata system .

T he d ata system function is to re p re se n t reality

empirically by counting or m easuring some empirical phenomena
which has been broken down into a set of categories or c la sses.

The

d ata system is defined to include th e firs t th re e components of th e
la rg e r information system .
th re e possible m eanings:

In th is c o n tex t, th e reliability of data has
1) conceptual reliability, 2) reliability of

operationalization, and 3) reliability of m easurem ent (B onnen, 1975,
p . 7 5 7 ).1
T he information system u n d ersco res a useful and significant
aphorism :

data a re not inform ation.

In o th e r w ords, d ata must be

analyzed or in te rp re te d into a form which makes it relev an t for specific
decision m aking.

Following th e logical flow of th e paradigm , data

become th e p ro d u ct of th e firs t th re e com ponents.

G enerally, th e

d ata system is managed by sta tistic ia n s who have e x p e rtise in
m easuring observ ab le phenomena in th e society.

The analytical

fram ework, analysis and in te rp re ta tio n , provides additional meaning
to th e collected d a ta .

Econom ists, acco u n tan ts, policy an aly sts and

o th e r disciplines a re equipped with a se t of theoretical and analytical
fram eworks which transform d ata into various forms which finally
become information only when used in decision m aking. Although
th e information system paradigm a p p ea rs to be com partm entalized.

^Bonnen a ttrib u te s th is observation to L .V . M anderscheid.

Decision Making

Information for Decision Makers
=i
O
“I

3
o
o

3
0)
*<

m

>v,;,v.v,;.v.;.y,v,w
,w ,v.v.y//.v.v/AV£AV.y.v//AXvXvXvX
I n tn r n r a tn tm n nnrl A n n ue

Data Oulput
and Testing
of Analytical
Measurements

F ra m e w o rk

(D

3

K

Theoretical Concepts
~
j
AV.WA'

Reality
Figure 2.1 An Information System
Source:

Bonnen, J .T . "Assessm ent of th e C u rren t A gricultural Data Base: An
Information System A pproach," Survey of A gricultural Economic L iterature
Vol. 2, Q uantitative Methods in A gricultural Economics 1930s to 1970s.
George Ju d g e, et a l., e d ito rs. U niversity of Minnesota P ress,
Minneapolis, 1977, pp. 386-*107.

24

interdependency of use and of management of th e data base is the
responsibility of all involved disciplines.
Explicit to th e information system paradigm is the notion that
information attain s its value in the context of a decision. T herefore,
the criterion of use is central to settin g statistical prio rities. The
c riteria for th e design of data a re also derived from the decision uses
of th at d ata.
C. Theoretical Concerns in the Economics
o f Information
Two variables a re of fundamental importance for the decision
maker:

resources and information. Until recently, economic theory

has dealt with th e problem of resource allocation among competing
u ses, assum ing th at information is equally d istrib u te d at no cost among
all individuals of an economic system and th at all individuals possess
perfect knowledge. With th ese assum ptions, it becomes immediately
a p p arent th a t traditional economic theory does not adequately ad d ress
information problem s; they were simply assumed away. A more
specific critiq u e of th e th eo ry , suggested by Demsetz, questions a
comparison of resource allocation produced u nder a sta te of perfect
knowledge with those produced u n d er a sta te of imperfect knowledge.
Since imperfect knowledge is regarded as a disto rtio n , it becomes
difficult if not impossible to sep arate out the effect of imperfect
knowledge from the resulting conclusions of th e theory (based on
p erfect know ledge).
Some economists have attem pted to adjust for the above mentioned
problem by viewing information as an economic good or commodity
(A rrow ). And like any o th er good, it becomes subject to demand

25

and supply analysis.

But unlike traditional m arketable commodities,

information exhibits a se t of c h a ra c te ristic s th a t invalidate th e use­
fulness of a com petitive equilibrium an aly sis; information possesses
th e ch arac teristics of a public good.
In th e Sam uelson-M usgrave definition, a public good is c h arac­
terized by 1) nonrivalness, o r jointness in supply and utilization, and
2) nonexcludability.

T he firs t a ttrib u te implies th a t th e good is

equally available to all.

The second implies th a t it is impossible for

p riv ate p ro d u ce rs to ap p ro p ria te th ro u g h m arket pricing th e full
social benefits arisin g directly from production or use o f th e good.
That is to say , it is difficult to exclude from utilization of th e good
those who do not pay for it—th e so called free rid e r problem .
N onrivalness is an in herent c h a ra c te ristic of inform ation.

Arrow

comments th a t a given piece of information is by definition an
indivisible commodity, and the classical problem of allocation in th e
p resen ce of indivisibilities is a p p a re n t.

For exam ple, th e use of

information about m arket tra n sac tio n s by a p ro d u ce r is not hindered
by th e adoption of th e same knowledge by o th e r p ro d u c e rs.

In

essen ce, th e marginal cost of adding an additional u se r of information
approaches zero.

If it were zero, then optimal allocation would

obviously call for unlimited d istrib u tio n of information w ithout c o st.
N onexcludability, in c o n tra st, is not a n atural c h a ra c te ristic of
inform ation, b u t ra th e r is determ ined by institutional a rran g em en ts.
For exam ple, p aten t laws a re institutional arrangem ents th a t make a
certain kind of information excludable, th e re b y cre atin g profit
incentives for p riv ate activ ities.

Arrow points out th a t in th e

absence of such special legal p ro tectio n , th e ow ner cannot cover his

26

c o sts of selling inform ation on th e open m arket b e cau se any one p u r­
c h a se r can d e s tro y th e monopoly inasm uch as he can re -p ro d u c e th e
inform ation a t little o r no c o s t.

As a r e s u lt, it is g e n erally held

th a t a socially optimum level o f su p p ly of su c h a good can n o t be
ex p e c te d if its su p p ly is left to p riv a te firm s.
Ih e public good c h a ra c te ris tic s o f inform ation also p re s e n t a
problem on th e dem and sid e o f th e inform ation m ark e t.

A rrow

s ta te s th a t sim ilar problem s o f in d iv isib ility and u n d e rv a lu atio n
e x ist for th e u s e r s o f inform ation:
. . . t h e r e is a fundam ental parad o x in th e d eterm ination of
th e dem and for inform ation; its value to th e p u rc h a s e r is
not known u n til he h as th e inform ation. B ut th e n he has
in effe ct a c q u ire d it w ithout c o st.
T h ese problem s a re c learly se rio u s fo r th o se who w ish to use
neoclassical su p p ly -d em an d th e o ry fo r a n a ly se s o f inform ational
phenom ena.

Q uoting from Newman, M arshak s ta te s :

T h ey lead to se v e re d o u b ts co n cern in g th e optim ality of
th e inform ation m arket in its e lf an d more g e n erally to a
view th a t—when know ledge p ro d u ctio n is in tro d u c ed into
an economy th e n n e ith e r for th e simple com petitive
mechanism n o r fo r a n y sim ple m odification o f it is th e
optim ality o f equilibrium p re s e rv e d , and even th e e x iste n c e
o f equilibrium is d o u b tfu l.
Up to th is p o in t, in review ing th e lite ra tu r e , we h av e c e n te re d
th e d isc u ssio n on th e economics o f inform ation w hile g iv in g little
a tte n tio n to th e in stitu tio n a l a sp e c ts o f inform ational phenom ena.
T h is is not s u rp ris in g sin c e most of neoclassical economics is s ta tic ;
th e in stitu tio n a l s tr u c tu r e of an economy is a fixed p a ra m eter in th e
an aly sis o f re s o u rc e allocation.

A lthough a com plete tre a tm e n t of

inform ation from an in stitu tio n a l p e rs p e c tiv e has not been d e v elo p ed ,
some useful in te re s tin g notions p u t fo rth by th e in stitu tio n a lis t a re

27

u sefu l in th in k in g about inform ational problem s.

C en tral to th e

in stitu tio n al ap p ro ach is th e concept of p ro p e rty rig h ts .
viewed a s a commodity alw ays involves p ro p e rty r ig h ts .

Inform ation
And it is

th e s e relatio n sh ip s th a t d eterm ine allocative outcom es in d ep e n d en t of
th e trad itio n a l m arket a n a ly sis.

Even if it is no more th a n a personal

s e c re t, th e ru les th a t gov ern th e relatio n sh ip betw een th e p a rtie s
c o n cern ed determ ine who is in th e know and who is n o t.

Given th is

prem ise, it follows th a t any e ffo rts to resolve su c h problem s can often
be more a p p ro p ria te ly d ire c te d a t th e in stitu tio n a l a rra n g em e n ts th a n
a t th e inform ation m arket its e lf.

B ut as one would s u s p e c t, any

c h an g e s in th e ru le s which d e sig n o r c re a te th e flow of inform ation
will e n c o u n te r th e reality th a t e ssen tial inform ation is p ro te c te d by
e n tre n c h e d in stitu tio n al re la tio n sh ip s.
A good exam ple of how th e p ro p e rty rig h ts in inform ation
o p e ra te can be tak en from th e U .S . food and fib e r m ark e ts.

As

in d u stria l c o n cen tratio n c o n tin u es to grow , "th e issu e s o f p riv a te
ow n ersh ip of inform ation v e rs u s th e p u b lic 's rig h t to know will become
more and more critic a l and heated" (B onnen, 1975).
G iant firm s a c q u ire with th e ir g re a t size not only an impact
on m arket b u t a major resp o n sib ility fo r p ublic inform ation.
Where th e d ata on a m arket a re collected from and d is tr i­
b u te d to firm s by a tra d e asso ciatio n , th e te n d e n c y to
monopolize d ata is even g r e a te r . (B onnen, 1975).
S ince inform ation as a commodity has unconventional p ro p e rtie s su c h
a s n o n -a p p ro p ria b ility , in cre asin g r e tu r n s in u se , and in d iv isib ility .
Arrow m aintains th a t no amount of legal p ro tectio n can make a
th o ro u g h ly a p p ro p ria b le commodity o f som ething so in tan g ib le as
inform ation.

Legally imposed p ro p e rty r ig h ts can p ro v id e only a

p artial b a r r ie r , since th e v e ry u se of th e inform ation in any p ro d u ctiv e
way is bound to reveal it, a t lea st in p a r t.

28

M oreover, th e in h eren t c h a ra c teristics of information a re not
only applicable to th e information m arket itself, but also to any
attem pt to a lte r th e institutional rules which govern its flow. Con­
s id e r, for example, appropriability where th e proposed problems
o f u n d e r-su p p ly of information a re due to th e non-appropriability
of r e tu r n s .

T hat is to say th a t th e u n d e r-su p p ly will depend on

th e d eg ree to which th e re tu rn s to investm ents in information cannot
be a p p ro p ria te d .

T his also holds tru e (theoretically) for any attem pt

to change th e ru les.

Institutional innovation itself also m aintains th e

p ro p e rtie s of a public good.
D. M arket S tru c tu re Effects on th e Costs
and B enefits o f Information
Because th e value of information is only realized ex post of
decision, public or p riv ate re tu rn s on investm ents in information
a re difficult to estim ate.

It may be reasonable for a decision maker

to co n cen trate on minimizing th e costs associated with acquiring
inform ation.

But u n d er some m arket conditions p riv ate decision

m akers can realize d ire c t benefits from information.
b en efits shape th e behavior o f decision m akers.

Both costs and

To help illu stra te

th is , hypothetical cases of information cost and benefit for p riv ate
firms and for public statistical agencies u n d er four d ifferen t m arket
s tru c tu re s and exchange mechanisms a re p resen te d .
For th e p u rp o se of th is p resen tatio n , we focus on m arket infor­
mation which tak es on a special m eaning.

In th e s tric te s t sen se, we

know th a t m arket signals a re not information per se because they have
not been analyzed nor in te rp re te d to serv e a specific decision.
Economists marvel o v e r th e signaling function which prices play
u n d er perfectly com petitive m arket conditions.

But o u tsid e of th is

29

se t o f p reco n d itio n s, th e limitations of th e informational co n te n t of
p rices a re well docum ented (C o llin s). N ev erth eless, given th e con­
te x t of a m arket, when exchange o c c u rs, th e re is alw ays th e p resen ce
of inform ation.

T he questio n a rises as to who has access o r rig h ts

to th is inform ation, how a re c o sts and b en efits from its u se d is tr i­
b u te d ; why do public sta tistica l agencies and p riv a te firm s behave
so d iffe re n tly with resp ec t to information d istrib u tio n and use in
d iffe re n t m arket s tr u c tu r e s .
To th e e x te n t th a t th e d istrib u tio n of m arket inform ation v a rie s
o v e r m arket s tr u c tu r e s , it is reasonable to assum e th a t c o sts and
b en efits a re d istrib u te d d ifferen tly among various m arket p a rtic ip a n ts .
Even within th e same m arket s tr u c tu r e , th e total cost o f producing
inform ation v a rie s betw een o rganizations for any num ber of reasons
inclu d ing, for exam ple, size of o rg an izatio n , p u rp o se of o rg an izatio n ,
m anagement sty le s , analytical capabilities and m ethods of accounting
for cost (B u rch , 1979, p . 13).

B ecause of its public good c h a ra c ­

te r is tic s , th e problem o f m easuring b e n efits o f inform ation becomes
equally d iffic u lt.
T he following assum ptions a re made fo r each hypothetical case:
1. Given th e m arket s tr u c tu r e , one h u n d re d p e rc en t of th e
m arket volume is tra n sa c te d u n d e r th e exchange mechanism typical
to th a t s tr u c tu r e .
2.

Both b u y e rs and sellers in th e m arket face th e same m arket

s tr u c tu r e s .
3.

Firms a re not req u ire d to re p o rt to th e public sta tistic a l

sy ste m .
4. T he n a tu re and ty p e of inform ation needed for decision
making ch an g es o v e r v ario u s m arket s tr u c tu r e s .

30

T h e an aly sis c o n sid e rs a se rie s o f fo u r com parative hypothetical
c a se s.

Each c ase exam ines how cost and b e n efits of inform ation a re

d is trib u te d u n d e r th e condition of a specified m arket s tr u c tu r e and
asso ciated p rice ex ch a n g e m echanism .

T he following m arket s tr u c tu r e s

w ith a commonly a sso ciated p ric e d isc o v ery mechanism a re c o n sid e re d :
com petitive m a rk e t/a u c tio n ; o lig o p o ly /c o n tra c t; m onopoly/bargaining;
an d single firm m a rk e t/v e rtic a l in te g ra tio n .
In th e f ir s t c a se , we exam ine th e co st and benefit o f inform ation
to th e public ag en cy and to th e p riv a te firm (s) in a com petitive
m ark e t.

A public auction is a close approxim ation o f th e com petitive

m ark e t.

In th is c a se , it is h y p o th esized th a t th e public a g e n t and

th e p riv a te firm would both in cu r relativ ely low co sts fo r o b tain in g
inform ation.

Why? T h e com petitive m arket with th e assum ption of

many b u y e rs and se lle rs ( e t c .) , especially in th e case o f a public
au ctio n as th e ex ch a n g e m echanism , p re s e n ts no problem fo r a
p a rtic ip a n t o r a n e u tra l a g e n t in ob tain in g a c c u ra te and re p re s e n ta ­
tiv e m arket inform ation m erely by p a rtic ip a tin g in o r o b se rv in g th e
c e n tra lly located auction p ro c e ss .
is n o n e x c lu d a b ility .)

(A c h a ra c te ris tic of inform ation

T h e public agency faces relativ ely m odest c o sts

in th is c a se , com pared to w hat it faces u n d e r o th e r m arket s tr u c tu r e s
Inform ational c o sts a re no h ig h e r an d o ften lower fo r th e firm b u t as
o ne com petitive firm among m any, it fin d s it d iffic u lt to c a p tu re any
r e tu r n on its in v estm en ts in inform ation.

T h e firm is re g u la te d by

th e m arket a n d , to th e e x te n t th a t th e m arket is able to su p p ly
an a d e q u a te am ount o f reaso n ab ly a c c u ra te inform ation, th e firm
does not in v est in th e collection o f m arket inform ation.

S ince no

31

p riv a te firm has an in centiv e to p ro v id e th e inform ation needed to
facilitate th e coordination of th e m ark e t, th e public sta tistic a l a g e n c y ,
while facing th e same relativ ely low c o s ts , has th e cap acity to
g e n e ra te v e ry high social r e tu r n s to so ciety .
As we move to th e n e x t m arket s tr u c tu r e and e x ch an g e m echanism ,
oligopoly and c o n tra c ts , we e n c o u n te r h ig h e r inform ation c o sts fo r th e
public agency and p e rh a p s slig h tly lower inform ation cost for th e
p riv a te firm for se v era l re a so n s.

While th e re a re many few er firm s

in th e m ark e t, th e co st o f inform ation to th e public a g en t is h ig h e r
b ecau se o f th e s u b s titu tio n o f a p riv a te c o n tra c t a rra n g em e n t fo r th e
open m arket sig n a ls o f a public a u c tio n .
inform ation h e ig h te n .

P ro p rie ta ry rig h ts in m arket

It is in th e individual firm 's in te re s t to

w ithhold inform ation so th a t it m aintains a com petitive ed g e on o th e r
firm s in th e m ark e t.

Inform ation ceases to be a p ro d u c t of th e public

p ro c e sse s of th e m arket and becomes more an in te rn al firm p ro d u c t o f
a publicly u n re c o rd e d p riv a te tra n s a c tio n .

B u t, even if th e con­

tra c tin g firm s should v o lu n tarily re p o rt to th e public a g e n t, th e com­
plex an d v a ry in g sp ecifics o f each o f th e many c o n tra c ts would c re a te
major form atting an d dissem in atin g c o s ts .

Also, much of th e co o rd in a­

tion o f th e m arket follows from th e few ness o f firm s and th e ir in te r­
d ep en d en ce in b e h av io r—re d u c in g th e b e n e fits to any public in v e st­
ment in m arket inform ation.

U n d er th is m arket s tr u c tu r e , th e firm

still faces about th e same inform ation c o s ts , b u t th e p o tential n et
b en efit to an oligopolistic firm is h ig h e r.

B ecause of th e v e ry n a tu re

o f th e m ark e t, th e firm can u se inform ation in te rn al to its o p e ra tio n s
to a rr iv e a t e stim ates for th e e n tire m ark e t.

M oreover, th e firm

32

recognizes th a t more o f th e re tu r n to its in v estm en ts in inform ation
can b e c a p tu re d by th e firm u n d e r oligopoly c o n d itio n s.
N ext, we co n sid er b ila tera l monopoly and a common e x ch an g e
mechanism associated w ith monopoly s tr u c tu r e , b a rg a in in g .

H ere

it is h y pothesized th a t th e public a g e n t will e x p erien ce v e ry much
h ig h er inform ation acq u isitio n c o sts an d th e firm will in c u r still
lower inform ation acquisitio n c o st.

All m arket inform ation is now

th e p ro d u c t of th e in te rn al d ecisio n s o f th e two m onopolists.

The

public a g en t inform ation c o sts a re likely to be h ig h er b ecau se of
th e o b stacle of e n tre n c h e d p ro p e rty rig h ts in inform ation by th e
firm .

Inform ation held by th e firm is re p o rte d only in th e c a se

w here th e firm is re q u ire d by law to re p o rt b ecau se o f some p r e ­
vailing p ublic policy co n cern (see assum ption 3 ).

C o n se q u e n tly ,

th e cost o f a cq u irin g m arket inform ation fo r th e public a g e n t
becomes extrem ely h ig h .

H ow ever, th e r e a re poten tially high social

b e n e fits for su ch public in v estm en ts, b u t fo r public policies reg u la tin g
firm b e h av io r, not fo r fa c ilitatin g m ark et coordination which is
e n tire ly in te rn al to th e two m onopolies.

T h e firm is in full control

o f all m arket inform ation—a t least on one sid e .

E xchange betw een

th e bilateral m onopolists is fac ilitated by b a rg a in in g .

A lthough th e

co st of b a rg a in in g may be h igh fo r th e m onopolist, th e cost of
a c q u irin g m arket inform ation is lower re la tiv e to th e firm s in o th e r
m arket s tr u c tu r e s .

H ere a g a in , b e c a u se o f m arket s t r u c tu r e s , th e

firm h as low inform ational co st and can realize high p riv a te
b e n efits from inform ation.

33

In th e last case, we examine th e extrem e situation of a single
firm economy—no m arket tran sactio n s. Although the potential
social benefits of publicly supplied information is high, the
acquisition cost of information for the public agent is prohibitively
high.

The cost of access to information for the firm becomes

extrem ely low. While information processing, managing, and
analyzing costs may be high, the cost of access to m arket infor­
mation is nil, and th e advantage and benefits in th e control over
d istrib u tio n of information, especially with respect to public
v e rsu s p riv ate use, lies in the private firm 's domain.
Concluding G eneralization: As one moves from case to case in
th e purely hypothetical examples above, m arket concentration increases,
and th e cost of m arket information for the public agent increase
g re a tly , while th e cost of m arket information for the firm probably
d ecreases. As m arket concentration increases, p rivate benefits to
firm investm ents in m arket information increase greatly providing a
major incentive for th e firm to invest in information and to deny
access to any public a g en t.

For th e public a g en t, as concentration

increases, the social benefits to public investm ents in information to
facilitate m arket coordination decline rapidly, while those to informa­
tion for public policy and regulatory decisions grow. T h u s, the
purpose of public investm ent in m arket information changes drastically.
T hese com parative cases provide hypothetical examples based on
theory of how acquisition costs and benefits are d istrib u te d between
th e p riv ate firm and th e public agent over various market s tru c tu re s
and exchange mechanisms.

It is im portant to recognize, however,

th a t information is a necessary but not sufficient condition for "good"
m arket perform ance.

PLEASE NOTE:

This page not included with
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received.

University Microfilms International

35

conceived o f th is fram ew ork, p e rh a p s he did not envision its u se .
in th e m anner which th is th e s is p ro p o se s.

B ut intuition s u g g e s ts

th a t th e re la tio n sh ip betw een inform ation and each com ponent o f th e
I/O fram ew ork ru n in a tw o-w ay s tr e e t a s shown in F ig u re 2 .2 .
Inform ation in flu en ces m arket s tr u c tu r e , b u t a giv en s tru c tu ra l
c h a ra c te ris tic o f a m arket can g o v e rn th e flow and d istrib u tio n of
inform ation; inform ation influences th e b eh av io r (co n d u ct) o f th e
firm , b u t th e firm can re d u c e its need s fo r inform ation by a d o p tin g
v a rio u s ris k m anagem ent p ra c tic e s w hich allow it to make decisions
in an environm ent o f im perfect know ledge; inform ation can be
asso ciated w ith m ark et p erfo rm an ce, b u t c o n v e rse ly th e perform ance
o f a m arket can im pact inform ation.
a full c irc le .

T h u s , th is rela tio n sh ip becomes

A lth o u g h , a dynam ic rela tio n sh ip betw een th e I/O

fram ew ork and inform ation is th e o riz e d , it becom es more m anageable
to tra c e o u t co n n ectio n s betw een th e two in a sin g le d ire c tio n .

T h at

is to s a y , one can hold th e s tr u c tu r a l a n d behavioral dim ensions o f
th e m arket g iv e n , an d q u e stio n what im pacts do v a rio u s elem ents o f th e
I /O fram ew ork hav e on th e d istrib u tio n and p e rh a p s value o f inform a­
tion in th e firm 's decision m aking p ro c e ss .
A lthough th e I/O fram ew ork has c o n trib u te d to valuable re s e a rc h ,
it c e rta in ly has b ro a d e r im plications th a n its tra d itio n a l u se .

P e rh ap s

th e two most commonly c ite d lim itations o f th e I / O fram ew ork a re
critic a l in a d a p tin g its u se to inform ation p roblem s.

T h e I/O fram e­

work d e-em p h asizes (1) v e rtic a l re la tio n sh ip s, and (2) th e b eh av io r
o f th e firm 's decision p ro c e ss .

INFORMATION
. . .

.

1
'

|

1

MARKET
STRUCTURE
/!>

<

MARKET
CONDUCT
A

.

N
V.

MARKET
PERFORMANCE

AI

Figure 2.2 Market Information and the I/O Paradigm

37

Inform ation is a p ro d u ct of e x ch an g e. And exchange tak e s
place in both horizontal and vertical dim ensions.

But trad itio n ally ,

in d u strial organization th eo ry has been applied only to horizontal
m arket rela tio n sh ip s. More recen tly several re s e a rc h e rs including
B oynton, H enderson, M arion, S h affer (1974), and Williamson (1975)
have attem pted to in te g ra te and combine v ertical coordination with
I/O th e o ry .

T hey have all recognized th a t th e I/O paradigm has

im portant applications to th e stu d y o f v ertical m arket relationships
and th e coordination o f th e s e system s in addition to its early applica­
tion to single in d u stry re s e a rc h .

Developments in th is a re a will have

implications for rese a rc h on inform ation system s because more infor­
mation (for both p riv a te and public p u rp o ses) is tr a n s fe r re d via
v ertical m arket tra n sa c tio n s th a n in horizontal o n es.
R e search ers a rg u e th a t th e I/O fram ework omits a sp e c ts of
reality w hich, if in co rp o rated , would e x te n d and stre n g th e n th e
scope of th e a n a ly sis.

T he I/O fram ework has c o n ce n tra te d on condi­

tions e x te rn a l to th e firm ( i . e . , definition of th e relev an t m ark e t).
T h u s, it has tre a te d th e firm like a "black b o x ."

S h a ffer (1979)

calls for linking th e I/O fram ework with th e bodies of knowledge
developed by organizational b eh av io ralists (Simon, M arch, C y ert)
whose prim ary concern commences with intra-firm decision m aking.
T his line of reasoning would not only add to I/O th e o ry b u t would
also make it possible to in v estig ate th e relatio n sh ip betw een th e
firm 's decision p ro cess and inform ation, a link th a t is c e n tral in
th e inform ation system s paradigm .

If I/O th eo ry does not account

for th e firm 's decision making environm ent, one cannot ex p ect it
to accommodate notions related to inform ation.

38

F igure 2.3 illu stra te s a fram ework which incorporates vertical
relatio n sh ip s and th e firm 's decision making p ro cess (M arion). Some
definitions o f term s a s th ey a re used in th is fig u re and as they will
be used in th is re se a rc h a re p re se n te d below.
S tru c tu re is a collection o f param eters th a t define th e oppor­
tu n ity set o f su b sec to r p a rtic ip a n ts . T h re e classes of param eters
a re c o n sid e re d :
1.

Basic conditions deal with m arket g eo g rap h y in relation
to supply and demand conditions and c h a ra c te ristic s
of th e p ro d u ce ( i . e . , e la sticities, p ro d u ct p e rish ­
a b ility , location o f m arket, e t c .) .

2.

M arket c h a ra c te ristic s include th e m arket s tru c tu re
v ariab les in th e application of th e I/O framework
( i . e . , concen tratio n ra tio s, num ber and size of
firm s, e n try and e x it, p ro d u ct d ifferen tiatio n , e t c .) .

3.

In stitu tio n s re fe rs to e stab lish ed custom s, ru les
o r p ro c e d u re s.

C onduct d e sc rib e s th e behavior o f p a rtic ip a n ts influenced by
m arket s tr u c tu r e , decision making p ro c e sse s, and goals of th e firm .
In th is stu d y we focus on th e conduct o f th e firm in its input
m ark et.
T h e firm 's decision environm ent p ic tu re s th e firm in a world
of u n c e rta in ty influenced by m arket s tr u c tu r e , goals of th e firm ,
and sta n d a rd o p e ra tin g p ro c e d u re s.
T he u n iv e rse o f m arket inform ation is divided into th re e p a r ts .
Inform ation th a t a ris e s o u t o f m arket tra n sa c tio n s is re fe rre d to as
th e informal system ( i . e . , information th a t is tran sm itte d between
grow er an d p ro c e s s o rs ).

Inform ation th a t is collected by p riv ate

firm s and sold to th e m arket p a rtic ip a n ts is re fe rre d to as th e p riv ate
sy stem . And inform ation collected an d re d is trib u te d by public in sti­
tu tio n s for th e p u rp o se o f im proving m arket perform ance is called th e
public information system .

MARKET
STRUCTURE

Basic Conditions
Product
Market Location
Production T rends
Consumption T rends
Market C haracteristics
# and Size of Firms
# of Products
E ntry and Exit
Type of Firm
# of Plants
Concentration
Channels S Functions
Product Differentiation

yFIRM N .
^
DECISION \
> N J E N V IR O N -^ /
Types of Decisions
A lternatives
Incentives
Control
Goals

MARKET
CONDUCT

Procurem ent:
Pricing
Contracting
Quality Control
Standard O perating
Procedures
Risk Management
Practices

Institutional A rrangem ents
Exchange A rrangem ents
Ownership
Cooperatives
Grades

Figure 2.3 Market S tru c tu re Analysis and Information

1
1

UNIVERSE OF
MARKET
INFORMATION

1
■ Public Information
Private Information
i Informal Information
|
1
,

40

F. A Research Framework
An adequate framework for analyzing m arket information problems
is still to be evolved.

N evertheless, th e need for a framework here

is ev id en t; it is needed to provide a means o f o rganizing, in te r­
p retin g , and filtering knowledge about reality while a b strac tin g from
the complexities of th e real world.

Given th e n a tu re of th e information

problems described and th e lack of an applicable integ rativ e theory
to solve them , a certain amount of research has to be inductive at
th is sta g e.

Kemeny defined induction as "the process by which a

scientist forms a theory to explain th e o bserved fa c ts ."

Induction

reasons from th e p a rts to a whole, from th e individual to th e general.
T h u s, a fram ework a rise s from th e inductive research process and
th en it is used deductively to su g g e st causal relationships, predict
outcom es, describ e a phenomena and te s t h y potheses.

T he main

focus o f th is research effort will be in an inductive mold.
At th is point, we explain how th e in teg rated framework illu strated
in F igure 2.3 is employed in an evaluation of m arket information for
the Michigan processed potato in d u stry .

T he theoretical o rigins of

each component of th e framework will be identified and a discussion
of its application in th is th esis will be p re se n te d .

At th e o u tse t, it

should be noted th a t th is work does not re p re se n t a complete integration
of ail th e elements of each component of th e fram ework.

We only

borowed what was necessary to illu stra te th e relationship between
information and components of proven bodies of th e o ry .

Also,

certain a sp ects o f each th eo ry were e asier to operationalize in the
context of th e Michigan processed potato in d u stry and within th e
reso u rce c o n strain ts of th is stu d y .

41

T his rese a rc h e ffo rt sta rte d out with th e intellectual fram ework
p re se n te d in th e firs t section of th is c h a p te r.

T he inform ation system

paradigm s tru c tu re d th e inq u iry process in th a t it focused th e re se a rc h
on th e decision m aker.

A ltern ativ ely , one may have commenced th e

re se a rc h with a given concept and su b seq u e n tly examined how th e
inform ation system conceptualized, operationalized, m easured, and
analyzed th e concept for a given se t of decision p u rp o se s.

B ut th is

re se a rc h adopted th e approach which s ta r ts with th e decision m aker,
and is informed by th e notion th a t information a tta in s its v alue in th e
c o n tex t of a specific decision.

T he operationalization and qualification

o f th is statem ent was aided by four bodies of th e o ry :

in d u stria l

o rg an izatio n , behavioral th e o ry of th e firm , th eo ries of v ertical
co o rdination, and neoclassical th e o ry .
T he stu d y began with th e model of in d u stria l o rganization (I/O )
infused with th e th eo ry of v ertical coordination and applied to th e
re se a rc h issue o f information and m arket s tr u c tu r e in th e p ro cessed
potato in d u s try .

T his encom passes th e left side o f F igure 2.3 u n d e r

th e heading of m arket s tr u c tu r e .

T he elem ents listed h e re a re d is­

cu ssed in C h a p te r IV of th is s tu d y .

Two elem ents of m arket s tr u c ­

tu r e , firm size and firm ty p e , a re inco rp o rated into th e an aly sis
p re se n te d in C h ap ter V.

Specifically, th e s e elem ents o f m arket

s tr u c tu r e w ere used to s tra tify firm s in th e Michigan p ro cessed
potato in d u s try .

Within th e se s tru c tu ra l se ts we c ro ss tab u late d

inform ation o btained from personal interview s with m anagers con­
c ern in g th e ir evaluation of ty p e s and so u rces of m arket inform ation
ag ain st specific decisions made by th e firm .
c o n sists of th re e categ o ries:

T he firm size variab le

la rg e , medium, and small.

T h e re fo re ,

42

th e an aly sis com pared th e re s u lts o f how p lan t m an ag ers ev alu ated
inform ation betw een each g ro u p .
g o rie s:

fre e z e rs and c h ip p e rs .

Firm ty p e c o n sists o f two c a te ­
Sim ilarly, com parisons w ere made

betw een fre e z e rs ' and chippers* evaluation o f m arket inform ation
ty p e s and so u rc e s .
C en tral to th e evalu atio n o f m arket inform ation is th e decision
environm ent of th e firm .

T h is stu d y has p ointed o u t some o f th e

lim itations of neoclassical economic th e o ry in d e sc rib in g and ex p lain in g
firm m anagem ent d e c isio n s.

T h e re fo re , a behavioral th e o ry o f th e

firm was adopted which c h a ra c te riz e d th e firm as an a d a p tiv e o rg a n iz a ­
tion su b je ct to u n c e rta in ty .

In C h a p te r IV we will lay o u t th is fram e­

work a n d p re s e n t th e d e s c rip tiv e re s u lts of each firm 's p e rc ep tio n s
o f its decision en v iro n m en t.

T h is inform ation will th e n be u se d to

v alid ate a p re se le c te d list of ty p e s o f m ark etin g d ecisio n s made by
potato p ro c e ss o rs.

T h e re s u ltin g se t o f d ecisio n s was u sed in th e

c ro ss tab u latio n s d e sc rib e d ab o v e.
M arket c o n d u c t, a c e n tra l com ponent o f th e in d u stria l o rg an izatio n
fram ew ork is used to link th e o th e r elem ents In th is s tu d y to th e
firm 's pro cu rem en t a c tiv itie s .

In th e tra d itio n a l application o f th e

I/O fram ew ork, m arket c o n d u ct has re fe re n c e to th e p ro d u c t m ark e t.
H ere, how ever, we exam ined th e p ro cu rem en t a c tiv itie s o f potato
p ro c e ss o rs.
u se fu l.

T h eo ries re la tin g to th e b e h av io r o f th e firm w ere also

C oncepts and p ra c tic e s of ris k m anagem ent a n d s ta n d a rd

o p e ra tin g p ro c e d u re s a re dim ensions o f firm b eh av io r th a t th e I/O
fram ew ork does not h a n d le .

In C h a p te r IV we d e sc rib e th e s e a sp e c ts

43

of th e firm and in C h ap ter V we attem pt to infer th e direction of
impact each category of firm behavior has on th e production, d is tri­
bution and u se of m arket information between a firm , competing firms
and public statistical agencies.
T his framework provided a means o f organizing and in te rp retin g
real world o b serv atio n s.
a reas of in q u iry .

It allows th e rese a rc h e r to s tru c tu re th e

In fact, many questions (re se a rc h issues) a rise

from the conceptual fram ework.

Some key a re as of inquiry include:

1. What is th e relationship between selected elements o f m arket
s tr u c tu re and p rice information?
2.

How does firm procurem ent behavior impact th e production,

d istrib u tio n and use of m arket information?
3. What is th e value (m easured in term s of usefulness) of various
so u rces and ty p e s of price information in th e context of specific
m arketing decisions?
4. What a re th e firm 's risk management practices and how do
th ey impact m arket information?
5. What a re th e firm 's sta n d a rd operating pro ced u res and how do
th ey impact m arket information?

CHAPTER III
A REVIEW OF THE METHODOLOGICAL APPROACHES

A.

Intro duction
In C h a p te r II se v era l in te g ra te d fram ew orks w ere p rese n te d

which a re applicable to th e an aly ses of inform ation problem s. T he
th eo retical developm ents in th e economics of inform ation a re still
evolving and th u s m ethodologies a re also d eveloping.
E isg ru b er s ta te s " n e ith e r th e o ry nor m ethodology e x ist to
a d d re ss ad eq u ately th e economics o f inform ation, and until re c e n tly ,
little e ffo rt was made to overcom e th is d e fic ie n c y ."

Since we a re

still a long way from a th e o ry o f inform ation, econom ists have employed
sev eral methodological a p p ro a ch e s in th e stu d y o f inform ation system s.
Each ap p ro ach re fle c ts th e d iv e rs e view th a t has e a rn e d th is su b ject
m atter th e title of th e "m yth o f m ethodology" (M iller). T h e approaches
review ed h e re w ere chosen to illu stra te th e v ario u s m ethodologies
which have been applied to th e problem o f m ark etin g , especially
p rice , inform ation sy ste m s.
d isc u sse d :

Four m ethodological ap p ro ach es will be

1) n e t social b e n e fit, 2) pragm atic u s e r a p p ro a ch ,

3) m arket s tr u c tu r e , p ricin g in stitu tio n and inform ation, and 4) m arket
perform ance and inform ation.
B.

Net Social B enefit
T he widely c ited Hayami and P eterso n a rtic le illu s tra te s th is

a p p ro a c h .

T h eir stu d y is based on p ro d u c e r and consum er su rp lu s

44

45

m easu res from w elfare econom ics.

T h e re fo re , th e stu d y m akes th e

tra d itio n a l assu m p tio n s o f com petition; lack o f e x te rn a litie s , p e rfe c t
m obility, an d hom ogeneous inform ation among th e a c to rs .
T h is s tu d y exam ines w h e th e r it is socially beneficial fo r U5DA
to seek g r e a te r s ta tis tic a l a c c u ra c y in c ro p fo re c a s tin g .

U sing an

in v e n to ry a d ju stm en t model a n d co st fig u re s su p p lied by USDA on
sam ple s u r v e y s w ith v a ry in g levels o f sam pling e r r o r , th e y found
th a t an e x tr a d o lla r s p e n t to in c re a se th e a c c u ra c y o f s ta tistic a l
re p o rtin g r e s u lts in n e t b e n e fits ra n g in g from $20 to $100.
T he n e t social b e n e fit a p p ro a c h has se v e ra l sh o rtc o m in g s.

T he

w ork o f Hayami and P e te rso n h a s ' been c ritiq u e d on se v e ra l f r o n ts .
F irs t o f all, th e global m odeling a p p ro a c h , w ith its heroic a ssu m p tio n s,
d o es n o t make e x p licit all th e im p acts a n d c o s ts o f additio n al in v e s t­
m ents in th e a c c u ra c y of c ro p r e p o r ts .

For exam ple, m ore a c c u ra te

inform ation fo r so y b e an p ro d u c e rs may be a t th e e x p e n se o f r e p o rts
fo r th e c o rn m a rk e t.
D obson (1979) n o te s th a t th e r e s e a r c h e r s n e g le c te d an im portant
fa c to r re la te d to th e a c c u ra c y o f c ro p fo re c a s ts —w e a th e r.

He

o b s e rv e s th a t e r r o r s in c ro p fo re c a s ts r e s u lt no t o nly from sam pling
e r r o r s , b u t also from c h a n g e s in gro w in g c o n d itio n s a f te r th e c ro p
s u r v e y s a r e ta k e n .
T h e H ayam i-P eterson s tu d y leaves th e re a d e r uninform ed
c o n c e rn in g how m uch o f th e e r r o r in c ro p fo re c a s ts re s u lts
from sam pling e r r o r a n d how m uch e r r o r r e s u lts from
abnorm al co n d itio n s w hich o c c u r a f te r th e sam pling d a te .
T h e re a d e r also is le ft to p o n d e r how m uch im provem ent
in c ro p fo re c a s t m ight be o b ta in a b le from m ore a c c u ra te
sam pling and how m uch im provem ent would be o b tain ed
from d e v elo p in g u sa b le lo n g -ra n g e w e ath e r fo re c a s ts
w hich would perm it a d ju stm e n ts to acco u n t fo r e x p e c te d
c h a n g e s in co n d itio n s a fte r th e c ro p s u r v e y .

46

C.

Pragm atic U ser's A pproach
A review of various stu d ies employing th e pragm atic u se r's

approach su g g e sts th at it best encom passes problems th a t are
ill-defined. Some would a rg u e th a t th is approach lacks a theoretical
base b u t n e v erth eless, th e pragm atic u s e r's approach co n trib u te s to
th e identification of th e issu es, to th e use and clarification of
term inology and to a b e tte r u n d erstan d in g of th e n a tu re of o u r data
and information system s.

In a sen se, th is approach is disciplinary

in th a t it potentially can lead to theoretical contributions as well as
add to fu rth e r testin g of th e methodology involved in th is ty p e of
re se a rc h .

It proposes no sophisticated analytical te s tin g .

Before

we can get to th e stag e of selecting ap p ro p ria te analytical proce­
d u re s to quan tify th e relationship between information and decisions,
we have to complete th e task of identifying and defining those rela­
tionships and developing a system atic conceptual fram ework.
The pragm atic u se r approach could serv e as th e link between
th e statistical system and an e v e r changing decision environm ent.
T he approach relies on th e e x p e rt opinion o f a selected group of
decision m akers to ren d e r sugg estio n s about th e design (in term s o f
th e ir specific needs) of th e statistical system .

In th e application of

th e pragm atic u s e r's approach, one often lacks clear c u t c rite ria
for deciding trad e-o ffs between a ltern a tiv e decision m akers.
P riorities among altern a tiv e statistical activities a re difficult for a
governm ent agency to e stab lish . T he Panel on Methodology for
S tatistical P riorities concluded th a t b en efit-co st analysis should be
used co nsistently in all federal agencies to determ ine data p lans.
While d eriving cost of th e program may be fairly stra ig h tfo rw a rd , the

47

difficulty lies in estim ating anticipated benefits to th e u se rs of
th e inform ation.

N ev erth eless, th e cost-benefit criteria does provide

a possible decision rule for determ ining statistical priorities and
has been applied in several stu d ies reviewed below.
T he search of th e lite ra tu re at th is point focuses on th e p rag ­
matic u se r methodology employed in studies on information for a g ri­
cu ltu ral m arkets. Within th e cash grain m arket, the USDA has
completed th e most com prehensive stu d y on m arket information
(H eifner, et a l. ) .

The stu d y was prim arily concerned with assessin g

th e m arket decision m akers' evaluation of m arket information, and
determ ine what implications th e u se rs' evaluation has for th e design
(in term s o f improving accuracy) of th e A gricultural M arketing
S erv ice's Grain M arket News. T he study describ es th e p articip an ts
in th e grain pricing process and th e flows of p rice inform ation. A
mail su rv e y was employed with follow-up interview s on th e volume of
g rain tra d e d at selected tran sactio n points d u rin g 1974. Also of
in te re st was d ata on th e term s of tra d e and th e kind o f information
used by g rain firms in making th e ir buying and selling decisions.
Supplem entary information was obtained from governm ent m arket
re p o rte rs via an open-ended interview process.
Since th e stu d y was concerned with assessing one m arket
p a rtic ip a n t's evaluation of m arket information, a broad system p e r­
spective was not adopted; it only concerned itself with th e infor­
mational needs of p ro d u c e rs.

T herefore, tra d e -o ffs betw een various

o th e r u se rs of information (elev ato rs, p ro cesso rs, e tc .) w ere not
of concern in th e stu d y and th e problem of allocating public in v est­
ment betw een a ltern a tiv e u se rs of information was not a d d re sse d .

48

A lthough th e s tu d y h ig h lig h ted sig n ifican t im plications o f th e d esig n
of th e sta tistic a l system (from th e p e rs p e c tiv e o f p r o d u c e r s ) , it did
not p ro v id e a basis for determ ining su ch q u e stio n s as how larg e a
p rogram is n e ed e d , o r th e r e tu r n s to in v estin g in a lte rn a tiv e s ta tis ­
tical m ethods.

T h e stu d y im plicitly assum ed p ro d u c e rs to be th e

only u s e rs o f th e inform ation an d th e re fo re se t a n o b jec tiv e to meet
th e ir decision n e e d s.
To a g re a t e x te n t, th e stu d y took u n d e r co n sid era tio n how s tr u c ­
tu ra l c h a ra c te ris tic s an d p ric e d isc o v ery m echanism s im pact th e u se
o f inform ation in th e m arket and su b se q u e n tly th e d a ta d e sig n s o f th e
sta tistic a l a g e n c y .

H ow ever, some o f th e re la tio n sh ip s betw een

v a rio u s p rice d isco v ery mechanisms (fu tu re s m ark et—c ash m arket
s tr u c tu r e ) w ere not e x p lo re d .

A se co n d , b u t closely re la te d , issu e

is th e q u e stio n o f how rela tiv e p rice s among locations and g ra d e s o v e r
time re fle c t cost d iffe re n c e s.

While th e form er c o n ce rn is w ith

linking s tr u c tu r e and p ric e d isc o v ery to th e s ta tistic a l d e sig n q u e stio n ,
th e la te r issu e deals with th e relatio n sh ip betw een th e d e sig n of th e
sta tistic a l system and m arket perform ance (m easu red in term s of
p rice d is p e r s io n ).
Within o th e r commodity g ro u p s , p a rtic u la rly th e p o tato in d u s try ,
a com prehensive stu d y ev alu atin g th e p ric e d a ta b a se was com pleted
in 1975 (Sjodin and D ahl).

T h e a u th o rs se n t a q u e stio n n a ire to a

random sam ple o f th e m arket p a rtic ip a n ts to o b ta in th e ir ev aluation
o f m arket p ric e inform ation.

T h e re s e a rc h e rs o p e ra te d u n d e r th e

prem ise th a t d a ta is collected for some specific p u rp o se o r se t of
p u rp o se s and th a t th e objectiv e o f th e d a ta system is to fill th e need

49

of the m arket decision m aker. While insights can be gained from the
market p articipants who provide information to the statistical agency,
th is approach does not reflect th e problems and views of the agency's
market rep o rte rs nor does it account for public decision makers or
oth er m arket p articip an ts.

Here again th e pragm atic user approach

is employed without considering a broader range of u se rs of publicly
m arketed information.

Also, th e study does not develop or apply

a decision rule for choosing between altern ativ e u se r g ro u p s.
An important empirical stu d y evaluating th e California
Federal-State Market News Service also placed emphasis on th e u sers
of information.

However, th is study goes a step fu rth e r by attem pting

to apply a decision rule to establish trad e -o ffs between the various
u se r g ro u p s. T he stu d y identifies broad categories of both market
and non-m arket u sers of th e publicly supported statistical system .
It does not, however, include th e analytical use of data by un iv er­
sities and governm ent agencies.

T he purpose of th e stu d y was to

determ ine the feasibility of m easuring th e net benefits (value) of
th e California Federal-S tate M arket News Information S ervice. Given
a value for information supplied by th e statistical agency, th e
research ers could apply th e cost-benefit criterio n to the allocation
o f m arket information. They concluded th a t it is feasible to measure
some benefits derived from M arket News S ervice, but th at th ese
m easures u n d e rstate the "tru e" economic value of information.

F ur­

therm ore, it was found, in th e conventional se n se , practically
impossible empirically to measure th e benefits to non-m arket users
and consum ers.

Because the value of information was not empirically

d eriv ed, th e research ers concluded th a t the co st-b en efit ratio is not
a feasible criteria for designing a statistical system .

50

The California stu d y does recognize a viable approach to th e p ro ­
blem by stre ssin g the institutional dimensions of th e sta tistica l agency.
T h erefo re, identifying th e institutional relationship betw een th e
organizational s tru c tu re of th e agency and organizational perform ance
dimensions (criteria for change) may o ffer an approach when dealing
with design q u e stio n s.

Hence, th e rese a rc h e r concluded th a t fu rth e r

research effo rts might be d irec te d tow ard improving th e organizational
efficiency of th e statistical ag en cy .

F urtherm ore, th e y recognized

th e a ltern a tiv e approach of linking changes in m arket s tru c tu re and
p rice mechanisms for th e design of th e statistical system .
T his section discussed several altern ativ e ways o f organizing
resea rch e ffo rts to a d d re ss th e problem at h an d . T he above mentioned
stu d ies pull to g eth er some of the applications o f one broad method—th e
u s e r 's approach. T h ere a re several c h a ra c te ristic s of th e u s e r's
app ro ach.

F irst, th is approach focuses on identifying th e u se rs of

information provided by th e statistical system (P ro fesso r Raup p re s e n ts
an in te restin g discussion of th e th re e broad functional uses of d ata
in th e evolution of a statistical d ata system ).
data u se r a re obtained.

N ext, th e needs of th e

Then o th e r step s often include identifying

a p p ro p ria te m easures th a t will improve th e system and estab lish
decision rules (criteria) for allocating reso u rce s.
D. M arket S tru c tu re , Pricing In stitu tio n s,
and Information
Numerous au th o rs have developed theoretical relationships
and implications between m arket s tru c tu re and information (Grossman
and S tig litz, 1976; Salop, 1976; and Hayek, 1945). T he pricin g system
is th e cen tral mechanism for communicating inform ation.

The

51

organ izational s tr u c tu r e o f a m arket im pacts th e sta b ility o f p rice s
and th u s has a d ire c t re la tio n sh ip to th e g e n e ra tio n , v a lu e , and use
o f inform ation for economic decision m aking.

For exam ple, th e com­

p e titiv e m arket w ith d e c e n tra liz e d decision m aking co o rd in ated by a
p ric e system is recognized as th e most e fficien t m arket o rg an iz atio n .
Implicit in th is position is th e view th a t such a m arket o rg an izatio n
has su p e rio r inform ation p ro p e rtie s (p ric e a c c u ra te ly re fle c ts s c a r c ity ) .
Hayek sum m arized th e a d v a n ta g e s of em ploying th e p ric e sy stem :
T he most sig n ific an t fact about th is system is th e
economy o f know ledge w ith w hich it o p e ra te s , o r how little
th e individual p a rtic ip a n ts need to know in o r d e r to be
able to ta k e th e rig h t a c tio n . In a b b re v ia te d form , by a
kind o f sym bol, only th e most e sse n tia l inform ation is p assed
o n , and p asse d on only to th o se c o n c e rn e d . It is more th a n
a m etaphor to d e s c rib e th e p ric e system a s a kind of
m achinery fo r re g is te rin g c h a n g e , o r a system o f te le ­
com m unications which en ab les individual p ro d u c e rs to watch
m erely th e movement o f a few p o in te rs , as an e n g in e e r
might w atch th e h a n d s o f a few d ia ls, in o rd e r to a d ju st
th e ir a c tiv itie s to c h a n g e s o f which th e y may n e v e r know
more th an is re fle cted in th e p ric e m ovem ent.
In m ark ets th a t e x h ib it some d e g re e of c o n c e n tra tio n , th e infor­
mational co n ten t o f p ric e s d e clin e and firm s o fte n in v e st in th e
collection o f additional inform ation in o r d e r to defen d them selves
a g a in st o r gain an e d g e on th e ir c o m p etito rs.

B ecause firm s in con­

c e n tra te d m ark ets can to some e x te n t realize a r e tu r n to th e ir
in v estm en ts in inform ation, th e y are more inclined to develop p riv a te
sy stem s and view th is inform ation a s th e p riv a te p ro p e rty o f th e firm .
B onnen (1975) d isc u sse d th e p ro p e rty rig h t issu e involving
inform ation in c o n c e n tra te d m ark e ts:
Some d a ta problem s a ris e b ecau se many o f th e p ro p e rty
rig h ts v e ste d in inform ation a re p riv a te ly held by firm s and
in te re s ts with c o n sid era b le economic an d th u s political
in flu e n c e ., .w e fin d th a t e sse n tia l inform ation is o fte n held
by a few firm s whose immediate in te r e s ts would not be se rv e d
b y th e rele ase o f th a t inform ation— As in d u stria l c o n ce n tra tio n

52

c o n tin u es to grow in food and fib e r m ark e ts, th e issu e of
p riv a te o w n ersh ip of inform ation versus th e p u b lic 's rig h t
to know will become more a n d more critic a l a n d h e a te d .
Giant firms a c q u ire with th e ir g re a t size not only an impact
on m arkets b u t also a major re sp o n sib ility fo r p ublic inform ation.
A lthough segm ents o f a g ric u ltu ra l m arkets b eh av e noncom petitively,
fo r many p ro d u c ts , farm e rs ten d to re p re s e n t th e classic exam ple of
p u re com petition on th e s e lle r's sid e o f th e m ark et.

H ence, p rice and

its ab ility to signal an d inform m arket p a rtic ip a n ts a re im portant
q u a litie s o f th e concept th a t is stu d ie d u n d e r th e heading of p rice
d e term in atio n .

P rice d eterm ination d eals w ith th e th e o ry o f p ricin g

and th e m anner in which economic fo rce s influence p ric e s u n d e r
v ario u s m arket s tr u c tu r e s and le n g th s o f r u n .
T h e re la tio n sh ip betw een m ark et s tr u c tu r e and inform ation is
well founded in economic th e o ry .

T h is re la tio n sh ip in and o f itself

does not p re s e n t a problem to public sta tistic a l a g e n c ie s.

S u n d q u ist

n o tes th a t w ith re s p e c t to s ta tis tic s on th e s tr u c tu r e of a g ric u ltu re ,
th o u g h d a ta needs for decisions have c h a n g e d , th e in stitu tio n al
m eans and p ro c e d u re s for collection have not a d e q u a te ly k ep t p ace.
For exam ple, R aup c ite s a fundam ental ch an g e th a t is a lre ad y upon
us.
It involves th e com pelling n e c e ssity to d is tin g u is h betw een
th e 'firm ' and th e 'p la n t' in o u r an aly sis o f a g ric u ltu ra l
in d u s try p ric e s . No d istin c tio n o f th is ty p e has been
n e c e ssa ry in th e p a s t, fo r th e firm and th e p lan t w ere
identical o v e r a d ecisiv e p a rt o f A m erican a g ric u ltu re . T he
id e n tity can no longer b e ta k e n fo r g ranted* how ever, for
it has been serio u sly d is tu rb e d by th e erosion o f th e economic
b o u n d a rie s th a t once clearly d efin ed a farm u n it.
O th e r s tr u c tu r a l c h an g e s in Am erican a g ric u ltu ra l s e c to rs th a t have
c a u se d problem s w ith o u r c u r r e n t s ta tis tic s in clu d e:

grow ing d iv e rs ity

in size o f p ro d u ctio n u n its , n o n a g ric u ltu ra l a c tiv itie s , an d c o n ce n tra tio n
o f p ro d u ctio n an d m ark etin g .

53

Here S undquist takes s tru c tu re to mean essentially th e num ber,
size and decision-m aking control th a t prevails for firms engaged in
the production and m arketing phases of o u r natural food and fiber
in d u stry .

This bro ad er definition includes su b sets of s tru c tu r e such

as te n u re , legal form, production composition of firm s and d eg ree of
v ertical integration.
T heoretically, prices may perform some o r all of th re e major
functions in any m arket or economy:

allocative fu n ctio n s, d is tri­

b u tiv e functions, and eq uilibrating functions (Tomek and Robinson,
H ouck).
Allocative Function.

Price acts as a signal in th e economy.

signaling concept lies at th e h e art o f most allocation decisions.

This
Alloca­

tive information is to a large d e g re e used in sh o rt ru n tactical decision
m aking.

For example, in making m arketing decisions a p roducer

is in te reste d in the c u rre n t m arket p rice because it enables him to
decide when and w here to m arket his p ro d u ct.
D istributive F unction. The d istrib u tiv e function in which price
theoretically plays a p a rt, relates to longer periods of time where
prices se rv e as m easures o f economic perform ance and as indicators
for lo n g er-ru n allocation decisions—stra te g ic decisions.

T his function

reflects m arket perform ance ra th e r th an m arket coordination.

T hat

is, p rice functions as a scorekeeper determ ining how much economic
rew ard is received by various m arket p a rtic ip a n ts.
E quilibrating Function. T o g eth er, the allocative and d is tri­
b u tiv e functions of p rice perform a th ird role, th e eq uilibrating
o r m arket clearing function.

In p u re th e o ry , an equilib ratin g set

of p rices can be viewed as th e solution to specific mathematical

54

problem s which sim ultaneously em body b oth allocative and d is trib u tiv e
fu n ctio n s o f economic a c tiv ity .
Collins recognized th e c h an g in g role o f p ric e in a g ric u ltu ra l
m ark e ts as a co o rd in a tin g fu n ctio n and co n cern ed him self with alter*
n a tiv e m ethods and p ro c e d u re s .

He s ta te d th a t th r e e conditions

should p rev ail if coordination in a d e c e n tra liz e d , specialized m arketing
system is to be a ch iev e d .

F ir s t, th e r e should be a communication

n etw o rk to link th e perfo rm an ce u n its in th e sy ste m .

S eco n d , sig n als

should be developed which a c c u ra te ly re fle ct th e re le v a n t economic
v a ria b le s.

A n d , th ir d , p a rtic ip a n ts o f th e system m ust be able

an d willing to tra n s la te th e sig n a ls receiv ed into an a p p ro p ria te
se t o f a c tio n s.
Collins p o in ts ou t th a t h isto ric a lly , for many a g ric u ltu ra l p ro ­
d u c ts , th e fu n c tio n s of comm unication an d co o rd in atio n hav e been
s e rv e d w ithin an open m ark et system u sin g p ric e s a s th e d ire c to r
o f economic a c tiv ity .

"Yet in a g ric u ltu ra l m ark e tin g , as in many

in d u stria l fie ld s, o th e r a v e n u e s fo r c o o rd in a tin g th e a c tiv itie s of
d iffe re n t firm s have been in c re a sin g ly em ployed."

He c ite s v e rtica l

in te g ra tio n b u t n o te s th a t v a ry in g d e g re e s o f incom plete in te g ratio n
a re common in a g ric u ltu re .
T h u s f a r , th e d isc u ssio n has been in term s o f th e determ in atio n
o f p ric e s and th e d istin c tio n s in its th e o re tic a l fu n ctio n s in th e m ark e t.
We now tu r n to p ric e d isc o v e ry , th e p ro c e ss by w hich b u y e rs an d
se lle rs a rr iv e a t sp ecific p ric e s .

T h e v a rio u s m ethods u se d to

a r r iv e a t p ric e s fo r a g ric u ltu ra l p ro d u c ts h av e b een cla ssified in a
nu m b er o f w ays.

Tomek and R obinson s ta te th a t th e following five

c a te g o rie s c o v e r m ost of th e p ric in g sy stem s now em ployed in

55

a g ric u ltu ra l m a rk e ts:

p riv a te n eg o tiatio n betw een in d iv id u a ls, tr a d in g

a t o rg a n iz e d m arket places inclu d in g a u c tio n s , b a rg a in in g betw een
g r o u p s , form ula p ric in g , an d a d m in istered p ric in g .
Many econom ists a n d m arket p a rtic ip a n ts believ e th a t a t p re s e n t
many m ark e ts a r e c h a ra c te riz e d by p ric e d isc o v e ry m echanism s th a t
do not perform well.

Some of th e c a u s e s in clu d e:

c o n c e n tra tio n of

decision m aking, h igh c o st o f o p e ra tio n , lim ited m ark etin g a lte rn a tiv e s
fo r p ro d u c e rs , lack o f m arket inform ation an d th in m a rk e ts, coupled
w ith fa c to rs e x te rn a l to th e m arket su c h a s th e in tro d u c tio n o f
so p h istic a te d tech n o lo g y in m ark etin g an d a p p lied political p r e s s u r e .
Thus, a lte rn a tiv e s to tra d itio n a l p ric e d isc o v e ry m echanism s a re
in c re a sin g ly p re v a le n t.

For exam ple, rem ote p ric in g , fo rw a rd con­

tr a c tin g , a n d v e rtic a l p ric in g a rra n g e m e n ts a re grow ing an d may
c o rre c t some o f th e sh o rtco m in g s in th e tra d itio n a l sy ste m .
C h a n g es in p ric in g d isc o v e ry m echanism s, like c h a n g e s in m ark et
s t r u c tu r e , c re a te a new se t o f d e cisio n s fo r b o th p r iv a te an d p ublic
d ecision m a k e rs.

In th e lig h t o f th e p re c e d in g , it can be seen th a t

th e s e c h a n g e s h av e a t least th r e e im plications fo r p u b licly s u p p o rte d
inform ation:
1.

T h e inform ational n e ed s o f th e d e c isio n -m a k ers m ust be

id en tifie d b e c a u se on e can e x p e c t c h a n g e s in th e ir n e ed s a s m arket
s t r u c tu r e an d p ric e d isc o v e ry m echanism s c h a n g e .
2.

A s m arket s t r u c tu r e a n d p ric e d isc o v e ry m echanism s c h a n g e ,

o n e m ight e x p e c t th e p u b lic s ta tis tic a l sy stem to employ d iffe re n t
d a ta collection m ethodologies.
3.

T h e s e new m arket a rra n g e m e n ts b rin g into q u e stio n w h e th e r

o r n o t p u b lic fu n d s should be in v e ste d in some m ark et inform ation
s y s te m s .

56

R esearchers have long debated th e causal relationship between
m arket s tru c tu re and price discovery mechanisms. Two general
hypotheses are implicit in the foregoing discussions and hence are
implicit in th e research on pricing mechanisms in ag ric u ltu re. One
is th at a causal relationship ex ists between pricing mechanisms and
m arket s tr u c tu re , governm ent policy, and o th er variables. As a
re su lt, th e mechanisms are subject to change. T hat is, price dis­
covery mechanisms a re endogenous variables in the m arketing system ,
and if the perform ance of a pricing mechanism is somehow unsatis­
facto ry , p riv ate o r public decision-m akers may be able to influence
th e development of more a p p ro p riate mechanisms. T hus, the general
justification for research on the topic is to develop information for
such decision-m aking.
A second hypothesis is th at the causation may not run exclusively
from stru c tu re to mechanism, bu t ra th e r may be simultaneous in
ch ara c te r.

S tru c tu ra l ch aracteristics help determ ine the n atu re of

th e pricing mechanism, but the n a tu re of th e mechanism may also
influence s tru c tu re .

For example, farm er bargaining may be a

response to th e declining num ber of b u y e rs, but the development of
a farm er bargaining group may, in tu r n , co ntribute to changing th e
s tru c tu re of b u y e rs.
At any ra te , argum ents centered around th is issue are likely to
continue. We can all a g ree, how ever, th at th e price discovery process
and s tru c tu re o f th e m arket can influence th e q u an tity and quality
o f information available, as well as th e distribution of information to
m arket p a rticip a n ts, and th e evaluation of th at information in the
sense of tr a d e rs ' decisions to buy o r sell.

In a v ery general sen se, th e notion of m arket organization and
informational p ro p erties is im portant to the design o f a statistical
system .

The s tru c tu ra l c h a rac teristics of a m arket may se rv e a s a

criterio n for public investm ents in inform ation. T his view su g g e sts
th a t th e amount and kind of information th at an individual decision
maker demands is related to th e s tru c tu re of th e m arket. One can
possibly te s t th e relationship between m arket s tru c tu re (m arket
arra n g em e n ts-p ric e discovery mechanism) and inform ation.

For

example, an examination of two o r th re e p rice discovery mechanisms
in a major ag ric u ltu ral commodity m arket can be evaluated on th e
basis of th e ir ability to g en erate information for th e m arket p a rtic ip a n ts.
A major outcome of th is approach is a dem onstration of how th e demand
fo r information is altered u n d er various m arket a rran g em en ts. More­
o v e r, inferences can be made as to how th e p re se n t day publicly
su p p o rted statistical system can b e tte r facilitate decision making of
v ario u s m arket p a rtic ip a n ts.
include:

Related research q u estio n s would

What a re th e institutions used for product tra n s fe r?

Where

within th e se in stitu tio n s do p rices ex ist? What function o r fu n ctio n s
do th e se p rices perform ? How does th e role of price change as
in stitu tio n s change? Finally, what is th e relationship, if a n y , between
th e various kinds of prices th a t exist within o r among various in sti­
tu tio n s? While th is approach does not necessarily lead to a value of
information p er se , it can provide a criterio n by which choice can be
made betw een altern a tiv e m arket decision m akers.

Not only should

th e re s u lts of th is resea rch be useful to th e public sta tistica l agencies,
b u t it could tell us a g rea t deal about where and how to collect price
information a n d , p erh ap s more im portantly, what p rice information is
really needed and what it means in a specific institutional c o n te x t.

58

E.

M arket P erform ance a n d Inform ation
While th e s t r u c tu r e o f a m ark e t c an h a v e s u b s ta n tia l im pacts on

th e d e sig n o f th e s ta tis tic a l sy ste m , a n asso c iatio n b etw een inform a­
tion an d some m easu res o f m arket p e rfo rm an c e may also s e rv e as
c rite rio n fo r p u b lic in v e stm e n ts.

S e v e ra l s tu d ie s h a v e a tte m p te d to

lin k inform ation to se le c te d dim ensions o f m ark e t p e rfo rm an c e su c h a s
p ric e s ta b ility an d p ric e d is p e rs io n .
Houck a n d P earso n in v e s tig a te d th e e ffe c t o f USDA c ro p r e p o r ts
on p ric e s ta b ility in four m ajor comm odity m a rk e ts .
w ere te s te d in th e s tu d y :

Two h y p o th e se s

1) C rop R e p o rtin g B oard c ro p p ro d u c tio n

fo re c a s ts from on e m onth to a n o th e r v a ry in v e rs e ly w ith m ark e t
p r ic e .

2) P ric es in commodity m a rk e ts a r e less v o latile follow ing a

c ro p re p o rt th a n ju s t b e fo re it is re le a s e d .
U sing daily p ric e s b e fo re an d a f t e r c ro p p ro d u c tio n a n d p ro s p e c ­
tiv e p la n tin g s r e p o rts o v e r a 13 y e a r p erio d (1963-75), th e y m easu red
th e m ark et reactio n to th e re le a s e o f th e USDA fig u re s on c o rn , so y ­
b e a n s , s p rin g w heat an d w in te r w h e at.

In g e n e ra l, th e y c o n clu d ed

th a t a fa irly s tr o n g re la tio n sh ip e x is te d betw een q u a n tity fo re c a s t by
SRS an d s u b s e q u e n t p ric e s .
In te s tin g th e second h y p o th e s is , th e y exam ined th e e ffe c ts of
c ro p r e p o r ts on d a y -to - d a y p ric e flu c tu a tio n s d u rin g th e w eek b e fo re
an d a f te r SRS re le a s e s .

T h e ir fin d in g s ra n c o u n te r to th e h y p o th e s is

th a t p ric e flu c tu a tio n sh o u ld d e clin e follow ing c ro p r e p o r t s .

To th e

e x te n t th a t th is re la tio n sh ip can b e em pirically m e a su re d , it may be
u se fu l in e stim atin g b e n e fits o f inform ation in te rm s o f th e v a lu e o f
th e r e s u ltin g p ric e s ta b ility .

59

T h e body o f inform ation th e o ry o ffe rs th e p lau sib le h y p o th e sis
th a t inform ation im p erfections can re s u lt in p ric e d is p e rs io n s .
P ric e d isp e rsio n is a m an ifesta tio n —a n d , in d ee d , it is th e
m easu re—o f ig n o ran c e in th e m ark e t. D isp ersio n is a
b iased m easu re of ig n o ran ce b e cau se th e r e is n e v e r a b so lu te
hom ogeneity in th e commodity if we in clu d e th e term s o f sale
w ithin th e co n cep t of th e commodity. T h u s , some autom obile
d e a le rs m ight perform m ore s e rv ic e s , o r c a r r y a la r g e r ra n g e
o f v a rie tie s in sto c k , a n d a portio n of th e o b se rv e d d is p e r­
sion is p resu m ab ly a ttr ib u ta b le to su c h d iffe re n c e s . B ut it
would be m etap h y sic a l, an d f r u itle s s , to a s s e r t th a t all
d isp e rsio n is d u e to h e te ro g e n e ity . ( S tig le r .)
T h is th e o ry in a com petitive equilibrium fram ew ork a rg u e s th a t
p ric e d isp e rsio n is a phenom enon o f m arket d ise q u ilib riu m .

If th e

c o st o f inform ation a cq u isitio n is low e n o u g h , co n su m ers will g ra v ita te
to th e lo w e r-p ric e d firm ; o th e r firm s will be o b lig a ted to lower th e ir
p ric e s to re g a in c u sto m e rs, a n d th e p ric e d isp e rsio n will e ffe ctiv ely
- d is a p p e a r (Dahl a n d H am m ond). T h e optim al d isp e rsio n o f p ric e s a t
eq u ilib riu m is assum ed to o c c u r w hen p ric e s a c c u ra te ly re fle c t co n ­
su m er p re fe re n c e s w ith a p p ro p ria te allow ances fo r tr a n s p o rta tio n ,
p ro c e ss in g an d s to ra g e c o sts (D iv in e ).
D ivine c o n d u c te d se v e ra l ex p erim e n ts th a t exam ined th e re la tio n ­
sh ip betw een selected C anadian reta il food m ark ets a n d p ric e inform a­
tio n .

T h e e x p e rim e n ts involved th e publicatio n o f co m parative re ta il

p ric e in d ices in se le c te d te s t m a rk e ts while m onitoring th e control
m a rk e ts .

T h e s tu d y had fo u r major h y p o th e s e s :

(1) S ig n ifican tly

d iffe re n t p ric e s fo r a s ta n d a rd iz e d m arket b a sk e t of food p ro d u c ts
would b e c h a rg e d b y com peting se lle rs p rio r to th e dissem ination o f
co m p arativ e p ric e inform ation.

(2) T h e pu b lic dissem ination o f

co m p arativ e p ric e inform ation would a lte r th e d isp e rsio n o f p ric e s
a c ro s s s to r e s a n d lower th e a v e ra g e m arket p ric e level in th e te s t
m a rk e t.

(3) T h e level o f co n su m er sa tisfa c tio n w ith food s to re s and

60

food p ro d u cts would increase significantly in th e te s t m arket as a
resu lt of th e com parative price information program .

(4) The

perceived and estim ated value of com parative p rice information would
exceed th e cost of providing such inform ation.
Some of th e concerns of th e retail m arket p rice rep o rtin g stu d y
range from methodology to practical implementation o f such a system .
The cost of o p eratin g th e system , c o n tra ry to th e findings of th e
Divine stu d y , may be p rohibitive.
cen tral to argum ents on both sid e s.

How one accounts for co sts is
Some economists feel th a t an

a p p ro p riate m arket basket should include a la rg e r num ber of items
than th a t which th e Divine stu d y included.

Also, m arket b ask ets

should reflect th e d iv erse m ake-up of various communities (ethnic
b ack g ro u n d , c la ss, e tc .) within and betw een c ities.

T h u s, a la rg e r

m arket b ask et and increm ents in th e num ber of m arket b ask ets
would certainly raise th e costs of such a se rv ice .
O pponents of retail p rice rep o rtin g system s also a rg u e th a t price
rep o rtin g system s at th e farm level cover homogeneous p ro d u cts (at
th a t level in th e m arket) and p rice signals a ccu rate information for
making com parative decisions.

But at th e retail level in th e m arket,

p ro d u cts a re extensively d ifferen tiated and as a resu lt a simple price
sta tistic cannot transm it adequate information for a cc u ra te consum er
decisions.

Also, retail p rice rep o rtin g system s ignore o th e r factors

of im portance to consum ers which determ ine th e ir shopping p a tte rn s .
O ther facto rs include fre sh n e ss of meats and v eg etab les, q u ality of
food and location of sto re , e tc .
A spects of th e retail p rice re p o rtin g system c ertain ly re q u ire
more re se a rc h .

T his does have significant implications for th e p e r­

formance of m arkets.

61

F.

Summary
T his c h a p te r p re se n te d fo u r methodological approaches to th e

stu d y of m arket inform ation.

Each approach re fle cts a theoretical

base w hich, in many c ase s, is inadequate to a d d re ss specific infor­
mational problem s.

T his c h a p te r also illu stra te s th e d ifferen c e s in

approach employed by econom ists in stu d y in g informational phenom ena.
The net social b enefit approach d e riv e d from th e neoclassical
fram ework fails to deal with many o f th e u n d erly in g problem s o f
information as a commodity with public good c h a ra c te ristic s .

T he

pragm atic u s e r 's a p p ro a c h , guided by a limited theoretical b a se, is
often applied to a single class of u s e r s .

T h ere fo re , q u e stio n s reg a rd in g

alte rn a tiv e u ses of inform ation a re seldom co n sid ere d .

T he relation­

ship betw een m arket s tr u c tu r e and inform ation is prim arily an in tu i­
tiv e one in th e h an d s of most econom ists.

For th e most p a r t, th e

lite ra tu re h as only d ealt w ith th is relationship in conceptual term s with
no empirical s tu d ie s .

While econom ists marvel o v e r th e information

signalling abilities of th e com petitive m arket, how inform ation re la te s
to o th e r m arket s tr u c tu r e s is given sc a n t a tten tio n in th e lite ra tu re .
T he final ap p ro ach review ed h e re re la te s m arket perform ance with
inform ation. Most stu d ie s attem pted to show th is relationship
em pirically w ithout co n sid erin g behavioral dim ensions of th e m arket
p a rtic ip a n ts .

In s h o rt, each methodological approach has serious

theoretical lim itations.

T h is void in economic th eo ry has d irec t impli­

cations for f u r th e r re se a rc h on m arket inform ation sy stem s.

CHAPTER IV
THE MICHIGAN PROCESSED POTATO INDUSTRY, THE
FIRM'S DECISION ENVIRONMENT, AND SUPPORTING
INFORMATION SYSTEMS: DESCRIPTIVE RESULTS

A.

Introduction
T his ch ap ter p re se n ts a description of th re e major components

of the stu d y framework: the Michigan processed potato in d u stry , the
supporting information system s operating in th e m arket, and th e
decision environm ent of the firm.

Personal interview s were conducted

with m anagers of processed potato firms to supplem ent existing infor­
mation on the s tru c tu re and conduct of th e in d u stry .

Follow-up

interview s were made to obtain information on th e procurem ent
behavior of th e firm .

Information sources were identified in th e in te r­

views and secondary documents were used to provide a description of
th e su p p o rtin g information system s operating in th e m arket.

The

last section describes th e n atu re of the firm decision environm ent
and is based on personal interview s with firm m anagers.
B. T he Michigan Processed Potato Ind u stry
1. Market S tru c tu re
M ichigan's agricultural industries a re of g rea t importance to
both th e agricultural and to th e industrial life of th e sta te .
Although th e problems of a g ricu ltu re are inextricably enmeshed in
th e business judgem ents of these firms, relatively little attention has
been given to the problems of the handlers and th e p rocessors of

62

63

a g ricu ltu ral commodities.

Indeed, th e bu sin ess decisions made at

th is m arket level impact th e e n tire food system in num erous and
significant ways.
In g en eral, th e s tru c tu ra l c h a ra c te ristic s of th e commodity m arkets
which supply most food and fib er in d u strie s d ifferen tiate s th e problems
of th ese in d u strie s from those of o th e rs .

T he raw pro d u ct used by

th e processed potato in d u stry comes from th o u san d s of farm ers who
in total a re producing a fairly homogeneous p ro d u ct which is
exceedingly difficult to control; th e pro d u ct e n te rs th e m arket in
accordance with w eather and seasonal determ inants th a t a re exogenous
to th e production p ro cess.

T h ere fo re , special kinds of problem s occur

in potato processing because of th e u n certain ty in supply of th e raw
p ro d u c t.
A nother d istin c tiv e fe a tu re of th is segm ent of th e potato in d u stry
is th a t usually th e identity of th e p ro d u cer becomes an unim portant
factor since th e commodity can be stan d ard ized and g ra d e d .

T his is

tru e p articu larly when potatoes a re bought and sold on th e open
m a rk e t.1 The economic implications of th is situation a re significant.
When p ro d u cts can be bought and sold by d e scrip tio n , sev ere price
competition usually e x is ts .

Price becomes m arket determ ined and su b ­

jected to any num ber o f exogenous fac to rs which c re ate p rice instab ility .
Also, some p ro d u cers believe th a t th e ir ability to "control" is fu rth e r
diminished by th e fact th a t th e re a re relatively few b u y e rs who can
e x e rt th e ir m arket power to d e p re ss th e prices o f raw p ro d u ct.

lnOpen m arket" is an ex p ressio n used in th e in d u stry which
implies th at th e b u y e r (p ro cesso r) p u rc h a se s p ro d u ct usually for
cash without any c o n tractu al arran g em en ts with th e se lle r.

64

Finally, th e potato m arketing seaso n , a s with o th e r v e g etab les,
is relatively s h o rt.

A lthough potatoes can be s to re d , th e p a rtic ip a n ts

in the m arket m ust decide who should b e ar th e c o sts and risk s
asso ciated with sto rin g a p erish ab le pro d u ct o v er th e c o u rse of a
y e a r.

T he s h o rt m arket season b rin g s on to th e local m arket, within

a two to th re e week sp a n , a c ro p which often fu r th e r d e p re ss e s p rices
d u rin g h a rv e s t.

T h e grow ing and m arketing season, of c o u rse, v a rie s

c o n sid erably o v e r th e n atio n , especially from n o rth to so u th .

B ecause

o f th e num ber of p ro d u c e rs, th e com paratively sta n d ard ize d commodity
which th e y p ro d u ce, and th e c o n ce n tra te d m arketing season, th e p ro ­
c essin g firm e n te rs a complex m arketing system for th e p u rc h a se of
raw commodities.
T he above ch arac teriza tio n o f th e production of potatoes is, for
th e most p a rt, th a t of a com petitive a g ric u ltu ra l m arket.

B ut as th e

p ro d u ct e n te rs th e p ro c e ss o r's level in th e m arket, th e m arket becomes
more c o n c e n tra te d ; it has a small num ber of firm s producing d iffe r­
e n tiated p ro d u c ts .

T h is m arket organization c re a te s an in te re stin g

se t o f implications for th e p ro cessed potato in d u s try .

T he discussion

th a t follows deals with th e to p ics of p ric in g , location of p lan t,
p rocurem ent problem s, q u ality problem s and p ro d u ct d ifferen tiatio n .
At th is level in th e m arket, th e p rocessing firm te n d s to be a
p rice m aker.

While p rice still is an im portant co n sid eratio n , n o n -p rice

v a ria b le s—q u a lity , q u a n tity , e t c . —become of g re a te r im portance as
th e firm g ains more control o v e r th e p rice o f th e p ro d u c t.
T he problem and m ethods of p u rc h a sin g a re d istin c tiv e in th e
p ro cessed v egetable in d u s trie s .

T h e s u p p ly -p ric e , v ariatio n s in

volume of in v e n to rie s, q u ality and m ethods o f procurem ent a re affected

65

b e c a u se th e commodity p u rc h a s e d is a p ro d u c t o f th e farm a n d th e r e ­
fo re su b je c t to u n co n tro lla b le e v e n ts .

S ig n ific an t v a ria tio n s in th e

s u p p ly o f raw p ro d u c t can re s u lt from c h a n g e s in farm in g p ra c tic e s ,
in g o v ern m en t p ro g ra m s, o r in w e a th e r co n d itio n s an d o th e r v a ria b le s .
Such v a ria tio n s not only h av e an im pact on th e firm 's p ro cu rem en t
p ra c tic e s b u t also a ffe c t location o f p la n ts , c o n s tru c tio n o f sto ra g e
facilities an d in v e n to ry policies.
C h ip p in g and fre e z in g firm s, th e dom inant form s o f p otato
p ro c e ss in g in M ichigan, d ecid e p la n t location on v e ry d iffe re n t
c r ite r ia .

Potato c h ip firm s locate th e ir p la n ts n e a r u rb a n a re a s ;

th e y a re m a rk e t-o rie n te d .

T h e national d is trib u tio n of c h ip p in g p la n ts

b y reg io n s u p p o rts th is c o n te n tio n sin ce th e la rg e s t nu m b er o f p la n ts
a r e located in th e h eavily p o p u la te d n o r th e a s te r n re g io n .

Within

M ichigan, all c h ip p in g p la n ts a r e located in u rb a n a r e a s .

Two main

fa c to rs in flu en ce th e location o f c h ip p in g p la n ts .

F ir s t, th e tr a n s p o r ­

ta tio n c o sts o f th e fin ish e d p ro d u c t re la tiv e to th e raw p ro d u c t a re
h ig h e r.

T h e h ig h volum e-low b u lk d e n s ity of th e fin ish e d p ro d u c t

r e s u lts in h ig h tr a n s p o rta tio n c o s ts .

S eco n d , q u a lity in term s o f

fr e s h n e s s o f c h ip is im p o rtan t to th e co n su m er.

T ra n s p o rtin g th e

fin ish e d p ro d u c t o v e r long d ista n c e s would lead to q u a lity d e te rio ra ­
tio n , sto c k in g problem s a n d s h e lf ro ta tio n d iffic u ltie s .

T h e re fo re ,

p la n ts a r e ty p ic a lly b u ilt to s e rv e a sp ecific c ity o r m etropolitan a re a .
C re ig , on th e o th e r h a n d , c o n te n d s th a t th e r e a r e c o n sid e ra b le
econom ies o f scale in p o ta to c h ip p la n ts .

He c ite s th e fa c t th a t c h ip

p la n ts in P e n n sy lv an ia s e rv ic e a re a s from F lorida to New Y o rk .
feels th a t th e in d u s tr y a s a whole would o p e ra te m ore e ffic ie n tly
w ith a sm aller n u m b er o f p la n ts .

Most p la n ts still s e rv e a lim ited

m ark et a re a an d locate on th a t b a s is .

He

66

Quality of raw product is an important locational factor for
frozen potato processing. Most freezers tend to locate near th e ir
source of potatoes.

Nationally, most freezers are located in the

w estern potato producing sta te s of Idaho and Washington.
Product differentiation supported through various forms of
ad v ertising and product quality variation, e tc ., is of in terest here
because of th e possible protection which it might afford th e individual
processor from th e competitive p ressu re of o th er processors and
potential e n tra n ts to th e m arket.

In describing product differentia­

tion as a dimension of the processed potato m arket, it is important
th at we distinguish between th e nationally advertised brands and
what is commonly refe rre d to as "minor brands" (brands th at are not
ad v ertised nationally). In Michigan, th e re are plants of two firms
producing nationally ad v ertised b ra n d s, one a freezer and one a
ch ip p er.

The remaining firms serve the minor brand m arket.

For th e most p a rt, nationally advertised brands have an advan­
tage over o th er processors in th a t they can command price premiums.
P resently available data do not allow detailed examination of th ese
ad v an tages, but several reasons can be cited for downgrading th e
importance of national b ran d s as a substantial source of market
power (Helm berger and Hoos).
1. Small as well as large processors are able to put up a
high-quality pack, and private labels on fancy grade p roducts as
opposed to stan d ard or e x tra sta n d ard g rad e s, are very common.
2. T he products as consum er goods are relatively non-technical in n a tu re and are purchased and consumed frequently so th a t
comparisons can easily be made.

67

3.

T he h ig h er p rices received by national p ro c e sso rs a re at

least p artially o ffset by a d v e rtisin g and promotional e x p e n se s.
In minor b ran d m ark ets, p ro d u ct d ifferen tiatio n provides th e
p ro cesso r with v ery little p rotection from th e rig o rs of com petition.
In th is segm ent of th e m arket th e re a re many relatively small
sellers who sell a p ro d u ct w here quality d ifferen ces a re reflected
in p ric e .

Beyond th e p rocessing level in th e potato in d u s try , th e

n ex t m arket level includes retail c h ain s, sto re s, rem anufacturing
and th e in stitutional m arket.
A complete s tru c tu ra l p ic tu re of th e in d u stry would look much
like th a t of an hour g la s s.

S ta rtin g with a highly com petitive p ro ­

d u c e r se c to r, one finds many grow ers producing a homogeneous
p ro d u ct th a t e n te rs a c o n ce n tra te d p ro cessin g se cto r c h arac terize d
by a few firm s who tran sfo rm th e raw p ro d u ct into a num ber of
finished p ro d u c ts which ultim ately find th e ir way via retail o u tle ts
to th e com petitive m arket of many consum ers.

T he hub of th is

m arket system —th e p ro cesso r level—is th e focus of th is s tu d y .
Number of P la n ts.

Lack of available time se rie s d ata limits

an an aly sis o f th e chan g es in num ber o f p lan ts and firm s o p e ra tin g
in Michigan o v e r th e y e a rs .

To some e x te n t, how ever, th e interview

p ro ce ss and secondary d ata provided some inform ation on th e num ber
o f firms in th e in d u stry (see T able 4 .1 ).
A lthough th e total q u a n tity of p ro cessed potatoes produced in
Michigan has in creased over th e last two decad es, th e num ber of
com panies engaged in potato p ro cessin g have d e creased su b sta n tia lly .
In 1960, th e re w ere approxim ately 23 to 30 potato pro cessin g firms
in th e s ta te ; in 1974, th e re w ere 23 firm s.

Today only 14 p ro cessed

68

T able 4.1

Number o f Potato P ro cessin g
P lants in M ichigan
1960

1970

1980

C h ip p ers

21

15

8

F re ez ers

2

3

2

5

4

T y p e o f Plant

O th er
S o u rce:

Data collected from perso n al in terv iew s with M ichigan
p ro ce ssed potato p lan t m an ag ers, 1980.

T able 4.2 A verage O u tp u t p e r P ro c essin g
P la n t, 1980
A nnual O u tp u t
(000 cwt)

Num ber of
P lan ts

P e rc e n ta g e

U n d er 100

2

20

100 to 1,000

5

50

O ver 1,000

3

30

10

100

TOTAL
S o u rc e:

Data collected from p erso n al in terv iew s w ith M ichigan
p ro c e sse d potato p lan t m an ag ers, 1980.

69

potato firms o p erate in Michigan. Only two of th ese are free ze rs;
eight a re c h ip p e rs.

T he larg e st change in num ber of firm s.occurred

among the chip p rocessors (see Table 4.1), The 1960s were volatile
y ears for th e chipping m arket which was characterized by m ergers
and b an k ru p tcies. Many of th ese firms were located in Detroit
where at one time as many as tw enty plants operated in th at city
alone.
As p art of th e F rito-L ay's national expansion, at one time
twenty plants were acquired in various cities across th e nation.
The company en tered th e Detroit chip m arket d u rin g th e early six ties.
In 1968, the Federal T rad e Commission charged the Frito-Lay
Company with violation of Section Seven of the Clayton A ct.

The

Company was subsequently o rd ered to divest itself of ten p lan ts.
The impact of F rito-L ay's activities on the Detroit market is difficult
to estim ate, b u t d u rin g th a t time period, several firms in the city
went out of business while o th ers sold out to la rg e r companies.
The most significant change over the last tw enty y ears in th e number
of firms in th e Michigan processed potato in d u stry o ccurred in
Detroit during th e 1960s.
Number of P ro d u cts Handled .

In general potato freezers tend

to process a single p ro d u ct—potatoes.

On th e o th er hand, chipping

firms are largely m ulti-product o p eratio n s. A major reason for
operating m ulti-product plants is to extend th e processing season
and to broaden product lines.
unit of o u tp u t.

T his te n d s to reduce fixed costs per

Although th e re is no ap p aren t relationship between

plant size and num ber of p ro d u cts handled (see Table 4 .3 ), most
plant m anagers indicated th a t they processed th e optimum num ber
o f p ro d ucts given th e size of th e ir p lan ts.

70

Table 4.3 Number of P ro d u cts P rocessed p e r P la n t, 1980
Number o f P ro d u cts
1

2

3

4 o r more

Chip

2

2

2

1

F reezer

2

2

2

T ype o f Plant

Annual O utput (000 cwt)
U nder 100

1

100 to 1,000

1

O ver 1,000

2

S o u rc e:

Data collected from personal interview s with Michigan
p ro cessed potato p lant m anagers, 1980.

1

71

T h e re is no horizontal in te g ra tio n among M ichigan potato
c h ip p e rs an d fre e z e rs .
po tato es fo r c h ip s .

All ch ip p in g p la n ts w ere en g ag ed in p ro cessin g

Potato fre e z e rs located in M ichigan m aintain only

th a t line o f b u s in e s s .
M arket C o n c e n tra tio n . Economic co n ce n tra tio n in th e Michigan
p ro ce ssed potato in d u s try is d iffic u lt to estim ate.

S everal problem s

a re asso ciated with m easuring a s ta tic co n ce n tra tio n ratio fo r th e
p ro ce ssed p otato in d u s tr y .

F ir s t, in th e ch ip m ark e t, w here p lan ts

a re b u ilt to s e rv e a specific m arket are a o r u rb a n m arket (minor
b ra n d m a rk e t), national o r in d u s try wide c o n ce n tra tio n m easures
do no a p p ly .

S econd, fre e z e rs s e rv e a national o r regional m arket

which m akes a s ta te 's m easure of co n ce n tra tio n in a p p ro p ria te .

In

s h o r t, th e re le v a n t m arket fo r most p ro cessed potato firm s does not
coincide w ith th e s ta te ; in a d d itio n , ch ip p in g and fre e z in g a re so
d iffe re n t th e y in effe ct c o n stitu te s e p a ra te in d u s try s u b s e c to rs .
T h is m arket p a tte rn will likely m aintain itse lf given th e p re s e n t mar­
k et co nditions (tec h n o lo g y , ta s te an d p re fe re n c e s o f c o n su m e rs).
T h u s , m aking economic c o n c e n tra tio n d ifficu lt to m easu re.
White th e r e is little d a ta on th e co n ce n tra tio n o f th e Michigan
p ro c e sse d p otato in d u s tr y , it is possible to p ro v id e some in sig h ts
on th e co n ce n tra tio n of p ro cu rem en t o f raw p ro d u c ts by em ploying
a m easure of d ista n c e o f p ro c u re m e n t.

Much like p ro d u c t sa les,

com plete docum entation on th e d e g re e o f co n ce n tra tio n o f p ro c u re ­
ment in local p ro c e sso r-g ro w e r m ark ets is d iffic u lt, if not im possible,
b ecau se of th e lack o f good d a ta an d th e co nceptual problem s
asso c iated w ith m arket m easurem ent.

T he p e rish a b ility a n d b u lk in e ss

o f p o tato es n e c e ssita te locating fre e z in g p la n ts n e a r so u rc e s o f raw

72

product supply.

On th e o th er hand, chip plants a re m arket-oriented

and th erefore locate near urban areas.

Table 4.4 displays the

percent of raw product procured over various distances from the
plant and reflects th e fundamental distinction between freezers and
ch ip p ers.
A spects of E xchange. Raw product quality is a major concern
of potato processing firm s. To maintain quality and to insure a
dependable flow of product supply into th e p lant, processors make
extensive use of co n tracts with grow ers.

R esults of d irect in te r­

views with processors indicate th at contractual exchange with grow ers
is employed in procuring 68 percent of th e raw product used by
processors (Table 4 .5 ).

B rokers provide approxim ately 16 percent

of the raw product processed by th ese firm s, and 16 percent of the
raw product was obtained via open m arket.

Oral agreem ents, vertical

integration (own o r ren t land) and grow er cooperatives each make up
a small fraction of th e raw product m arketed for processing.
Freezers obtain 83 percent of th e ir raw product via w ritten
co n tract with grow ers w hile

relying on th e open m arket to supply

17 percent of th e ir raw product needs.

C hippers, on th e o th e r hand,

use w ritten c o n tracts less extensively than free ze rs.

C hippers

indicated th a t they employ w ritten co n tracts with grow ers to supply
62 percent of th e raw p ro d u ct.

B rokers and open market a rra n g e ­

ments accounted for 24 and 13 percent respectively of raw product
su p p ly .

Compared to free ze rs, chippers employ b ro k ers to a

g re a te r e x te n t.

As a general m atter, Michigan chippers rely on

b ro k ers to supply th e ir raw product needs from oth er sta te s, a fte r
the potato storage season ends in Michigan.

73

Table 4.4 S hare of Total Raw Product P rocured Within
Specified D istances from Michigan Potato
P rocessing P lants, 19801
C h ip p ers

F re ez ers

All Firms

P ercent of Total Raw Product
Miles from Plant J
Less th a n 50
51-100
101-200
O ver 200
TOTAL
S o u rce:

14
11
7
68

63
5
5
27

30
10
6
54

100

100

100

Data collected from personal interview s with Michigan
p rocessed potato plant m anagers, 1980.

^Weighted on basis of th e av erag e volume o f potatoes handled
in 1980.
T able 4 .4 shows th a t ch ip p e rs p ro c u re 14 p e rc e n t of th e ir raw p ro d u ct
w ithin a 50 mile ra d iu s of th e plant com pared to 63 p e rc e n t by fre e z e rs .
S u b seq u e n tly , for each d istan ce category g r e a te r th a n a 50 mile ra d iu s ,
c h ip p e rs p ro cu red a la rg e r p ercen t of th e ir raw p ro d u ct th an did fre e z e rs.
Within th e 51-100 mile rad iu s c h ip p e rs obtained 11 p e rc e n t and fre e z e rs
five p e rc e n t; within th e 101-200 mile rad iu s c h ip p e rs obtained seven
p e rc e n t and fre e z e rs obtained five p e rc e n t; and o v e r 200 miles,
c h ip p e rs obtained 68 p e rc en t while fre e z e rs obtained 27 p e rc en t of
th e ir raw p ro d u ct n eed s.

711
T a b le 4 .5

O p e ra tio n a l A s p e c ts o f E x c h a n g e

S o u rce o f Raw P ro d u ct

F re e z e rs

C h ip p ers

All

(P e rce n t)
C o n tra c ts:
W ritten

83

62

68

(*)

(*)

(*)

(*)

G row er co o p erativ e

(*)

(*)

B ro k e rs

24

16

17

13

16

TOTAL

100

100

100

S o u rc e:

Data collected from p erso n al in terv iew s w ith M ichigan
p otato p lan t m an ag ers, 1980.

Oral
Own o r r e n t land

(*)

F arm er's M arket
O th e r P ro c esso rs
O th e r (sp e cify
O pen M arket

*

)

Am ounts th a t a re less th a n one p e rc e n t.

W e ig h te d on th e b asis o f th e a v e ra g e volume o f p o tato es
p ro c e sse d in 1980.

75

T y p e s of B u y e rs for* P ro c e s so r's P ro d u c t.

R etailers o f all ty p e s

(national c h a in s, regional and local) p u rc h a se d 71 p e rc e n t of th e 1980
o u tp u t o f th e potato p ro c e ssin g p la n ts included in th is stu d y (T able 4 .6 ).
Within th is g ro u p , national food c h ain s a cc o u n ted fo r 48 p e rc e n t of
th e p ro d u c t p u rc h a se d from p ro c e ss o rs and regional and local food
ch ain s accounted for 12 p e rc e n t and 11 p e rc e n t re s p e c tiv e ly .

F u r th e r ,

w ithin th e ir re sp e c tiv e m a rk e ts, retail b u y e rs o f f re e z e rs ' o u tp u t
a r e fairly well d is trib u te d betw een th e n atio n al, regional an d local
food c h a in s.

B uying o f M ichigan potato c h ip p lan t o u tp u t, on th e

o th e r h a n d , is co ntrolled fo r th e most p a rt by national food ch ain s
(72 p e rc e n t) .

T h is fig u re ru n s m uch h ig h e r th a n estim ates of

e x ten sio n econom ists.

N ationally, food c h ain s ta k e about half of

all potato ch ip o u tp u t,

it is likely th a t re s p o n d e n ts had v a ry in g

notions o f w hat c o n stitu te s a national c h a in .

Regional and local food

ch ain s p u rc h a se e ig h t p e rc e n t an d fiv e p e rc e n t o f M ichigan c h ip p e rs '
p ro d u c t re sp e c tiv e ly .
T h e second la rg e st m arket fo r p ro c e sse d p o tato es is th e in sti­
tu tio n al m ark e t.

In stitu tio n s b u y approxim ately 19 p e rc e n t of all

p ro ce ssed p o ta to e s.

F re e z e rs sell m ore to in stitu tio n s th a n c h ip p e rs

in th a t th is retail o u tle t a c c o u n ts fo r 34 p e rc e n t of fro zen p ro d u c t
com pared to fo u r p e rc e n t o f th e p ro d u c t from c h ip p e rs .

C ooperative

wholesale b u y e rs and g o v ern m en t ag en cies b u y ab o u t five p e rc e n t
of th e fre e z e rs ' and c h ip p e rs ' p ro d u c ts .
2.

P rocurem ent C onduct

We have mapped o u t, in a g e n eral fash io n , th e major elem ents of
m arket s tr u c tu r e —num ber a n d size o f firm s, c o n c e n tra tio n , p ro d u c t

76
T a b le 4 .6

T y p e o f B u y e rs fo r P r o c e s s o r's O u tp u t, 1980

Type of Buyer

Freezer

C hipper

All

(Percent)
National retail food ch ain s1

19

72

48

Regional retail food ch ain s1

19

8

12

Local retail food c h ain 1

19

5

11

4

6

5

34

4

19

5

5

5

C ooperative wholesale buyers
2
In stitutions
Government agencies
O ther food m anufacturers
and processors
TOTAL
Source:

100

100

100

Data collected from personal interview s with Michigan
processed potato plant m anagers, 1980.

1T he various categories of food chains, though term s in common
usage do not have a clear, widely established definition in the
in d u stry . In its absence, th ere fo re , th e concept was respondent
defined h e re .
2

Establishm ents such as re s ta u ra n ts , hotels, hospitals
and cafeterias.

77

d iffe re n tia tio n , and several le sse r o n es—which make up th e economic
environm ent of th e Michigan p ro cessed potato in d u s trie s .

As developed

in th e th eo ry p re se n te d in C h a p te r II, m arket s tr u c tu r e has an
u ndeniable relationship to m arket co n d u ct, th e topic of th is section.
In its most common application, m arket conduct re fe rs to th e
firm 's policies tow ard its p ro d u ct m arket and tow ard th e moves
made by its rivals in th a t m arket (C av es, S c h e re r).

For th e p u r­

poses of th is section, em phasis is placed on th e behavior o f th e firm
in p ro cu rin g raw p ro d u cts for p ro cessin g ra th e r th an docum enting
th e firm 's behavior in its finished p ro d u ct m ark et.

Firm procurem ent

of raw p ro d u c ts is of in te re st for several rea so n s.

F irs t, it allows

th is stu d y to link with p revious stu d ie s d o n e .at th e p ro d u c e r's f ir s t
tra n sa c tio n level in th e m arket.

Second, little w ork has focused on

th is v ertical relationship from th e p ro c e ss o r's p e rs p e c tiv e . Finally,
th is m arket level provides a m anageable scope of th e in d u stry from
which to stu d y th e implications o r relatio n sh ip s betw een m arket
co n d u ct and inform ation.
In trad itio n al in d u stria l organization th e o ry , key v ariab les
commonly used as m easures of m arket conduct include pricin g
b eh av io r, p ro d u ct s tra te g y , re se a rc h and innovation, a d v e rtisin g ,
legal tac tic s and o th e rs .

T h ese v ariab les a re of in te re s t because

th e y enable one to u n d e rsta n d how firms behave u n d e r a given m arket
s tr u c tu r e .

T his section defines and d e scrib e s a se t of variables

th a t explain th e behavior of p rocessed potato firm s in p ro cu rin g raw
p ro d u c t.

In th e n ex t c h a p te r (C h a p te r V ), th e s e p ra c tic e s a re

linked to th e su p p o rtin g m arket inform ation sy ste m s.

In o th e r w ords,

h e re we exp lore th e im portant c ateg o ries of firm beh av io r in p ro cu rin g

78

raw p ro d u c t.

In th e n e x t c h a p te r, we also exam ine th e im plications

o f firm b ehavior (m arket con d u ct) fo r th e inform ational needs o f th e
firm .

To make th is stu d y m anageable, maket conduct a s it rela te s

to th e pro cu rem en t a c tiv itie s o f th e firm is d ivided into th e following
p rim ary a re a s o f c o n ce rn :
1. C o n trac tin g policies and p rac tic es
2.

P ricin g policies

3.

Q uality co n tro l policies

4.

M arket inform ation a ttitu d e s and b ehavior o f th e firm

C o n trac tin g Policies an d P ra c tic e s . C o n tra c ts a re widely used
in th e M ichigan p ro ce ssed p o tato in d u s try .

T hey make up 68 p e rc e n t

o f th e volume o f p ro d u c t ex ch an g ed betw een th e p ro ce ssin g firm s
an d th e g ro w e rs.

As th e num ber o f p ro ce ssin g firm s declined and

as a la r g e r p e rc e n t o f th e Michigan potato cro p has been m arketed for
p ro c e ss in g , c o n tra c t e x ch an g e has in c re ased in u se o v e r th e y e a rs .
S everal rea so n s a re c ited by econom ists fo r th e e x iste n c e o f
c o n tra c t ex ch a n g e ( S a r g e n t) .

F ir s t, th e m ark ets in which c o n tra c t

e x c h a n g e o c c u rs g e n e ra lly tr a d e in non-hom ogeneous p ro d u c ts .
S eco n d , c o n tra c t e x ch an g e usu ally c o v e rs an ex te n d ed time period
th a t involves two o r more p a rtie s in an e x clu siv e commitment.

And

fin ally , c o n tra c t e x c h a n g e o fte n a ris e s b ecu ase o f specific p ro d u ct
o r se rv ic e dem ands on th e p a rt of th e b u y e r.
S ince a p rim ary p u rp o se o f th is s tu d y is to d e sc rib e th e rela­
tio n sh ip betw een firm b eh av io r a n d inform ation, it is n e c e ssa ry to
u n d e rs ta n d th e term s d isc u sse d in c o n tra c t ex ch a n g e betw een
p o tato p ro c e ss o rs an d p ro d u c e rs .

To th is e n d , two basic q u e stio n s

w ere a sk e d of all potato p ro c e s s o rs :

1) what term s o f tr a d e a re

79

.

covered in your c o n tra cts with p ro d u cers? 2) Which additional term s
o f tra d e do you believe should be included in th e co ntract? The
resp o n ses to th ese questions a re discussed below.
All firm s indicated th at th e ir c o n tra c ts covered p ric e , delivery
sc h e d u le s, weighing p ro ced u res and quality s ta n d a rd s . Price was a
term of tra d e on all firm s' c o n tra cts and under certain conditions
p rice was subject to change.

For exam ple, chipping firms included

provisions for th e p ro d u cer to sto re th e pro d u ct over th e y e a r, which
affected th e final p rice of th e pro d u ct received by th e grow er.
Usually sto rag e fees a re added to th e p rice of th e product at a rate
of 20C to 40C p er month p e r h u ndredw eight. Also, free ze rs would
c o n tra ct to pay a premium for th e quality c h a ra c teristics of th e raw
p ro d u c t.

Although delivery schedules and weighing p ro ced u res were

considered in each c o n tra c t, th e enforcem ent provisions and a rra n g e ­
ments d iffered among th e processing firm s. Some firms adm itted th a t
th e ir delivery schedules u n d er c o n tract were flexible and more o r less
serv ed as a guide to th e grow er.

Weighing procedures d iffered ; some

firm s, usually th e la rg e r ones, would weigh th e load at th e plant while
some o th e r firms would req u ire a delivery tic k et indicating th e load
had been weighed at th e source o f d e liv ery .

Quality provisions were

also im portant term s specified in th e c o n tra c ts.

As p a rt o f th e con­

tr a c t, some p ro cesso rs insisted upon hig h er sta n d a rd s of quality
th an o th e r p ro ce sso rs.

For exam ple, some c h ip p ers c o n tracted for

100 p e rc en t G rade A load while o th e rs co n tracted for 85 percent
G rade A load.

80

R esponsibilities and rig h ts d u rin g production w ere sometimes
specified. T hese fea tu res determ ine th e d istrib u tio n of expenses for
sp ra y in g , w hether c ertain chemicals were u sed , o r who applied th e
s p ra y s .

For th e most p a rt, fre e z e rs make provision for such term s

of tra d e in th e ir c o n tra cts while th e large chipping firms did not
co n tra ct for production term s of tra d e .
When questioned on th e need for introduction of new term s of
tra d e in th e c o n tra c t, firm m anagers indicated th a t they were sa tis­
fied with th e p re se n t num ber and choice of term s included u nder
c o n tra c t.

One m anager believed th a t th e term s included in his con­

tra c t were th e optimum num ber.

He sta te d th a t more term s would

make a complex process more complex and would inhibit exchange.
C ontracts v a ry g rea tly from processor to p ro cesso r.

T h ere a re

clearly no sta n d ard c o n tra c ts in use although several sta n d ard con­
ventions occur as fea tu res of individual c o n tra c ts.
T ypes of Prices C ontracted for by P ro c esso rs. Pricing policies
a re a key m easure of firm behavior.

T he pricing policies of firm s a re

used in d istin g u ish in g oligopolistic m arkets from com petitive m arkets
in th a t firms in oligopolistic m arkets a re "p rice m akers" ra th e r than
"p rice ta k e rs ."

Several case stu d ies and some empirical research

have su g g e ste d th a t many firms use relatively simple rules of thum b
(sta n d a rd o p eratin g p rocedures) for se ttin g p rice —c o st-p lu s,
m ark -u p , fixed cost p ricin g , e tc . (S c h e re r, B reim yer).

In th is

case, th e policies used by p rocessing firms in se ttin g p rice to
g row ers for raw pro d u ct is of in te re s t.

What a re th e processing

firm 's rules of thum b for se ttin g co n tra ct prices with potato grow ers?

81

From th e review o f o th e r stu d ie s and based on informal d is ­
cu ssio n w ith m arket p a rtic ip a n ts , several ty p e s of p ric e s which p ro ­
c e ss o rs may o ffe r in c o n tra c ts w ith a grow er w ere id e n tifie d .

A b ase

p ric e is e sta b lish e d p rio r to p lan tin g and is common in most c o n tra c tu a l
a rra n g e m e n ts .

T h is p ric e is not a m arket determ ined p ric e in th a t

it may not re fle ct th e re la tiv e sc a rc ity o f th e commodity; it may not
re fle c t th e o p p o rtu n ity co st o f grow ing p otatoes re la tiv e to o th e r
c ro p s ; and it may not re fle ct c h an g e s in th e c o sts of in p u ts o v e r
tim e.

T h is form of p ricin g is typ ical in most v eg etab le m a rk e ts.

To

gain some in sig h t into th e p ric in g p ro c e d u re s of M ichigan p ro ce ssed
p o tato firm s, each m anager was a sk ed to d e sc rib e his p ric in g policies.
Two firm s in dicated th a t th e p ric e th ey c o n tra c te d fo r was a b a se
p ric e (see T able 4 .7 ).

A b ase p ric e is a g re e d upon p rio r to p la n tin g .

final p ric e paid th e p ro d u c e r, how ever, is ultim ately d e p e n d e n t upon
sto ra g e fees o r th e q u a lity o f raw p ro d u ct d e liv ere d to th e p la n t.
F re e z e rs prim arily employ "q u ality clauses" in th e ir c o n tra c ts which
rew ard o r penalize (p ro v id e in cen tiv es) th e gro w er a cco rd in g to th e
q u a lity o f th e p ro d u c t (siz e , p e rc e n t b ru is e fre e , co lo r, e t c . ) .
Most p ro c e sso rs indicated th a t th e p ric e th e y se ttle d on was
p eg g ed to an ongoing c o n tra c t m arket p ric e .

Two p ro c e ss o rs s ta te d

th a t th e y would follow o r m atch th e p rice o ffe re d by th e dom inant
firm in th e m arket b e cau se th e y felt th a t th e la rg e r firm for th e most
p a r t se t (controlled) th e m ark et.
Two firm s s ta te d th a t th e y really made th e ir p ric in g decision
in d e p e n d e n t of th e o th e r firm s in th e m ark et.

One s ta te d th a t th e

p ric e he o ffere d a gro w er was heavily d e p e n d e n t on his o p e ra tin g
b u d g e t.

T h e o th e r p ro c e ss o r, who d ealt w ith a limited num ber of

T he

82
T ab le 4 .7

K inds o f P ric e s C o n tra c te d fo r b y P ro c e s s o rs

T ype of C ontracted Pricing
Base Price

All Processors
2

Pegged to Some Market

Price

4

Pegged to C rower Costs of Production
Formula Price Dependent upon Quality Levels
Dominate Firm
O ther
Source:

Followed as Price Leader

2
2

Data collected from personal interview s with Michigan
processed potato plant m anagers, 1980.

83

g ro w ers, indicated th a t one of his prim ary concerns was to "keep th e
grow er in b u sin e ss11 and th at he often paid a premium to his g row ers.
T his statem ent may reflect how some p ro cesso rs view th e importance
o f dealing with grow ers who can co nsistently deliver quality p ro d u ct.
B ut it is unreasonable to expect th e firm to rew ard th e grow er for
"good wil!" p u rp o se s.

G row ers who produce a quality pro d u ct may

receive p rice premiums.
Quality C o n tro l. Quality co n tro l, as a dimension of m arket con­
duct is p e rh a p s a unique variable to be considered u n d er procurem ent
co n d u ct.

Quality control becomes of p a rticu la r im portance here for

several reaso n s:

(1) th is stu d y focuses on th e procurem ent activities

of th e pro cesso r who faces th a t p a rt of th e ag ric u ltu ral secto r of the
food m arketing system w here perishability is a co n stan t th re a t; (2) price
oftentim es does not reflect q u ality of product and th e re fo re m easures
o f quality become a se p ara te topic of negotiation between exchange
p a rtn e rs .
In an environm ent w here th e m arket fails th ro u g h th e pricing
system to transm it information about quality of th e p ro d u ct being
ex ch an g ed , decisions with resp ect to quality become negotiated
decisions which a re su p p o rte d by one o r both of two arran g em en ts:
c o n tract and governm ent g rad es and s ta n d a rd s.

One is a public

decision, th e o th e r is p riv a te .
The c o n tra ct perform s many functions—specifies forms of tra d e ,
red u ces u n c e rta in ty , a ssig n s ris k , and estab lish es liabilities. T his
in stru m ent is a response to m arket failure c h aracterized by im perfect
inform ation, high cost associated with committed reso u rce s, and
un d esirable ex a n te d istrib u tio n s of ris k .

At th is level in th e m arket.

84

th e c o n tra c t plays an im portant role in d efin in g th e q u a lity o f raw
p ro d u c ts .

T h is p ro c e ss may be han d led e x clu siv ely betw een th e

se lle r an d b u y e r o r it may b e n efit from e sta b lish e d governm ent g ra d e s
and s ta n d a rd s .
S h e p h e rd and o th e r s h av e id en tified th e U .S . g ra d e s and s ta n ­
d a rd s for a g ric u ltu ra l commodities a s one o f th e facilitatin g fu n ctio n s.
Hill s ta te s th a t sta n d a rd iz a tio n is especially im portant in th e list of
facilitatin g fu n ctio n s b ecau se it is closely re la te d to one o f th e s tr u c ­
tu ra l req u ire m e n ts for p e rfe c t com petition.

"Com petition among se lle rs

is p o ssible only if th e y a re selling identical o r com parable p ro d u c ts ."
Uniform ity o f term inology an d m easurem ent of im portant c h a ra c te ris tic s
is u seful fo r e sta b lish in g re la tiv e v alu es betw een th e v a rio u s form s
o f th e p ro d u c t.
In th e c ase o f p otato g ra d e s an d s ta n d a r d s , th is uniform ity o r
sta n d a rd iz a tio n s e rv e s two basic p u rp o s e s :

(1) it perm its b u y in g

an d selling of th e p ro d u c t by d e sc rip tio n r a th e r th a n by inspection
o f each load o ffe re d for sa le ; (2) it p ro v id e s a m ethod fo r b u y e rs to
estim ate th e v alue o f a p a rtic u la r load an d to com m unicate th is value
back th ro u g h a complex m arket system to d e a le rs and p ro d u c e rs .
T h e re fo re , g ra d e s an d sta n d a rd iz a tio n is one of th e prim ary fu n ctio n s
o f th e m arketing sy stem .

T hey a re e sse n tia l in an y m arket w here

millions o f d o llars ch an g e h a n d s via th e tele p h o n e .
To gain in sig h t into how potato p ro c e ssin g firm s h an d le q u a lity
o f raw p ro d u c t, th e following q u e stio n was posed to M ichigan potato
p ro ce ssin g firm s:

How does y o u r firm control for p ro d u c t q u a lity ?

T he re sp o n se s a re sum m arized below.

85

B ecause q u a lity o f p ro d u c t (p a rtic u la rly on th e sa les sid e o f th e
firm ) is a m ajor d e te rm in a n t o f p ro d u c t d iffe re n tia tio n in th e p ro c e sse d
p o tato in d u s tr y , m ost firm m an ag ers in d icated th a t raw p ro d u c t
q u a lity was a major c o n c e rn o f th e b u s in e s s .

M anagers re sp o n d e d to

th e q u e stio n o f c o n tro llin g p ro d u c t q u a lity in se v era l w ay s.
common re s p o n se was "to in sp e c t each lo a d ."

T h e most

M anagers in d icated th a t

all loads d e liv e re d to th e ir p lan t would b e in sp e c te d b y ta k in g a
sam ple o ff a n d ru n n in g it th r o u g h v a rio u s t e s t s —g r a v ity , co lo r,
p e rc e n t of fo re ig n o b je c ts .
th a t

T h is was a s ta n d a rd o p e ra tin g

p ro c e d u re

ra n c o n s is te n tly th ro u g h o u t th e in d u s tr y .
T h e second m ost common re s p o n se was th e u se of g ra d e s and

s ta n d a r d s via th e c o n tra c t p ro c e ss o r when b u y in g p o ta to e s on open
m a rk e t.

O ne m anager s ta te d th a t he sp e cified p a rtic u la rly h ig h s ta n ­

d a rd s o f q u a lity on c o n tra c ts to a s s u r e th a t th e d e liv e re d load would
fall w ithin th e lim its o f a c c e p ta b ility .

A lso, he had each load in sp e c te d

a t th e p la n t g a te .
L east o fte n m entioned a s a m easu re o f a s s u r in g p ro d u c t q u a lity ,
b u t n e v e rth e le s s c ite d by two p ro c e s s o rs , was th e relia n c e on a
long term tra d in g re la tio n sh ip w ith a "good g ro w e r."

T he m anagers

s ta te d th a t th e re la tio n sh ip w hich th e y h ad d eveloped w ith a few
g ro w e rs o v e r th e y e a rs was p e rh a p s th e main fa c to r in in su rin g a
d e p e n d a b le su p p ly o f h igh q u a lity p ro d u c t.
P ro c e sso rs A ttitu d e s T ow ard In fo rm a tio n . T h is section a tte m p ts
to m easu re p ro c e s s o rs ' a ttitu d e to w ard inform ation w ithin th e p ro ­
c e ss e d p o tato in d u s tr y .
firm m an a g er.

S e v e ra l scale q u e s tio n s w ere posed to each

T h e r e s u lts a r e re p o rte d in T ab le 4 .8 .

86

Table >1.8 P ro cesso rs' A ttitu d es Toward Information^
Statem ent
1.

Scale Rating Score

Information is a major source of power
in th e m arket p ro cess.

4.444

2. We could fully share information (on prices
p roduction, c o sts, concerns and plans) which
we have with grow ers and th e ir organization
without p u ttin g u s at a com petitive disad­
v an ta g e.

3.555

3.

We solicit such information activ ely .

3.444

4.

A processor and grow er plan jointly th e ir
m arketing stra te g ie s, coordinate price
s tru c tu re s and exchange information
between each o th e r about th e ir plans
and goals.
Do you believe th a t it should be perm itted?
Do such actions e v er have desirab le
m arket consequences?
C ases such as th is probably occur
fre q u e n tly .

2.444*

5.

Two processing firms exchange information
about sales plans and p rice schedules.
Do you believe th a t it should be perm itted?
Do such actions e v e r have d esirab le
m arket consequences?
C ases such as th is probably occur
fre q u e n tly .

2.555*
4.000

1.44>(*
1.666*
3.222

^For each of th e statem ents g iv en , resp o n d en ts w ere asked
to check th e most ap p ro p ria te response below.
5=
4=
3=
2=
1=
S o u rce:

S trongly A gree
A gree
No Opinion
D isagree
Strongly D isagree

*3 = Yes
*2 = No Opinion
*1 = No

Data collected from personal interview s with Michigan
p rocessed potato plant m anagers, 1980.

87

T h e f ir s t th re e statem en ts w ere d esig n ed to obtain a reading on
th e firm 's a ttitu d e tow ard inform ation, tow ard sh a rin g information
with g ro w e rs a n d tow ard selecting inform ation for th e firm 's u se .
Most m anagers believed th a t "inform ation is a major source of power
in th e m a rk e t," resp o n d in g to th e statem ent with an overall 4.44
ra tin g ou t of a scale o f 1 to 5. When m anagers were ask ed to ra te
statem en ts about sh a rin g inform ation with grow ers or soliciting
inform ation from o th e r m arket p a rtic ip a n ts , th e y responded with an
overall score of 3.555 and 3.444 resp e c tiv e ly .

T h ere fo re , it was

concluded th a t th e y had no opinion on which th e y w ere likely to act
about sh a rin g inform ation w ith g ro w ers o r obtaining information from
o th e r m arket p a rtic ip a n ts .
The last two statem en ts p re se n te d th e m anager with a situation
involving sh a rin g inform ation with o th e r m arket p a rtic ip a n ts .

S ta te ­

m ent 4 d e alt with p ro c e sso rs and g ro w ers sh a rin g inform ation.

For

th e most p a rt, p ro c e sso rs resp o n d ed by ra tin g th e statem ent slightly
above a no-opinion re sp o n se .

However, th e y all ag re ed th a t p ro ­

c e ss o rs and g ro w ers do exchange inform ation fre q u e n tly .
d ealt with two p ro c e sso rs sh a rin g inform ation.

Statem ent 5

P rocessors in general

believed th a t such c ase s did not o c cu r fre q u e n tly and also were of
th e opinion th a t th e action o f two p ro cessin g firm s exchanging infor­
mation would not have d e sira b le m arket co n seq u en ces.

In te re stin g ly ,

p ro c e ss o rs indicated th a t th ey had no opinion on w hether th e y
ex ch an g e inform ation betw een them selves.
C.

T h e S u p p o rtin g Inform ation System s
T h is section will attem p t to d e sc rib e th e major inform ation s y s ­

tems o p e ra tin g in th e Michigan p ro cessed potato in d u s try .

T h is stu d y

89

Public
Information

«
I
%

Public
Decision
Envlronmen

Private
Information
System

»
$

I

In fo m tlo n

Figure 4*1 The S upporting Information Systems in the
Michigan Processed Potato Industry

*

90

prices received by g row ers, estim ates o f crop sizes, and farm income
estim ates.

T his information is generaiiy thought of as an indicator

of sector perform ance.

On th e o th e r hand, AMS publishes spot m arket

prices and develops th e g rad es and sta n d a rd s for fresh and processed
produce.

T heir d ata a re designed to reflect th e c u rre n t m arket

situation and a re directed tow ard m arket p a rticip a n ts to aid in th e ir
decision m aking.
The P rivate M arket S tatistical S ystem . The p riv ate statistical
system is distin g u ish ed from th e public statistical system by th e fact
th at p riv ate m arket firm s supply information to m arket p a rticp a n ts
for profit while th e public agency supplies information for the purpose
of facilitating th e functioning of th e m arket and meeting public
policy information needs related to our food and fib er se c to r.

From

th e interview s conducted with Michigan processed potato plant
m anagers, we learned th e re a re at least th re e p riv a te statistical
firms o perating in th e m arket.
The informal S tatistical S ystem . T he informal statistical system
is p erh ap s th e most difficult to define.

Unlike th e above two system s,

th is system does not supply information to m arket p a rticip a n ts for
p ro fit, nor attem pt to achieve public policy goals.

For th e most p a rt,

th e system is composed of m arket p a rtic ip a n ts who transm it information
automatically th ro u g h th e ir activ ities in th e m arket o r when q u eried
about m arket e v e n ts.
B ro k ers, b u y e rs , m arketing cooperatives all perform informational
fu n ctio ns. They aid in th e tran sactio n of goods and serv ices between
b u y e rs and se lle rs.

91

D.

T h e Firm Decision E nvironm ent
In C h a p te r II, an inform ation system paradigm was p re s e n te d

th a t u n d e rs c o re d th e n a tu re of th e rela tio n sh ip betw een inform ation
an d d ecisio n :

inform ation a tta in s its value only in th e c o n te x t o f a

specific d ecisio n .

T h e c h a p te r w ent f u r th e r into a d isc u ssio n on th e

economics o f inform ation, th e lim itations of neoclassical th e o ry in
d ealin g w ith inform ational phenom enon, and s u g g e s te d an a lte rn a tiv e
fram ew ork fo r an aly zin g and id en tify in g m arket inform ation problem s.
T h u s f a r , little h as been said about decisio n , th e p ro c e ss th a t re q u ire s
inform ation.
Decision m aking, m ore th a n inform ation, is a major c o n ce rn in
economic th e o ry .

B ut to a larg e d e g re e , economic th e o ry does not

p ro v id e any unified s e t of analytical tools p ro v en em pirically (p a rtic u la rly
as decision re la te s to th e firm an d its environm ent) w hich one could
call th e th e o ry of firm decision m aking.

Do firm s a ctu a lly e q u a te

m arginal c o sts with m arginal re v e n u e s? T h e n eed to s tu d y th e decision
en v iro n m ent o f th e firm in th e c o n te x t of e v a lu a tin g inform ation is
n e v e rth e le s s se lf ju stify in g and n e c e s s a ry .
h as th r e e main o b je c tiv e s:

T h is sectio n o f C h a p te r IV

(1) to review th e m anagem ent decision

m aking th e o rie s o f th e firm , (2) to p re s e n t th e r e s u lts of th e in te r ­
view s w ith firm m anagers on m ark etin g d e c isio n s, an d (3) to o u tlin e
some bro ad p rin c ip le s for view ing firm b eh av io r (decision) a s it
re la te s to inform ation in th e m arket place.
T h eo ries of m anagem ent decision m aking a t th e level of th e firm
fall into two b ro ad g ro u p s: forma) models an d inform al b eh av io ral
models (Jo sk o w ).

Formal models a re e sse n tia lly m icroeconom ic.

T h is

92

body of th eo ry contains c e rta in assum ptions and concepts about th e
way businessm en make p ricin g and production decisions u n d e r p re ­
scrib ed m arket conditions. V irtually all of th e th eo ries assum e
(a) th a t th e decision m aker is om niscient and ratio n al, (b) th a t firms
seek to maximize p ro fits, and (c) some behavioral assum ption con­
cern in g th e ways in which a p a rtic u la r firm rela te s to th e o th e rs in
the m arket.

Given th is fram ew ork, what th e n a re some of th e diffi­

culties in using microeconomics th e o ry a s an aid in stu d y in g decision
making at th e level of th e firm?
T he limitations of microeconomic th e o ry in firm decision making
a re well documented (S p en cer, C y e rt and M arch).

F irs t, th e notion

of "economic man" as an om niscient, high speed com puter confronting
a set of known o r probabilistic outcom es is a g ra v e d isto rtio n of
re a lity .

Second, th e utility function is too am biguous and a b s tra c t

to accommodate th e v aried objectives of th e m odern firm .

T hat is,

th e firm may have objectives o th e r th a n p ro fit maximization (m arket
s h a re , good will, pow er, e t c . ) . T h ird , th e trad itio n al th eo ry of
th e firm ignores the internal problem s and conflicts of th e firm re su ltin g
from organizational s tr u c tu r e , b ecause it is assum ed th a t in th e long
r u n , competition in th e m arket place will perm it th e su rv iv al of only
th e most efficiently organized firm s.
The above limitations (and o th e rs ) of neoclassical microeconomic
th eo ry se rv e as a point of d e p a rtu re an d p e rh a p s an incentive to
reform ulate th eo ries th a t explain th e firm decision making p ro c e ss.
The work of Nobel L aureate, H e rb ert Simon and o th e rs a re noted for
exploring th e firm 's decision th eo ry (B ehavioral T h e o ry ).

93

T his school of thought a s s e rts th a t real world organizations do
not maintain continuous, perfectly calibrated control over all th e ir
activities in o rd e r to in su re "optimal" outcomes. Simon and o th ers
a rg u e th a t doing so is often impossible, and in any case it is generally
not globally ratio n al; th e gains of perfect over imperfect decisions a re
typically not worth th e added c o sts.

Instead, "satisfactory"

solutions ra th e r than "maximatory" behavior are sought to a series
o f problems as th ey a re generated by changing external circum stances,
b u reau cratic ro utines, o r th e poor perform ance of th e organization
in th e eyes of Its members (R o b e rts).
Decision theory of th e firm is also complicated by a heterogenous
external and internal environm ent of the firm which exten d s from a
competitive m arket, with many firms and hence many decision m akers,
to one of p u re monopoly with a single decison m aker. Somewhere
between th ese extrem es is th e oligopolistic m arket where theoretical
formulations a re not as well developed. What makes oligopoly theory
d ifferen t from competitive m arket theory is th e recognition by th e firms
th a t outcomes of th e ir decisions a re affected by th e behavior o f o th e r
firm s.

Since it ap p ears th a t th e im portant ch arac teristics of oligopoly

behavior a re not c ap tu red by conventional (formal) models, th e informal
school points out th at research based on the "oral" trad itio n s of
in d u strial organization theory involves more careful analysis of actual
firm decision making processes and th e phenomena which determ ine
decision form ulation. More specifically, the im portant ch arac teristics
of much of th is applied work incorporates th e use of informal models,
case stu d ies, th e consideration of p articu lar decision making p rocesses,
situation-specific reasoning, consideration of u n c e rta in ty , information
c o sts, transaction c o sts, and various institutional c o n strain ts (Joskow ).

94

In th a t tra d itio n , th is stu d y employs an oral case stu d y approach
which em phasizes th e decision m akers' perception of th e decision
making processes within th e ir firm s.

It is assum ed th a t each manager

has a conception of his decision se t and information n e ed s.

For a

m anager to know what information he needs he m ust be aw are of each
ty p e o f decision he needs to make and he m ust have an adequate con­
ceptualization o f each decision.

It would ap p ear from th e following

re su lts th a t th e s e conditions a re seldom sa tisfie d . Most m anagers
had a conception of at least some o f th e ty p e s of decisions they make.
Ackoff, w riting on common m isconceptions about management informa­
tion system s, notes th a t th e decision m akers' conceptions about th e ir
decision environm ent a re likely to be deficient in a v e ry critical way,
a way th a t follows from an im portant p rinciple of scientific economy:
"T he less we u n d e rstan d a phenomenon, th e more variables we req u ire
to explain it."

T h is situ atio n leads to an environm ent where th e

m anager/decision m aker demands more information th an he really
needs and th e re fo re may overload th e decision p ro cess with an "over
abundance of irrelev a n t inform ation."
To obtain insight into th e firm 's decision environm ent, th e study
posed th e following q u estio n to each plant m anager:

What a re your

most im portant m arketing decisions? T he resp o n ses to th is question
a re summarized below.
Firm #1. When q uestioned on th e n a tu re of th e firm 's m arketing
decisions, th e m anager of th is large potato p rocessing firm responded
with broad operational and s tru c tu ra l explanations reflecting his role
in a complex o rganization.

He began to explain th e organizational

s tru c tu re of th e firm em phasizing th e relatio n sh ip s and responsibilities

95

o f each d iv isio n .

In th is c o n te x t, th e m anager c h a rac terize d his role

as th a t o f a lead er who conform ed to a dem ocratic sty le ; he did not
p a rtic ip a te in th e d a y -to -d a y o p e ra tio n s (a c tiv itie s o r decisions) of
each division h ead , b u t reta in e d veto pow ers o v e r each decision.
He did see his overall resp o n sib ilities and o bjectives a s o p e ra tin g an
efficien t (p ro fitab le) p la n t.
T h e ty p e s of specific decisions he saw him self m aking ran th ro u g h
a sp e ctru m .

His resp o n se s did not focus d ire c tly on m arketing

decisions p e r se , b u t r a th e r focused on th e broad operational ty p e
o f decision (p ro d u ctio n sc h e d u le s, labor c o n tra c ts , b u d g et and
fin a n c e s ). He did in dicate th a t d u rin g c o n tra c t time he sa t in on th e
b a rg a in in g sessio n s b u t th a t for th e most p a rt he allowed his field
people to n e g o tiate .

He supplem ented th e negotiation p ro c e d u re s

with inform ation rela tin g to th e firm 's p ro ce ssin g p lan s fo r th e upcoming
y e a r.
Firm #2. T he m anager o f th is medium size potato p ro ce ssin g firm
em phasized th e im portance o f m aintaining "control" of his b u sin e ss.
He d efin ed control of th e b u sin e ss in term s of selectin g th e b u y e rs of
his fin ish ed p ro d u c t; he determ ined th e d istrib u tio n of sales to a lte r­
n a tiv e retail o u tle ts .

T he policy o f th e firm was to re s is t th e attem pt

o f larg e national ch ain s to control a m ajority s h a re o f th e firm 's p ro d u ct
m ark et.

T h e re fo re , th e firm prim arily dealt with local chains and o th e r

small retail o u tle ts .
B ecause of in flation, specific decisions on ch an g es in w eights of
fin ish ed p ro d u c t, size of packages a n d p ric e s of raw and fin ish ed
p ro d u c ts become im p o rtan t.

T he amount of p riv a te labeling was also

96

important because th e firm also viewed th is aspect of th e business as
a method of maintaining control over m arket sh a re.

The m anager also

mentioned the need to make decisions on the quality of raw product
on a daily b asis.
Firm #3. Manager of th is medium size processed potato firm
indicated th at pricing decisions for raw product and for his finished
product were v ery im portant.

He also noted th at decisions relating

to tran sp o rtatio n of raw product a re of major concern because of the
rapid increases in fuel prices.

The m anager also mentioned decisions

related to expanding his p lant. The plant had been expanded five
times over th e past forty y e ars and he anticipated expanding his plant
again within th e next y ear.
Firm #4. Because of the general conditions of th e economy, the
m anager believed th a t his decisions were not clearly defined. A major
objective of th is firm was merely to su rv iv e .

He believed th at it was

important for decisions about product changes to be accepted by his
custom ers.

Because of the rapid changes in neighborhoods, he felt

th a t th e re was a g rea t need to change th e composition of his product
lines to meet th e changes in demand.

He emphasized th a t only the

p riv ate sector could and would ad ju st rapidly to changing m arket
dem ands.
Firm #5. The manager of a small potato processing firm stated
th at he made all decisions—from contracting with grow ers to the sale
of th e finished pro d u ct.
p ro cessor.

Pricing decisions were of major concern to this

The manager stated th a t he knew th at th e prices of his

products were "out of iine" (higher) than o th er p ro cesso rs.

He

indicated th a t th is did not concern him v ery much because at th e

97

c u rre n t p ric e levels his firm was able to make a modest p ro fit although
he quickly sta te d th a t th e re were seasons his firm had and would
o p e ra te at a loss.

In e ffe c t, th e inflation problem was complicating

pricin g d ecisio n s.

T he m anager also e x p re sse d concerns about

developing a p ro d u ct th a t would meet changing consum er p refe ren c es.
He also noted th a t decisions relatin g to th e procurem ent of raw
p ro d u ct would v a ry in n a tu re o v e r th e c o u rse of th e y e a r.

When th e

potato season came to an end in M ichigan, he used b ro k e rs to pro cu re
most o f his raw p ro d u ct needs from o th e r producing a re a s , th e re fo re
relieving him of th is problem .
Firm #6. T he m anager sta te d th a t his m arketing decisions were
th o se o f m eeting th e in v en to ry needs of th e v arious pro cessin g p la n ts.
T h at is, his job was making s u re th a t potatoes were supplied on
sch ed u le .

Also, he saw the need to make decisions about quality of

raw p ro d u c t.

The m anager sta te d th a t he was fully aw are of th e in te r­

d ep en d ence betw een th e grow er and th e firm and th e re fo re attem pted
to resolve all conflict th a t might a rise betw een th e two p a rtie s .
E.

T he B ehavior o f th e Firm a s an
A daptive In stitu tio n 1
T h u s f a r , a case has been p re se n te d th a t c h a rac terize s th e formal

th eo ry of an om niscient firm as in ap p ro p riate in dealing with questions
o f m icrobehavior.

As a re s u lt, a behavioral approach was employed

which relaxed th e classic assum ptions and hence viewed th e firm as
an in stitu tio n th a t is co n fro n ted by th e u n c ertain ty of its environm ent,

*This section borrow s heavily from C y e rt, R .M ., and M arch, J .G .
A B ehavioral T heory of th e Firm . P rentice-H al I, I n c ., Englewood
C l i f f s , 1963.

98

co n fro n te d w ith problem s o f m aintaining a viable v ertical b u sin e ss
coalition, and co n fro n te d with a limited capacity to assem ble, to s to re ,
and to utilize inform ation.
C y e rt and M arch in A B ehavioral T heory of th e Firm , c h a ra c te riz e
"th e firm as an ad ap tiv e ly rational system r a th e r th a n an om nisciently
rational sy ste m ."

2

T hey a rg u e th a t a b u sin e ss org an izatio n is an

a d a p tiv e in stitu tio n ; th e firm lea rn s from its e x p e rie n c e s.

T hey assum e

th e a d a p tiv e system has th e following p ro p e rtie s :
1. T h e re e x ist a num ber o f s ta te s of th e system . At any
point in tim e, th e system in some se n se " p re fe rs " some
of th e s e s ta te s to o th e rs .
2. T h e re e x is ts an e x te rn a l so u rc e of d istu rb a n c e o r shock
to th e sy ste m . T h ese shocks cannot be c o n tro lled .
3. T h e re e x ist a num ber o f decision v a riab les in tern al to
th e sy stem . T h ese v a ria b le s a re m anipulated acc o rd in g
to some decision ru le .
4. Each com bination o f e x te rn a l sh o ck s a n d decision
v a ria b le s in th e system ch an g es th e s ta te o f th e
sy stem . T h u s , given an e x istin g s ta te , an e x te rn a l
s ta te , and a d ecisio n , th e n ex t s ta te is d e term in ed .
5. A ny decision ru le th a t lead s to a p re fe rre d s ta te
a t any point is more likely to be used in th e fu tu re
th a n it was in th e p a s t; any decision ru le th a t leads
to a n o n p re fe rre d s ta te a t one point is less likely
to b e u sed in th e fu tu re th a n it was in th e p a s t.
C y e rt and M arch a s s e r t th a t a s long a s th e environm ent of th e
firm is u n s ta b le , th e h e a rt of a behavioral th eo ry m ust be a p ro c e ss
o f s h o rt ru n a d a p tiv e re a c tio n s.

To exam ine th e major a ttr ib u te s of

s h o rt ru n ad ap tatio n by firm s e x istin g in a chan g in g w orld, th e y
focused on th e s ta n d a rd o p e ra tin g p ro c e d u re s of b u sin e ss o rg an iz atio n s
and th e ways in which th e s e p ro c e d u re s c h a n g e d .

S ta n d a rd o p e ra tin g

p ro c e d u re s a re a se t o f fairly w ell-defined ru le s which en ab le th e firm

See H .A . Simon, Models o f Man. New Y ork: Macmillan, 1956. C y e rt
a n d M arch s ta te th a t th e y " p re fe r th e term 'ad ap tiv ely ra tio n a l1 to refle ct
some sen tim en ts about th e ratio n ality of le a rn in g ."

99

(decision process) to adapt to different environm ents; th ey a re the
formal institutional memory of an organization.

For example, in micro-

economic theory one finds th e decision rule which equates costs and
revenue at th e margin (MC=MR). For similar p u rposes, the firm
adopts a set of rules th a t aid in decision making.
As p a rt of th e sh o rt run n atu re of th e firm, C yert and March
summarize th re e basic principles of general choice procedures:
1. Avoid U ncertainty. R ather than looking for ways of
dealing with uncertain ty through certain ty equivalents,
th e firm looks for procedures th a t maximize the need for
predicting uncertain fu tu re e v e n ts. One method uses
sh o rt run feedback as a trig g e r to action, another
accepts (and enforces) standardized decision ru les.
2. Maintain th e R ules. Once it has determ ined a feasible
set o f decision p ro ced u res, th e organization abandons
them only under d u re s s. T he problems associated
with continuously redesigning a system as complex
as a modern firm a re large enough to make organizations
cautious about change.
3. Use Simple R ules. The firm s rely on individual "judgement"
to provide flexibility around simple ru les. One of th e
most common forms of a decision rule consists in a basic,
simple procedure and the specification of a list of
"considerations" describing th e conditions u n d er which
th e procedure may be modified.
Specific examples of stan d ard operating procedures of the firm
a re review ed. C yert and March note th a t procedures most likely to
be tre a te d as fixed are those incorporated in th e explicit stan d ard
operating procedures of th e firm.

"They give stability to th e organiza­

tion and direction to activities th at are constantly re c u rrin g ."

In

addition to providing needed stability, the stan d ard operating pro­
ced u res influence (and in many cases dictate) the decisions made in
th e organization.
C onsider the four major ty p es of p rocedures described below:

100

1. T ask Perform ance Rules a re a set of rules th a t relate to a
specific "job" o r d u ty th at is perform ed by a member or su b g ro u p
within th e firm . T ask perform ance rules a re im portant to th e organiza­
tion for several rea so n s.

F irs t, they permit th e tra n s fe r of knowledge

gained by o th er members in th e organization.

Second, organizations

oftentim es req u ire solutions to problems th a t a re consistent with a
large num ber o f o th e r solutions to o th e r ta s k s being perform ed in th e
organization; th ese ru les control behavior within the firm.
T ask perform ance rules o riginate from two sources:
firm and external to th e firm .

within th e

They emerge from in-house train in g

of w orkers to rules th a t a re learned within th e organization and
communicated to o th e r organizational members. On th e o th er h and,
th ey can be introduced by recruitm ent and selection.

Also, some

ru les a re more general than th e individual firm and th e re fo re originate
out of a b ro ad er se ttin g such a s "sta n d a rd industry p ra c tic e s ," or
" sta n d a rd b u sin ess p ra c tic e s," "ethical bu sin ess p rac tic es," o r
"good bu sin ess p ra c tic e s."
2.

Records and re p o rts kept by th e organization enable one to

deduce im portant c h a ra c te ristic s of th e firm 's decison-m aking system .
Tn most organizations record and re p o rt keeping are used to maintain
control and make p red ictio n s.

Records ten d to be related to elem ents

of b u sin e ss operation th a t a re most im portant to the effective operation
o f th e firm (financial statem ent, cost re p o rts, e tc .) .
3.
tio n s.

Inform ation-handling rules a re found in all b u sin ess o rganiza­
They transm it information in th e form of d irections, estim ates,

and re s u lts .

In o rd e r to provide reasonable certain ty th a t relevant

information will be available at th e p ro p er place and p ro p e r tim e,

101

ru les developed by th e firm govern th e flow and c o n te n t.o f inform ation.
C ertain ty th e size and sophistication of th e firm d eterm ines th e d etail,
specification, and com plexities of th e ru le s.
S ta n d a rd o p eratin g p ro ce d u res for information a re o f two ty p e s :
ro u tin g and filterin g ru le s.

"R outing ru le s specify who will

communicate to whom about what" (C y ert and M arch). T he b e st
known and one of th e most im portant o f such ru les is th e
"th ro u g h -c h a n n els" ru le, w here th e organization re q u ire s th a t
c e rta in kinds o f inform ation be handled th ro u g h th e p re sc rib e d
channels (chain of com m and). For exam ple, th e p re sid e n t talk s only
to th e Board of D irecto rs, his sta ff and vice p re s id e n ts .

T he

th ro u g h -c h a n n e ls ru le is closely related to th e sta n d a rd organization
c h a rt which is itself a ru le for communication.
F iltering ru les a re p ro c e d u re s which eliminate th e " irre le v a n t
b its" of information o r e n tire bodies of information o r p a ss on "re le v a n t
b its" o f information to the p ro p er so u rc e s.

From th is point o f view.

It is clear th a t biases a re in troduced in th e filterin g ru le s .

(For

exam ple, each departm ent within th e firm may view inform ation
rela tin g to th e ir perform ance d ifferen tly th an an unbiased a p p ra ise r
would ev aluate th e d e p artm e n t's p erform ance.)

But it is o b se rv e d

th a t in th e long ru n , o rganizations learn to p rovide c o u n te r biases
fo r each b ia s. M oreover, in th e long r u n , inform ation-filtering
and bias has a learn in g e ffe ct.

Q uoting from C y e rt an d M arch, "one

o f th e ways in which th e organization a d a p ts to th e u n reliab ility of
inform ation is by devising p ro ced u res fo r making decisions w ithout
a tte n d in g to a p p a re n tly relevant inform ation." T h u s , th e intern al
biases in th e organization increase th e p re s s u re (from e x te rn al

102

u n c e rta in ty ) to develop decision m ethods th a t do not re q u ire reliable
inform ation (o th e r th an th e sim plest, most easily ch eck ed in fo rm atio n ).
Plans and Planning R ules a re a c tiv itie s perform ed by th e firm
which p re s c rib e a fu tu r e c o u rse of a c tio n .

In th e usual se n se of

th e word " p la n ," one th in k s o f long-term plan n in g which p lay s a
rela tiv e ly minor role in d a y -to -d a y decision m aking in th e firm .

B ut

firm s do en g ag e in a c tiv itie s th a t may b e classified a s p lanning
(d e sc rib e d a s su ch by th e firm) and th e s e a c tiv itie s a r e specified
as s ta n d a rd o p eratio n p ro c e d u re s .

A lso, b e ca u se p lan s a re made on

a p erio dic b a s is , th ey en fo rce a v a rie ty o f in te re s tin g b eh av io rs
w ithin th e firm .
b u d g e t.

P e rh ap s th e b e s t exam ple of a plan is th a t of th e

It plays two basic roles w ithin th e firm .

F irs t it is u sed as

a m anagem ent control d ev ice to implement policies w hich e x e c u tiv es
have d ecided and to clock achievem ent a g a in st e sta b lish e d c rite r ia .
S eco n d , th e b u d g e t is a device fo r determ in in g feasib le p ro g ram s.
In b o th c a se s, th e b u d g e t te n d s to d efin e in a d v an c e a se t o f fixed
commitments and fixed e x p e c ta tio n s,

in th is s e n s e , th e b u d g e t a ffe c ts

th e firm 's b e h av io r and decision m aking p ro c e ss .
T h is section has p re s e n te d a th eo re tic al p ic tu re o f th e firm in a
real w orld environm ent of u n c e rta in ty , c h a n g e , and a d a p tio n .

It

d e v ia te s from th e depiction of th e firm assum ed in microeconomic th e o ry .
C y e rt and M arch su b s c rib e to th e notion th a t th e firm is an a d a p tiv e
in stitu tio n an d fiv e p ro p e rtie s o f th a t system w ere p re s e n te d .

A lso,

it was po in ted o u t th a t th e firm is heavily conditions by ru le s (s ta n ­
d a rd o p e ra tin g p ro c e d u re s) a n d th e s e ru le s in t u r n re fle ct o rg an iz a ­
tional le a rn in g p ro c e sse s by w hich th e firm a d a p ts to its env iro n m en t.

103

The classification of specific stan d ard operating procedures will
be useful in obtaining insight into th e firm 's decision making process.
How specific operating procedures are employed by th e firm have many
implications for market information system s. At th e o u tse t, some
categories of operating procedures will be more useful in developing
th is relationship than o th e rs, primarily because information on some
stan d ard s a re held closely by the firm and are difficult to obtain.
T ask perform ance rules are general and can be identified fairly
easily.

It was expected th a t th e firm 's reco rd s, plans and budget

would be "sensitive information."

CHAPTER V
AN EVALUATION OF INFORMATION AGAINST PROCESSOR'S
DECISIONS, MARKET STRUCTURE AND FIRM BEHAVIOR

A.

Introduction
T his c h a p te r p re s e n ts a b rie f evaluation of th e su p p o rtin g d ata

and information system s o p e ra tin g in th e Michigan p rocessed potato
in d u s try .

In a p rev io u s c h a p te r, th e shortcom ings of neoclassical

th eo ry in evaluating (valuing) inform ation w ere d isc u sse d .

T h is

c h a p te r is prem ised on the notion th a t inform ation a tta in s its value
only in th e context of a specific decisio n .

We will attem pt to ev alu ate

c u rre n t m arket inform ation a g a in st decisions made by potato p ro c e ss o rs.
T his a n aly sis will th en be e x te n d e d by relatin g it to dim ensions o f
m arket s tr u c tu r e and of firm b e h av io r.
T he d ata analyzed in th is c h a p te r w ere o b tain ed from d ire c t
personal interview s with m anagers and b u y e rs in M ichigan's p ro ­
cessed potato firm s.

T he in terv iew s w ere d esig n ed to obtain infor­

mation on th e n a tu re of th e decision environm ent o f th e firm , ty p e s
and so u rces of information used by th e firm and its perceiv ed value
for decision.

R esponses w ere elicited by open en d ed q u e stio n s on

each of th e above a re a s .

T h ese open ended resp o n se s w ere used in

v alidating o th e r q u e stio n s u sin g a p re -s e le c te d list o f ty p e s and
so u rc es of inform ation, an d specific decision s e ts .

An attem p t was

made to ev aluate e x istin g inform ation system s of th e p ro c e sse d potato
in d u stry from th e p e rsp e c tiv e o f th e p ro c e ss o r's decision m aking n e e d s.

104

105

T h is p ro c e d u re for e v a lu atin g inform ation d iffe rs from th e
usual opinion poll ap p ro ach in th a t th e q u e stio n s posed to each
m anager w ere placed in th e c o n te x t o f th a t firm 's decision e n v iro n ­
ment r a th e r th a n ju s t ra tin g an inform ation so u rc e o r ty p e d ire c tly
a g a in st a g en eral q u a lita tiv e v a ria b le .

M anagers w ere ask ed to

ra te th e u se fu ln e ss o f d iffe re n t ty p e s and so u rc es of inform ation in
th e co n te x t o f how th e y w ere u se d in specific decisions o f th e firm .
T h is an aly sis has as its p rim ary prem ise th a t inform ation can be
valued only in th e specific decision c o n te x t.
T he L ikert scaling m ethod (L ansing a n d M organ) is u se d to
m easure th e d e g re e o f u se fu ln e ss to p ro ce ssin g firm s o f v a rio u s ty p e s
an d so u rc e s of p ric e inform ation for decision m aking.

L ansing and

M organ point o u t th a t scaled q u e stio n s a re well a d a p te d to th e d is ­
co v ery o f g en eral a ttitu d e s .

"People a re ask ed to resp o n d to each

item not sim ply by a g re e in g o r d isa g re e in g , b u t by in dicating th e
d e g re e o f agreem ent o r d isa g re e m e n t."

T ypically sev eral s te p s , in

th is stu d y fo u r, a re given betw een extrem e ag reem en t an d extrem e
d isa g ree m e n t.

T h is form s an o rd in al scale which ra n k s individual

a ttitu d e s along a continuum .

T h e re is, how ever, no implication of

d ista n c e betw een th e s c o re s .

T he scale q u e stio n s a sk e d resp o n d en ts

in th is stu d y included " v e ry u s e fu l," "m oderately u s e fu l," "ra re ly
u s e fu l," a n d "not usefu l" a s p o ssib le re s p o n se s.
T h e L ikert scaling m ethod has a d v a n ta g e s a s well as d isa d v a n ­
ta g e s .

B irch a n d Schmid note th a t "scales o ffe r th e a d v a n ta g e , o v e r

o p e n -e n d e d q u e stio n s , o f p ro v id in g easily q u a n tifia b le m easures
th a t a re am enable to sta tistic a l m anipulation a n d in te rp re ta tio n ."
T h e a u th o rs s ta te th a t while scaled q u e stio n s a re useful in d isc o v ery

106

of general a ttitu d e s, "they are not useful . . .

in th e discovery of

resp o n dents' specific marginal p re fe re n c e s." They fu rth e r note that
"th ere are no limitations preventing a person from saying th at he
feels all problems are serious o r taking some o th e r consistently
extrem e position." A nother limitation in th is specific study is th at
it is a case study and as such empirical resu lts a re based on a
limited number of observations.

On the oth er hand, small as it is,

th e universe of Michigan potato processors was completely enum erated
in the stu d y .
This c h ap ter is divided into th re e sections.

Section one p re ­

sen ts the resu lts of th e interview s with Michigan processors con­
cerning th e ir evaluation of the value of various ty p e s and sources of
information for use in specific processing firm decisions.

Section two

stratifies the group of firms by m arket s tru c tu re variables ( i . e . , size
o f firm and type of firm) and p re se n ts th e re su lts of Section one
arra y ed across various elements of m arket s tru c tu re .

Section th re e

of th is ch ap ter examines the relationship, if a n y , between th e firm 's
behavior in th e procurem ent of raw product and of m arket information.
B. T ypes of Information Used by Potato Processors
in Making M arketing Decisions
Table 5.1 p resen ts th e pro cesso rs' evaluation of th e usefulness
of various types of information in making m arketing decisions.
mation is divided into four broad categories:

Infor­

p rice, supply, demand,

and co st. An a priori list was firs t co n stru cted from variables derived
from published d ata, from economic th eo ry , and from o th e r stu d ies.
T his list was then modified a fte r d irecting an open ended question to
plant m anagers. The absolute num ber of firms responding in the
su rv e y to each data type is p resen ted in the table.

107
T a b le 5.1

U se fu ln e ss o f V a rio u s T y p e s o f In fo rm atio n
in D ecision M aking, All P ro c e s s o rs

T ypes of
Information

Very
Useful

Moderately
Useful

Rarely
Useful

Not
Useful

Total

(A bsolute Frequency)
Prices
Quotations
C ontracts
Wholesale
Retail
F u tu res
Past Year
Forecast
O ther

6
4
6
5
2
3
4
7

2
3
1
3
1
5
2
0

1
1
1
0
3
1
1
0

0
1
0
0
2
0
2
0

9
9
8
8
8
9
9
7

Supply
P v t. Intentions
Crop Estimates
Vol. Ship
Stocks (Storage)

4
4
2
4

2
2
4
3

1
0
1
2

2
3
1
0

9
9
8
9

Demand
Population T ren d s
Income T ren d s
Consumer Profile
Demand Estimates

1
2
3
2

4
4
4
4

1
1
1
2

2
1
0
0

8
8
8
8

Cost
Production
Processing
T ran sportation
Labor (Wages)

6
8
8
5

1
1
1
2

1
0
0
2

0
0
0
0

8
9
9
9

S ource: Data collected from personal interview s with Michigan
processed potato plant m anagers, 1980, su rv e y question
11.5, Appendix A.

108

Within th e category of p rice inform ation, p rice q u o tatio n s, contra c t p ric e s, wholesale p rice inform ation, retail p ric e s, fo recast
p rice and p rices of in p u ts were ra te d most often as "v ery useful"
by all p ro c e sso rs.

P ast y e a r p rice received a ra tin g of "m oderately

u se fu l." Futures m arket p rices w ere ra te d "rarely " to "not useful"
by more th a n 50 p e rc en t of th e firm s.
In g e n e ra l, c u rre n t p rice —p ric e q u o tatio n s, wholesale and
q u o tes on input p rices w ere given h ig h er ra tin g s .

Historical p rice

inform ation o r estim ates of th e fu tu re were generally ra te d lower.
T h ese re s u lts a re not s u rp risin g in th a t many of th e firm m anagers
indicated th a t th e general c u rre n t economic situ atio n (inflation)
d ictated th e need to maintain a daily check on p ric e s. M oreover,
th e y indicated th a t because of p rice flu ctu atio n s common in a g ric u l­
tu ra l m ark ets, daily m onitoring of p rices was im portant.
N on-price inform ation; su p p ly , demand and cost a re also impor­
ta n t c ateg o ries of information to p ro c e sso rs.

Of th e th re e categ o ries,

co st inform ation was most co n sisten tly ra te d " v e ry useful" by all
p ro c e ss o rs.

Cost information included fo u r categ o ries:

p ro c e ssin g , tra n sp o rta tio n and w ages.
cost w ere given th e highest ra tin g .

p ro d u ctio n ,

P rocessing and tra n sp o rta tio n

A lthough information on wages

was given a ra tin g of "v ery useful" by o v er 50 p e rc en t o f th e firm s,
it receiv ed th e lowest overall ra tin g within th e cost c ateg o ry .

Plant

m anagers indicated th a t labor union c o n tra c ts , which often covered
sev eral y e a rs , reduced th e u sefu ln ess of wage information to th e
firm .
Within th e supply c a te g o ry , planting intention re p o rts , crop
estim ates and stock re p o rts received a ra tin g of " v e ry useful" from

109

44 p e rc e n t o f th e firm s.

A t th e same tim e, c ro p estim ates w ere o f

little im portance to 33 p e rc e n t of th e p ro c e s s o rs .

T hose p ro ce sso rs

who ra te d c ro p estim ates low s ta te d th a t th is inform ation was often
in c o rre c t a n d th e re fo re was not useful in m aking d e cisio n s. While
p lan tin g in te n tio n s receiv ed a high ra tin g , 30 p e rc e n t of th e p ro c e sso rs
" ra re ly used " o r did not u se th is inform ation.

T h is la tte r g ro u p ra te d

p lan tin g in te n tio n s tow b e cau se th e y b elieve th a t th e grow ing season
is too u n p re d ic ta b le a n d th u s th e inform ation is usu ally e rro n e o u s.
A lthough 50 p e rc e n t o f th e firm s ra te d alt ty p e s of demand
inform ation a s "m oderately u s e fu l," th e actu al u se fu ln e ss of th e ty p e s
o f inform ation d isp lay e d in th e q u e stio n a re po ssib ly low er.

Several

rea so n s lead to th is con clu sio n : only a few firm s ra te d inform ation
dem and ty p e s as " v e ry u s e fu l."

S eco n d , firm s fo r th e most p a rt

employ a g e n eral m arket tria l a n d e r r o r a p p ro a c h (m arket te s te d )
in determ in in g th e dem and for th e ir p ro d u c ts .

F inally, inform ation

on population tr e n d s , income t r e n d s , a n d dem and estim ates a re
u su ally available in a g g re g a te s th a t do not a p p ly to th e p ro c e s s o r's
re le v a n t m ark e t.

A lso, dem and inform ation su c h a s th e ty p e obtain ed

from consum er p ro file s a re a p ro d u c t o f an analytical p ro ce ss th e
c ap a city for which many o f th e firm s in th e s tu d y do not p o ss e s s.
C.

S o u rc es o f Inform ation in Decision M aking
T able 5.2 p r e s e n ts th e r e s u lts of p ro c e s s o rs ' e v alu atio n s of th e

u se fu ln e ss of v a rio u s so u rc e s of p ric e inform ation in decision m aking.
T he lis t of p ric e so u rc e s was developed a p rio ri an d modified via an
open en d ed q u e stio n posed to each firm m anager.

O v er 90 p e rc e n t

o f th e p ro c e s s o rs ra te d b r o k e r s /d e a le r s as a " v e ry u sefu l" so u rc e of

110

Table 5.2 U sefulness of Sources of Price Information
in Decision Making, All Processors
Source of
Information

Very
Useful

Moderately
Useful

Rarely
Useful

Not
Useful

Total

(Absolute Frequency)
Radio and T .V .

2

1

3

3

9

Newspapers

3

3

1

2

9

Magazines

0

4

2

3

9

U niversity Publications

2

1

2

4

9

USDA Economic
Publications

3

4

1

1

9

USDA Crop R eports

3

3

1

2

9

Consultation with
Persons in Govern­
ment o r U niversity

0

1

6

2

9

Commercial M arketing
Services

1

3

2

3

9

Banks

0

0

6

3

9

Retail S tores

2

5

1

1

9

D ealers, B rokers

8

1

0

0

9

O ther Processors

3

3

3

0

9

S ource:

Data collected from personal interview s with Michigan
processed potato plant m anagers, 1980, survey question
11.6, Appendix A.

111

p rice inform ation.

S u rp risin g ly , even th e firms who employed b u y e rs

also indicated th a t b ro k e rs/d e a le rs were v ery useful sources of price
inform ation. N ew spapers, tra d e journals (m agazines), USDA economic
publications, and o th er pro cesso rs were rated "m oderately" to "v ery
useful" sources by o ver 80 percent of th e firm s.

Rated low in u se­

fulness as a source of p rice information were radio and T .V ., consul­
tation with governm ent o r u n iv ersity , commercial m arketing firms and
ban k s.
Several reasons can be offered for th e above evaluation of th e
u sefu ln ess of th e sources of price inform ation.

P erhaps th e most

im portant factor a rises out of a distinction between information sources
th a t a re p a rt of th e m arket and sources th a t a re not d ire c t p articip a n ts
in th e m arket.

B ro k e rs/d ea le rs perform an im portant function in th e

m arket; th e y a re b e a re rs of inform ation. The information they tr a n s ­
mit is often c u rre n t and a cc u ra te.

If not, th e ir tra d in g p a rtn e rs —pro­

c e sso rs, p ro d u c e rs, and b u y e rs—can choose to deal with o th er b ro k e rs .
T hey can e x it.

This potential penality provides an incentive for th e

b ro k e r to perform well. On th e o th e r h an d , p a rticip a n ts who transm it
information but who a re not directly involved in th e m arket a re
generally rated low in u sefu ln ess.

P rocessors feel th a t th ese

non-m arket sources transm it "stale information" but p erh ap s more
im portantly, th e processor-decision maker has little reco u rse if th e
information obtained from th e non-m arket source leads to a poor
decision.

The logic here does not su g g e st, for exam ple, th a t USDA,

a non-m arket source of inform ation, must become a d ire c t m arket
p articip an t in o rd e r to gain cred itab ility as a useful source of infor­
mation.

But it may su g g e st to th e non-m arket p a rtic ip a n ts, who wish

112

to become a useful source o f Inform ation, to build in feedback mechanisms
so th a t th e public sta tistic a l agencies can respond o r modify th e infor­
mation source for b e tte r use in decision m aking.
D. U sefulness of Price Inform ation in Specific
Decisions Made by Potato P ro cesso rs
Table 5.3 p re s e n ts th e re s u lts of th e p ro c e sso rs' evaluations of
th e u se fu ln ess of p rice inform ation in making specific decisions. An
im portant bu t d ifficu lt p a rt of th is an aly sis is specifying th e decision
m aking environm ent so th a t a re p re se n ta tiv e list or set of decisions
can be id en tified .

T he approach in identifying th is set of decisions

is sim ilar to th a t used in developing th e lis ts of ty p e s and so u rces of
inform ation.

F irs t, an a p riori list of decisions was c o n stru c te d .

T his

list was com pared with resp o n se s obtained from open ended q u estio n s
posed to firm m anagers about th e ir decision s e t.

Inasmuch as th e

re su ltin g list of decisions w ere not modified v e ry m uch, th is leads one
to conclude th a t:

1) th e a p rio ri list adequately reflected th e firm

decision environm ent, o r 2) open en d ed q u e stio n s a re p e rh a p s not a
good approach fo r a cq u irin g knowledge about th e firm 's decision
en v iro n m ent.
At any ra te , th e re s u lts of th e open ended q u e stio n s on th e
firm 's decision environm ent rein fo rced th e list of p re -se le c te d decisions.
A lso, it should be noted th a t no attem pt was made to ran k th e list of
decisions in term s o f im portance and th e re fo re it is assum ed th a t all
decisions a re of equal im portance.
In g e n e ra l, p rice inform ation was found to be v e ry im portant
among more th an 50 p e rc e n t o f th e p ro c e sso rs in making th e following

113
T ab le 5 .3

U se fu ln e ss o f P ric e D ata fo r V a rio u s
D e cisio n s, All P ro c e s so rs

Very
Useful

T ype of
Decision

Moderately
Useful

Rarely
Useful

Not
Useful

Total

(Absolute Frequency)
Size of Plant
(Expansion)

1

3

3

2

9

Number of Plants
(Build)

1

4

3

1

9

V ariety of Potato
To Buy

4

2

2

1

When to Buy
Potatoes (Timing
of Purchase)

5

4

0

0

9

Geographical Market
in Which to Buy
Potatoes

7

2

0

0

9

Market in Which to
Sell Potatoes
Product

5

3

1

0

9

Quality of Raw
Product

1

2

4

2

9

Source:

Data collected from personal interview s with Michigan
processed potato plant m anagers, 1980, survey question
11.8, Appendix A.

114

d ecisio n s:

1) v a rie ty of potato to b u y , 2) timing of p u rc h a se s,

3) place o r m arket to buy raw p ro d u c t, and 4) m arket in which to
sell p ro cessed p ro d u c t.

Several reasons may e x ist as to why p rice

inform ation is v e ry im portant in th e above decisions.

With a num ber

o f d iffe re n t v arieties o f potatoes grow n in Michigan and o th e r v arieties
sh ip p ed in from o th e r s ta te s , th e p ro c e sso rs demand for potatoes
is fairly specialized.
p o tato .

T he fin ish ed p ro d u ct yield v aries by v a rie ty of

P rocessors p re fe r th e v a rie tie s th a t a re known to have high

potential p ro d u ct yield.

T h e re fo re , th ey will pay a premium b u t not

an ex cessiv e premium, for a v a rie ty th a t will give h ig h er y ield s.
D ecisions on when to sell and buy and in which m arket a r e , o f c o u rse,
d ire c tly influenced by p rice .
Decisions in which p rice a p p e a rs to have little impact as rated
by p ro c e sso rs a re expansion of p lant size, num ber of p la n ts , and
q u ality o f raw p ro d u c t.

T he com plexities of decisions to expand

o p e ra tio n s and to build additional p lan ts a re such th a t a single bit
of d a ta ( e . g . , price) cannot possibly supply all th e needed inform ation.
Price inform ation is a factor b u t o th e r ty p e s of inform ation m ust be
c o n sid e re d :

th e cash flow sta te m e n ts, su p p ly , dem and, in te re s t

r a te s , tra n s p o rta tio n , and s o o n .
P rice information was rate d v e ry low by 70 p e rc e n t o f th e p ro ­
c e sso rs when making decisions about q u ality o f raw p ro d u ct to
p u rc h a s e .

In o th e r w ords, th e y believe th a t p rice c a rrie s v e ry little

inform ation about th e q u ality o f th e raw p ro d u c t.

P ricing decisions

and q u a lity decisions a re two se p a ra te decisions.

T h is relationship

a p p e a rs to be c o n sisten t in all p ro cessin g firm s.

Some p ro c e sso rs

sta te d th a t th ey would not accept raw p ro d u ct of poor q u a lity for a

115

lower p ric e while o th e r p ro c e sso rs w ere willing to make some m arginal
tra d e -o ffs betw een p ric e and q u a lity .
A lthough th e r e w ere no a p p a re n t in co n sisten cies betw een e v alu atin g
th e u se fu ln e ss o f p ric e in th e c o n te x t of g en eral decision u se s a s com­
p a re d to its evaluation in th e co n te x t o f a specific decision, th e
p o ssib ility may e x is t.

In g e n e ra l, p ric e inform ation received a high

ra tin g in all d ire c t m arket e x ch an g e (b u y and sell) situ a tio n s.

In

o th e r a s p e c ts o f th e b u sin e ss, p ric e becomes one o f many fa c to rs to
c o n sid e r.

O f major in te re s t h e re is th e fact th a t p ro c e sso rs believe

th a t p ric e tra n s m its little inform ation about th e q u ality o f th e raw
p r o d u c t.
E.

Inform ation an d M arket S tr u c tu r e
T h is section p re s e n ts an a n a ly sis of th e u se fu ln e ss o f inform ation

a c ro ss v a rio u s elem ents o f m arket s tr u c tu r e .

In an e a rlie r c h a p te r, a

review o f th e lite ra tu r e on th e re la tio n sh ip betw een m arket s tr u c tu r e
and inform ation was p re s e n te d .

A lthough th e lite ra tu re is v e ry

d iffu s e , econom ists have long recognized th is rela tio n sh ip in th e o ry
an d in tu itiv e ly , b u t th e topic is poorly d ev elo p ed ; th e re a re few
em pirical stu d ie s which attem p t to analy ze th is basic re la tio n sh ip .
In tra d itio n a l m arket s tr u c tu r e stu d ie s employing th e I/O fram e­
w ork, it is common to focus on se v era l s tr u c tu ra l v a ria b le s:

size and

n um ber o f firm s, b a rr ie r to e n tr y , p ro d u c t d ifferen tiatio n and concen ­
tra tio n ra tio s .
For th e p u rp o se of th is s tu d y , two elem ents of m arket s tr u c tu r e
w ere se le c te d , size o f firm and ty p e o f firm .

T h ese v a riab les w ere

se lec te d b e ca u se th e y a re easy to o b tain giv en b u d g e t c o n s tra in ts ;

116

th e y a re c ritic a l to th is s tu d y 's h y p o th e sis on th e re la tio n sh ip b etw een
m ark e t s t r u c tu r e an d inform ation; and th e y can be o p e ra tio n a liz e d .
Two b a sic ty p e s of p o tato p ro c e ssin g firm s o p e ra te in M ichigan:
fre e z e r s a n d c h ip p e r s .

T h e q u e stio n ra ise d in th is se ctio n is w h e th e r

th e u se fu ln e ss o f inform ation fo r decision m aking d iffe rs by firm ty p e .
Size o f firm , th e second elem ent o f m arket s t r u c tu r e u n d e r co n ­
sid e ra tio n is d e fin ed in term s o f th e volume of raw p ro d u c t h a n d led
by each p la n t.
1. T y p e s o f Inform ation A cro ss Firm T y p e
T able 5 .4 p re s e n ts th e r e s u lts o f p ro c e s s o rs ' ev alu atio n o f
v a rio u s ty p e s o f inform ation a c ro ss firm ty p e .

In g e n e ra l, fre e z e r s

g a v e h ig h e r ra tin g s to most ty p e s of inform ation th a n did c h ip p e r s .
S e v e ra l in te re s tin g o b se rv a tio n s can b e made on d iffe re n c e s b etw een
fre e z e rs and c h ip p e rs .

With re s p e c t to p ric e inform ation, fre e z e rs

c o n s is te n tly ra te d all ty p e s of p ric e inform ation (fo r b o th p ro c u re m e n t
a n d p ro d u c t m a rk e ts ), e x c e p t p o tato f u tu r e s p ric e s , a s "m oderately
u sefu l" to " v e ry u s e fu l."

Somewhat s u r p r is in g ly , c h ip p e rs ra te d

c o n tra c t p ric e inform ation a t 2.857, w hich is slig h tly below "m o d erately
u s e f u l."

On th e o th e r h a n d , c h ip p e rs view ed w holesale (p ro d u c t)

p ric e inform ation a s m ore th a n "m oderately u s e fu l."

A n o th e r m ajor

d iffe re n c e betw een fre e z e rs a n d c h ip p e rs is in th e ir e v a lu a tio n of
fo re c a st (p ro d u c t) p ric e inform ation.

F re e z e rs r a te th is ty p e of in fo r­

mation as " v e ry u s e fu l," while c h ip p e rs in d ic ate d th a t fo re c a s t p ric e
inform ation is " ra re ly usefu l" to them when m aking d e c isio n s.
With n o n -p ric e inform ation, a sim ilar com parison is m ade b etw een
th e u s e fu ln e s s fre e z e rs a n d c h ip p e rs place on v a rio u s ty p e s o f in fo r­
m ation.

H ere a g a in , fre e z e rs g e n e ra lly ra te d all ty p e s o f inform ation

117
T a b le 5 .4 A v e ra g e R an k in g o f V a rio u s T y p e s o f
Inform atio n A c ro ss Firm T y p e f

T ypes of
Information

All
Firms

Freezers

C hippers

Prices
Quotations
C ontract
Wholesale
Retail
F utures
Past Year
Forecast
O ther Inputs (Oil)

3.555
3.111
3.625
3.600
2.375
3.222
2.888
4.000

4.000
4.08
3.500
3.500
2.500
3.500
4.000

--------

3.428
2.857
3.666
3.666
2.333
3.142
2.570
4.000

Supply
Pit. Intentions
Crop Estimates
Vol. Shipments
Stocks

2.888
2.777
2.875
3.222

3.500
3.500
3.500
4.000

2.714
2.571
2.666
3.000

Demand
Population T ren d s
1ncome T rends
Consumer Profile
Demand Estimates

2.500
2.875
3.250
3.000

2.500
2.500
3.500
4.000

2.500
3.000
3.166
2.666

Cost
Production
Processing
T ransportation
Labor (Wages)

3.444
3.888
3.888
3.333

4.000
4.000
4.000
3.500

3.285
3.857
3.857
3.285

Source:

Data collected from personal interview s with Michigan
processed potato plant m anagers, 1980, su rv ey question
11.5, Appendix A.

The average number is based on assignm ent of number 4 to
"very u se fu l," 3 to "moderately u seful," 2 to "rarely u sefu l," and
1 to "not u se fu l." T herefore, th e highest ratin g possible would
be 4.0 and the lowest, 1.0.

118

more useful th a n did c h ip p e rs .

Alt supply ty p e of inform ation, p lan tin g

in ten tio n s, cro p estim ates volume shipm ents, and c a rry -o v e r sto ck s
w ere rate d "m oderately useful" to "v ery useful" by fre e z e rs.

C h ip p ers

ra te d su p p ly ty p e of inform ation as " ra re ly useful" to "m oderately u se ­
fu l."

Demand and cost ty p e s of information w ere evaluated fairly

co n sisten tly betw een ty p e s of firms with th e exception of th e ir evalua­
tion of demand estim ates.

F reezers rate d demand estim ates as "very

u se fu l," while c h ip p e rs felt th a t th is information ty p e was less th an
"m oderately u se fu l."
Some generalizations can be made about how th e fre e z e rs and
c h ip p e rs rate d th e u se fu ln ess of v arious ty p e s of inform ation.

As

noted above, fre e z e rs g enerally ra te d most ty p e s o f information h ig h er
th a n did c h ip p e rs.

For exam ple, fre e z e rs ra te d c o n tra ct p rice and all

su p p ly information as "v ery u se fu l."

C h ip p ers generally ra te d p ro d u ct

side information ty p e s as more u sefu l.

For exam ple, th ey gave h ig h er

ra tin g s to wholesale and retail p rice inform ation th a n did fre e z e rs.
M oreover, fre e z e rs rated Information ty p e s th a t re q u ire more an aly sis
( i . e . , forecast p ric e , demand estim ates) h ig h er th a n did c h ip p e rs.
2.

Sources of Inform ation A cross Firm T ype

T able 5.5 p re s e n ts th e re s u lts of p ro c e ss o rs1 evaluation o f v ario u s
so u rces of inform ation a cro ss firm ty p e s .

Most o f th e so u rces of in fo r­

mation for both fre e z e rs and c h ip p e rs w ere ra te d "rare ly useful" to
"m oderately u se fu l."

F re ez ers and c h ip p e rs both ra te d b ro k e rs as a

v e ry useful source of p rice inform ation.

F re ez ers rate d o th e r p ro ­

c e ss o rs, USDA economic p u b licatio n s, and commercial m arketing firms
as a " v e ry useful" to "m oderately useful" source of inform ation.

On

119
T a b le 5 .5

A v e ra g e R a n k in g o f S o u r c e s o f
P r ic e D ata A c ro s s Firm T y p e 1

S o u rce o f Inform ation

All

F re ez ers

C h ip p e rs

(9 firm s)

(2 firm s

(7 firm s)

Radio and T .V .

2.222

2.000

2.285

N ew spapers

2.777

2.000

3.000

M agazines

2.111

2.000

2.142

U n iv e rsity Publications

2.111

2.500

2.000

US DA Economic
Publ ications

3.000

3.500

2.857

USDA C rop R ep o rts

2.777

3.500

2.571

2.500

1.714

C o n su ltatio n with P erso n s
in G overnm ent or
U n iv e rsity
Commercial M arketing
S e rv ice s

1.888

3.500

1.857

B an k s

1.666

1.500

1.714

R etail S to re s

2.888

2.500

3.000

D ealers, B ro k e rs

3.888

4.000

3.857

O th e r P ro c esso rs

3.222

4.000

2.714

S o u rc e :

Data collected from p erso n al in terv iew s with M ichigan
p ro c e sse d p otato p lan t m an ag ers, 1980, su rv e y q u e stio n
M .6, A ppendix A.

T h e a v e ra g e num ber is b ased on assig n m en t o f num ber 4 to
“v e ry u s e fu l," 3 to “m oderately u s e fu l," 2 to " ra re ly u s e fu l," an d
1 to "not u se fu l." T h e re fo re , th e h ig h est ra tin g possible would be
4.0 an d th e low est, 1.0.

120

the o th er hand, chippers rated new spapers and retail sto re s as
"moderately useful" sources of information. Here again, from examining
th e ratin g s given each source, it appears th at for free ze rs information
on the procurem ent side of th e firm is most im portant, while for
chippers information from the product side of th e firm is more important
for decision making.
3. Specific Decisions Across Firm Type
This section of th e analysis p resen ts resu lts on processors'
perceptions of the usefulness of price information in making specific
ty p es of decisions (see Table 5 .6 ).

Freezers rated price information

"moderately useful" to "very useful" for th e se t of decisions.

Price

information was rated "very useful" in deciding on th e num ber of
plants to build, when to buy raw product, and from which geographical
m arket to buy raw pro d u ct.

For ch ip p ers, p rice information rated th e

highest when deciding in which geographical m arket to buy.

C hippers

make a g re a te r distinction than freezers when making q u a lity /p rice
tra d e -o ffs.

In oth er w ords, chippers rate price information as "rarely

useful" when making raw product quality decisions while freezers
rated price information as "moderately u seful."

C hippers also rated

price information low when making decisions on th e size o f plant
and in making a decision on th e number of plants to o p erate.
4. Size of Firm and Market Information
Table 5.7 p resen ts the resu lts of processor evaluations of ty p es
of information across various sizes of firm.

For the most p a rt, large

firms rated information sets as "very useful" to "m oderately u sefu l."
Medium and small firm s, on th e whole, rated information ty p es lower.
Price information received a "very useful" rating by th e large

firm.

121
T a b le 5 .6

A v e ra g e R a n k in g o f P ric e D ata fo r .
V a rio u s D e c isio n s A c ro s s Firm T y p e

All
P ro cesso rs

F reezers

C hippers

Expansion of Plant Size

(9 firms)
2.250

(2 firms)
3.500

(7 firms)
1.833

Number of P lants

2.625

4.000

2.166

V ariety of Potato

3.111

3.500

3.000

When to Buy

3.555

4.000

3.428

G eographical M arket in
Which to Buy

3.750

4.000

3.666

M arket to Sell

3.500

4.000

3.333

Quality of Raw P roduct

2.000

3.000

1.857

Decision

S o u rce:

Data collected from personal interview s with Michigan
p ro cessed potato plant m anagers, 1980, su rv e y q u estio n
11.8, A ppendix A.

T h e a v erag e num ber is based on assignm ent of num ber 4 to
" v ery u s e fu l," 3 to "m oderately u se fu l," 2 to "ra re ly u se fu l," and
1 to "not u s e fu l." T h e re fo re , th e h ig h est ratin g possible would
be 4.0 and th e low est, 1.0.

122
T a b le 5 .7

T y p e s of Inform ation

A v e ra g e R a n k in g o f V a rio u s T y p e s
o f In fo rm a tio n A c ro s s Firm S iz e '

2

Small2

Medium2

L arge

(2 firm s)

(4 firm s)

(3 firms)

(9 firm s)

P rice
Q uotations
C o n tra c ts
W holesale
Retail
F u tu re s
P ast Y ear
F o recast
O th e r In p u ts (Oil)

3.500
2.000
4.000
3.000
1.500
3.000
2.000
4.000

3.400
3.400
3.400
3.800
2.400
3.000
2.800
4.000

4.000
3.500
4.000
4.000
4.000
4.000
4.000
4.000

3.555
3.111
3.625
3.600
2.375
3.222
2.888
4.000

S u p p ly
P it. In ten tio n s
C rop E stim ates
Vol. S hip
S to ck s (S torage)

2.000
1.000
2.500
3.000

3.200
2.800
2.800
3.600

3.000
3.500
4.000
3.000

2.888
2.777
2.875
3.222

Demand
Population T re n d s
Income T re n d s
C onsum er Profile
Demand E stim ates

2.000
2.500
3.000
3.000

2.400
2.800
3.200
2.800

4.000
4.000
4.000
4.000

2.500
2.875
3.250
3.000

C ost
P roduction
P ro cessin g
T ra n sp o rta tio n
Wages

3.000
3.500
3.500
2.500

3.400
4.000
4.000
3.400

4.000
4.000
4.000
4.000

3.444
3.888
3.888
3.333

S o u rc e:

All Firms

Data collected from personal in terv iew s with Michigan
p ro c e sse d potato p lan t m an ag ers, 1980, su rv e y q u e stio n
I I . 5, A ppendix A.

T h e a v e ra g e num ber is based on assignm ent o f num ber 4 to
" v e ry u s e fu l," 3 to "m oderately u se fu l," 2 to " ra re ly u se fu l,"
and 1 to "not u s e fu l." T h e re fo re , th e h ig h est ra tin g possible
would b e 4.0 and th e low est, 1.0.
2

Firm size m easured in volume of potatoes han d led annually
by th e p la n t, a s d efin ed in T able 4 .2 , C h a p te r IV.

123

All non-price information received high rating from large firms
while medium and small firms ran the spectrum from "moderately" to
"rarely usefu l."

In o th er w ords, medium and small firms did not

ex p ress strong feelings one way o r th e oth er on the usefulness of
information ty p es.
The resu lts indicate th a t larg er firms rated supply information
higher compared to small and medium firms' evaluations of supply
information. Within th is categ o ry , volume of product shipped was the
only information ty p e th a t large firms rated as v ery im portant. The
high rating of supply information may indicate th at larg er firms are
more concerned about stable supplies of raw product th an small and
medium sized firm s. As a re su lt, they find supply related types of
information more useful.
A nother reason th a t may explain why larger firms rate most
information higher th an small and medium firms is the g re a te r
analytical capability of the larg er firm s.

L arger firms have, for th e

most p a rt, an analytical sophistication which resu lts in a g re a te r
realized value for information in th e ir decisions.

T herefore, it can be

expected th at larg er firms rate most information as "very u sefu l."
5. Firm Size and Source of Information
Table 5.8 p resen ts the re su lts of processor evaluations of sources
of information by size of firm.

B ro k er/d ealers a re rated as th e most

useful source of price information, all o th er sources of price information
were rated low by all firm sizes.

Besides giving b ro k ers a "very

useful" ratin g , th e large firms also rated USDA crop rep o rts as a
"v ery useful" source of price information.

O ther processors as a

124
T a b le 5 .8 A v e ra g e R a n k in g o f S o u rc e s o f
P ric e D ata b y Firm S ize 1

All

Small2

Medium 2

Large 2

(9 firms)

(2 firms)

(4 firms)

(3 firms)

Radio and T .V .

2.222

3.000

2.000

2.000

N ew spapers

2.777

3.000

2.600

3.000

Magazines

2.111

2.500

1.600

3.000

U niversity Publications

2.111

2.000

1.800

3.000

USDA Economic
Publications

3.000

2. 500

3.000

3.500

USDA Crop R eports

2.777

2.500

2.400

4.000

2.000

1.600

2.500

Sources of Information

C onsultation with
P ersons in G overn­
ment o r U niversity
Commercial M arketing
S ervices

1.888

2.500

1.800

3.000

B anks

1.666

2.000

1.400

2.000

Retail S to res

2.888

3.500

2.400

3.500

D ealers, B ro k ers

3.888

3.500

4. 000

4.000

O th er P rocessors

3.222

2.500

3.200

3.000

S o u rce:

Data collected from personal interview s with Michigan
processed potato plant m anagers, 1980, su rv e y question
11.6, A ppendix A.

T he av erag e num ber is based on assignm ent o f num ber 4 to
"v ery u se fu l," 3 to "m oderately u se fu l," 2 to " ra re ly u se fu l," and
1 to "not u se fu l." T h ere fo re , th e highest rating possible would
be 4.0 and th e lowest, 1.0.
2

Firm size m easured in volume of potatoes handled annually
by th e p la n t, as defined in Table 4.2, C h ap ter IV.

125

source of p rice information were rate d "ra re ly useful" by small firm s
and "m oderately useful" by medium and large firm s.
6.

Size of Firms and Specific Decision

L arge firm s ra te d p rice information "v ery useful" in all decisions
ex cep t fo r decisions related to quality o f pro d u ct (see T able 5 .9 ).
Medium an d small firms ra te d p rice information as "ra re ly useful"
when making decisions related to th e quality of raw p ro d u ct for
p ro ce ssin g .
Price inform ation was rated "not useful" to " ra re ly useful" by
small p lan ts when confronted with decisions to expand o r built
p la n ts, and to choose a v a rie ty o f potatoes to p ro cess.
For all firm siz es, p rice information proved to be "v e ry useful"
to "m oderately useful" in making decisions on when to buy an d in
which geographic m arket to b u y .
F.

Im plications of Firm B ehavior for M arket
Inform ation System s
In th e p revious c h a p te r, th e question

was posed o f, "What

a re th e major dim ensions of input m arket conduct?"
w ere d isc u sse d :

Four elem ents

c o n tra c tin g , p ric in g , quality co n tro l, and a ttitu d e s

tow ard inform ation.
Beyond th e conventional notion of m arket s tr u c tu r e , environm ental
c h a ra c te ristic s should be considered as fac to rs which influence p ro c u re ­
ment behavior o f p ro c e sso rs.

T his would include such fa c to rs as

technology, u n c e rta in ty , and im perfect know ledge.

Im perfect know­

ledge is th e "code word" in economic th e o ry fo r inform ation.

In th is

stu d y it is of p a rtic u la r im portance to tra c e th e relatio n sh ip betw een

126
T a b le 5 .9

A v e ra g e R a n k in g o f P r ic e D a ta f o r .
V a rio u s D e c isio n s A c ro s s Firm S iz e

2

2

All

Small2

Medium

(9 firm s)

(2 firm s)

(4 firm s)

(3 firm s)

Size o f Plant
(E xpansion)

2.250

1.000

2.400

4.000

Num ber o f P lants

2.625

2.000

2.600

4.000

V ariety of Potato

3.111

2.500

3.200

3.500

When to Buy

3.555

3.500

3.600

3.500

G eographical M arket

3.750

4.000

3.600

4.000

M arket to Sell

3.500

4.000

3.200

4.000

Q uality o f Raw P roduct

2.111

2.000

2.400

1.500

D ecisions

L arge

Which to Buy

S o u rce:

Data collected from personal in terv iew s w ith M ichigan
p ro ce ssed potato p lan t m an ag ers, 1980, su rv e y q u e stio n
11.8, A ppendix A.

T he a v erag e num ber is based on assig n m en t o f num ber 4 to
" v e ry u s e fu l," 3 to "m oderately u se fu l," 2 to " ra re ly u s e fu l," an d
1 to "not u s e fu l." T h e re fo re , th e h ig h est ra tin g p ossible would be
4 .0 and th e low est, 1.0.
2

Firm size m easured in volume o f potatoes han d led an n u ally by
p lan t as d efined in T able 4 .2 , C h a p te r IV.

127

m arket information and firm behavior.

With th is broader view of the

firm 's environm ent, it seems ap p ro p riate to pose a more encompassing
q u estio n , "What are th e firm 's rules (stan d ard operating p ro ced u res),
policies, stra te g ie s th at guide its decision making process in pro­
cu rin g raw product?" Why do firms vertically integrate? Under what
market conditions do firms employ b rokers? What are th e firm's
information handling rules? The premise here is th at the above
practices of th e firm exist not so much because information has
changed th e firm 's behavior, but ra th e r, th e lack of information
(u n certain ty ) has altered its behavior (p rac tic es).

These behavioral

practices influenced by uncertainty subsequently impact market
s tru c tu re and market perform ance.
Given the above dimensions of m arket conduct and risk
management practices of the firm, what implications do firm procure­
ment m arket behavior and risk management practices have for
m arket information? Here, we a re concerned with th re e actors:
the firm , o th er firms in the m arket, and non-m arket p articipants
(public statistical in stitu tio n s).

It should be evident th at a firm 's

behavior has implications for its information needs.

E arlier, the

firm was p o rtray ed as an adaptive institution. The behavior of the
firm will certainly impact its decision process and hence suggest
something about its information needs. At the same time, the firm 's
behavior also has implications for o th e r market p a rticip a n ts, th eir
decisions and information need s.
is a non-m arket p a rticip a n t.

The last acto r, statistical agencies,

In th is case, reference is to th e two

principle public su p p o rted USDA statistical institu tio n s, th e Economics
and S ta tistics S ervice, and the A gricultural M arketing Service.

128

T ypically, commodity procurem ent stra te g ie s , p ricing policies
and th e like a re closely held by th e firm because of th e potential
com petitive re p e rc u s sio n s.

Firms ten d to hold onto th e ir " s e c re ts ."

As a re s u lt, much of th e following discussion stems from personal
interview s with m anagers and o b se rv atio n s su p p o rted by o th er
stu d ie s .

No e ffo rt was made to obtain information on two im portant

sta n d a rd o p e ra tin g p ro c e d u re s, th e firm 's record keeping and its
plan n in g , b ecause it was th o u g h t most firms in the in d u stry would not
p ro v id e th is inform ation.

N e v erth eless, information on ta s k p e rfo r­

mance rules and inform ation handling ru les were solicited from th e
firm and o th e r m arket p a rtic ip a n ts.
1. C ontracting
T h ree main o b se rv atio n s come out of th e descrip tio n of c o n tra c ts
(in C h ap ter IV, see Procurem ent C onduct) used by Michigan p ro ­
cessed potato firm s.

T h ese have d ire c t implications for th e d is trib u ­

tio n , need, and p e rh a p s value of inform ation in th e m arket.
F irs t, th e c o n tra c tin g process is complex. Many dim ensions of
th e p ro d u ct and conditions m ust be d isc u sse d before exchange ta k e s
place betw een p ro d u c e r and p ro c e sso r.

To th e e x te n t th a t th e re is

no co n sistency betw een c o n tra c ts o ffere d by each firm , th e term s of
tr a d e o r inform ation which flows from th e exchange process becomes
tailo red for th e firm , difficu lt to summarize and, in any case,
g en erally closed to th e p u b lic.

T he complex co n tra ctin g process

would make inform ation (p ric e , q u a n tity , e tc .) collection costs high
fo r th e public sta tistic a l in stitu tio n s .

Also, th is closed information

ex ch an ge arran g em en t makes it d ifficult to evaluate m arket perform ance.

129

S econd, th e c o n tra c tin g p ro c e ss d ev ia te s from com petitive m arket
co n d itio n s.

In th e o ry , p rice is th e single signaling a g en t which is

e x p e c te d to aid decision m akers w ith re so u rc e allocation.

In a m arket

w here th e inform ational c o n te n t of p ric e is lim ited, some o th e r mechanism
is re q u ire d to perform th e inform ation signaling fu n ctio n —c o n tra c ts .
T he c o n tra c tin g p ro ce ss does p ro v id e a forum th ro u g h which infor­
mation is g e n e ra te d while goods and se rv ic e s a re e x ch a n g ed .
T he th ir d o b se rv atio n about c o n tra c ts in th e M ichigan p ro cessed
potato in d u s try deals with th e relatio n sh ip betw een th e firm 's behavior
and o th e r firm s in th e m ark et.

T h e e x iste n c e of inform ation and

c o n tra c tin g c o sts have im portant im plications for many a sp e c ts of
firm b e h av io r.

T h e oligopoly firm is not only c o n cern ed with th e

p rev a ilin g m arket inform ation—p ric e , c o s ts , q u a n tity —b u t is also
c o n ce rn e d with th e beh av io r o f rival firm s an d potential e n tr a n ts in
th e m arket (J u s k o w ). Juskow s ta te s th a t th e firm 's ability to m onitor
and resp o n d to th e actio n s of riv a ls , both real and p o tential is
lim ited b y c o n sid eratio n s o f inform ation c o st.

A lso, th e firm 's

ab ility to form , m onitor an d e n fo rc e informal collusive agreem ents
(c o n tra c ts) is determ ined by th e same c o n sid e ra tio n s.

T h e d ire c t

im plications o f th is statem en t a re th a t th e lower inform ation and
c o n tra c tin g c o sts become, th e g r e a te r will be th e ability o f a small
g ro u p of firm s to beh av e th e way one single monopoly firm b e h a v e s.
B a rrie rs to e n try become extrem ely h ig h .

T he la rg e r a re inform ation

c o s ts , th e more likely will firm s b eh av e com petitively, th u s easing
th e b a rr ie rs to e n tr y .

130

2. Pricing Behavior and S trategy
Because of the volatility of price in agricultural commodity
m arkets, procurem ent decisions are becoming increasingly im portant.
Processors can employ several strateg ies in procuring raw product;
(1) purchase from th e open market and be subjected to price
instability, (2) position them selves in the m arket in advance and
in this case stand to gain if price increases and lose if market prices
fall, and (3) employ a combination of th ese two stra te g ie s.
If price instability is ch aracteristic of a m arket, th e firm 's timing
o f commodity purchases has a significant influence on the cost of
th e finished product, and th u s on its competitive position relative to
o th er firms in the m arket.

Hayenga notes th at key elements in the

decision must include
the forecast probability distribution of th e relevant cash
and fu tu re delivery commodity price levels (and th e ir
■basis' relationship) over th e time period p rio r to use,
the key contingencies or environm ental factors (w eather,
governm ent policy changes, e tc .) affecting those prob­
abilities, th e typical distrib u tio n of forecast e rr o r , and
the c u rre n t cash and fu tu re contract p rice.
Although an accurate assessm ent of th e probability distribution
of fu tu re commodity price levels is d ifficult, it is critical in effective
risk management.

Hayenga co n stru cts a model which shows how the

expected probability distribution of commodity p rices, which will be
available to th e firm in the fu tu re time period, fits into th e firm 's
decision process.

In Figure 5.1 the expected probability distribution

of fu tu re commodity prices available to th e firm is illu stra te d .

Because

a g re a te r num ber of undeterm ined factors can influence p rices, the
figure is constructed such th a t prices in th e more d ista n t time period
are p o rtray ed with a larg er variance.

Hayenga sta te s th a t th e firm

131

Price

P robability
Most Likely
P robability
roE ab ility

Time
F igure 5.1 The Firm 's Decision P rocess and E xpected
Probability D istrib u tio n of F u tu re
Commodity P rices

can in co rp o rate th is inform ation into th e m anagem ent decision process
by tak in g commodity p ric e s p re se n tly available fo r c u rr e n t and fu tu re
d e liv e ry , and o v erlay in g them on th e expected p rice s in th e fu tu re .
Hayenga identifies additional fa c to rs c ritical to firm 's decision on
commodity p ric e s . They include th e ex p ec te d p rice of th e p ro d u c ts
to be sold by th e firm , th e re su ltin g m argin, ex p ectatio n s re g a rd in g
com petition's b ehavior in both th e commodity and p ro d u ct m arket,
and th e level o f ris k a ccep tab le to firm m anagem ent.
R esults from d ire c t interview s with m anagers of potato p ro cessin g
firms indicate th a t th e y employ much sim pler ru le s in making decisions
on p ric e s .

F re e z e rs, fo r exam ple, minimize th e ir risk th ro u g h forw ard

132

purchases of production (acreage) co n tra cts. C hippers employ
co n tracts to lock in a price of a fu tu re delivery of raw product to
th e ir plant.

Both freezers and chippers buy on th e open market to

fulfill processing short falls throughout th e y e a r. T hus, they use
a combination of pricing stra te g ie s.
When it comes to determ ining an offer price, interview resu lts
indicated th at processors resorted to a combination of pricing rules
th at ranged from a price leadership model to a market determ ined
p rice.

The price leader model holds particularly tru e in Michigan

during late w inter and early sp rin g of the year when the processor
comes to term s with th e grow er on th e contract price.

One firm

stated specifically th at they were not signing contracts with th eir
grow ers in 1980 until th e dominant firm in th e m arket had completed
its co n tractin g .

He fu rth e r indicated th a t his firm would attem pt to

match th e price offers of th e dominant firm. This su p p o rts th e
resu lts of o th er research on th e m arket conduct of processors in the
determ ination of th e ir procurem ent policies which suggested barom etric
price leadership of a competitive variety as a plausible form of pricing
behavior (Collins, Mueller and B irch ).

Quoting from Heimberger

and Hoos, Jesse Markahm defines barom etric price leader of a competi­
tive ty p e which "appears to do little more than set prices th a t would
eventually be set by forces of com petition." The authors state th at in
th is ty p e of price leadership, th e price leader is more o r less the
victim o f competition; an announced price by a would-be leader is not
intended to achieve price discipline among oth er firm s, but ra th e r
to reflect or anticipate an inevitable development.

133

This behavior has significant implications for price information
system s.

It appears that the cost of price determination falls on the

dominate firm; this firm has the task of arriving at a price which
ultimately serves (or greatly influences) the market price. Assuming
th at the smaller firms in the market rely heavily on the actions of the
dominate firm in making pricing decisions, the cost of th is activity
should be low for the smaller firm. They become free rid ers in th at
this strateg y facilitates smaller firm decision making on pricing
without having to invest in collecting price and other types of
information.
The public statistical agencies could not rely solely on th is
source of price data because a public information agency is charged
with the responsibility of collecting representative market prices.
Price offers determined by one firm may not rep resen t the entire
market (industry) in th at contract prices are often signed with
specific groups of farm ers in a concentrated production area.
3. Quality Control Rules
Evidence strongly suggests th at processors make pricing
decisions separate from decisions on quality of raw product p urchases.
T herefore, information related to quality is needed by th e firm for
its quality decisions. The firm has two options in plotting a quality
control stra te g y :

1) invest in obtaining information on quality of

raw pro ducts, or 2) adopt specific rules and procedures which reduce
the need for such information thereby simplifying the decision process.
R esults indicate th at the latter option best describes th e behavior
of Michigan processors in making quality related decisions.

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The c o n tract is th e integral mechanism for controlling quality
o f raw p ro d u cts in th e processed potato in d u stry .

T he co n tract

disp lay s th e " ru le s," specified by th e firm and ag reed upon by the
p ro d u cer th a t governs raw product q u ality .

T his specification

ran g es from production p ractices to specific g rad es of raw p ro d u ct.
One rule th a t has been controversial is th e so called "chip on arriv al
ru le ."

T he rule provides for rejection of any potatoes th a t do not

chip to th e b u y e r's (processor) satisfaction. A lthough favored by
p ro ce sso rs, th e rule is not favored by many grow ers because they
feel th a t th e clause is used to b rea k co n tracts and obtain lower priced
supplies (H a rriso n ).

C ontracting is sta n d ard p rocedure with most

firms and even if not included in a w ritten c o n tra c t, th e chip on
arriv al ru le ap p ears to be a p ro ced u re practiced in d u stry wide.
The firm 's decision process is significantly influenced by th e
sta n d a rd o p eratin g p ro ced u res of th e in d u stry relating to quality
co n tro l.

T his rule reduces th e information needed by th e firm in

making q u ality decisions.
T he o p eratin g p ro ced u res for quality control o f th e individual
firm , although p racticed in d u stry wide, have little impact on o th e r
firms in th e m arket.

Quality plays a significant role in product

differentiation and each firm s triv e s for th e highest possible sta n d a rd s
of q u a lity .

Each firm se ts its sta n d a rd s somewhat independent of

o th e r firm s in th e m arket.

For exam ple, it was found th a t firms in

th e Michigan processed potato in d u stry specify d ifferen t p ercen tag es
of G rade A potatoes in th e ir c o n tract and re q u ire d iffe re n t ru les
governing quality co n tro l.

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N on-m arket p a rtic ip a n ts p e rh a p s could c o n trib u te to th e
m ark eting p ro cess not by sup p ly in g more inform ation on q u a lity ,
b u t ra th e r by s tre n g th e n in g ru les (s ta n d a rd s ) which will enable
m arket p a rtic ip a n ts to make b e tte r decisions relatin g to q u a lity .
For exam ple, re se a rc h could p ro v id e some basis for estab lish in g
ch ip p in g potato d isease and defect color c h a rts (C hipper S n a c k e r).
A lthough th e in d u stry has developed such c h a rts , little is known in
th e Michigan m arket about th e p ro ce sses u n d e rly in g th e ir developm ent,
th e ir b a sis, w h eth er g ro w e rs w ere involved, and so on.

At any ra te ,

it seem s th a t a plausible solution to th is issu e is for th e statistical
agency to su p p ly inform ation relatin g to sta n d a rd p ro ce d u res ra th e r
th a n q u ality rela te d d a ta .
4.

Risk Management P ractices

A v a rie ty of risk m anagement p ra c tic e s adopted by th e firm have
im plications for m arket inform ation need s o f th e firm , com peting firms
and non-m arket p a rtic ip a n ts .

(1) Why do firms vertically in te g ra te ? 1

F irst of all, v ertical in teg ratio n th ro u g h ow nership in th e Michigan
p ro ce ssed potato in d u stry is limited to two firms and th e re fo re does
not re p re s e n t a major form of ex ch a n g e.

A lthough vertical integration

is not a major m arket arran g em en t in th e M ichigan potato in d u s try ,
it is a common p rac tic e in many o th e r fru it and vegetable m ark ets.
Protection a g ain st ris k is one of th e major reaso n s many p ro ce sso rs

"V ertical in teg ratio n em braces a broad ran g e o f in ter-firm
rela tio n sh ip s betw een su ccessiv e sta g e s in p ro d u ctio n . Elements in
v e rtica l in teg ratio n e x ist in almost all in te r-firm a rra n g em e n ts th a t
affect p roduction o th e r th a n th o se a rriv e d a t in th e open com petitive
m arket" (M ighell). In th is stu d y v ertical in teg ratio n has refe ren c e
to o w n e rsh ip .

136

(a n d g ro w e rs) in te g ra te fo r su p p lie s o f raw p ro d u c t.

T h is form o f

m ark et a rra n g e m e n t e n s u r e s p ro c e s s o rs a q u a n tity o f p e ris h a b le
p ro d u c ts to th e firm .

F u r th e r , u n c e rta in tie s a sso c ia te d w ith p ric e

in sta b ilitie s a re co n tro lle d to a g r e a te r d e g re e .
V ertical in te g ra tio n also p ro v id e s th e p ro c e s s o rs w ith some
c o n tro l in th e in p u t m arket w hich may s e rv e as a b a r r ie r to p o te n ­
tial m arket e n tr a n ts (W illiamson).

T h e e x te n t o f v e rtic a l in te g ra tio n

in th e M ichigan p ro c e sse d p o tato in d u s try is so limited th a t it p ro b a b ly
does not p ro v id e en o u g h "m ark et pow er" to c a u se m uch o f a b a r r ie r
to m ark et e n tr y .
(b )

B ro k e r v e rs u s B u y e r? T h e choice betw een em ploying a

b ro k e r o r a full time b u y e r is o fte n d ic ta te d by th e size o f th e firm .
For th e m ost p a r t , la rg e r firm s employ b u y e rs a n d th e sm aller firm s
em ploy b ro k e rs to p ro c u re th e ir raw p ro d u c ts .

R e su lts from th e

p re v io u s se ctio n of th is c h a p te r re p o rt th a t w ithout a n y d o u b t,
b r o k e r s a re th o u g h t o f b y th e firm s in th e M ichigan p ro c e ss e d p o tato
m ark et a s th e major so u rc e o f inform ation.

A lso, from th e firm 's

p e rs p e c tiv e , b ro k e rs play an im portant role in re d u c in g r is k .
G iven th e im p o rtan t role th a t b r o k e rs p lay in re d u c in g r is k an d
tra n s m ittin g inform ation in th e p ro c e ss e d po tato in d u s tr y , p e rso n al
in te rv ie w s w ere c o n d u c te d w ith fiv e o f th e la rg e s t b r o k e rs in th e
s ta te .

All b ro k e rs in d ic ate d th a t th e y a r r a n g e th e e x c h a n g e betw een

b u y e rs a n d s e lle rs .

T h is p ro c e ss o ften re q u ire s th e b r o k e r to b e a r

much o f th e ris k involved in th e m a rk e t.

For exam ple, one b ro k e r

d e s c rib e d it by sa y in g th a t h is b u s in e s s was to " p ro te c t th e m a rk e t."
He a r r a n g e s th e e x c h a n g e betw een a ris k a d v e rs iv e g ro w e r a n d a ris k
a d v e rs iv e b u y e r by ta k in g re s p o n sib ility o f e n s u rin g paym ent o f goods

137

and tran sp o rtatio n of goods over a specified time period.

The broker

believed th at th is function was necessary because neith er buyer or
seller would otherw ise undertake the risk of making the transaction.
These responses may exag g erate b ro k er risk s since b ro k ers are
rational and, in addition, only infrequently take title to the potatoes.
A nother dimension of risk bearing occurs when a load of potatoes
is "rejected at the plant door" by th e processor.

In some cases, the

bro k er takes the responsibility, th u s reducing th e risk of a bad
quality load to both grow er and processing firm by absorbing tra n s ­
portation c o sts, or if possible, by locating another buyer who requires
lower quality sta n d ard s (soup firm s, e tc .) .
Information transm itting is a prim ary function perform ed by the
b ro k er.

In a sense, one can think of his commission as th e value of

information to the firm. When questioned on th e ir sources of market
information each bro k er indicated th a t they telephoned various market
p articip ants around th e c o u n try .

One broker stated th at while he

supplied USDA with price q u o tes, public price re p o rts were not
useful to him because th ey were not timely enough to meet his
immediate decision needs. T his may ignore th e use of such USDA
information for ex post validation of oth er ro u rces.
The functions of th e b ro k er have trem endous implications to
the firm decision process with resp ect to th e procurem ent of raw
p ro d u ct. Michigan processors employ b ro k ers in procuring 16 percent
of th eir raw product n eed s.

The firm simply delegates th is function

to the b roker and as a resu lt many o f the firm s' decisions and th eir
information problems a re resolved.

138

(c)

Information handling ru le s. T hese ru les a rise in the pro­

cessed potato in d u stry from basically two situ atio n s:

1) those th a t

a re in d u stry wide (filterin g ru les related to Information sources
ex te rn al to th e in d u s try ), and 2) those th a t a re internal to the firm
b u t c h a ra c te ristic of th e m arket s tru c tu re (oligopoly).
Firms within th e in d u stry seem to have established a set of
ru les which govern th e value of various sources of information.
Non-m arket information sources a re generally considered not useful.
Information resu ltin g from m arket p articip a n ts w hether req u e ste d by
th e firm o r obtained via tran sactio n (exchange) is given a higher
premium.

T his ru n s fairly co n sistently th ro u g h o u t th e in d u stry .

Because of the s tr u c tu r e of th e in d u stry , th e firm can o b serv e
its internal op eratio n s and make inferences about total m arket infor­
mation.

One m anager indicated th a t th e b e st so u rce of information

about his com petitors was obtained by m onitoring th e changes in
volume o f finished p ro d u ct demanded in th e m arket.
force o f th e firm serv ed as information collectors.

Also, th e sales

One firm m anager

indicated th a t he has weekly m eetings with salesmen to d iscu ss
information g a th e re d on th e ir com petitors.

O ther firm s in the in d u stry

ten d e d to have a fairly "loosely s tru c tu re d " organizational system
for acq u irin g m arket inform ation.

T hat is, th ey have not developed

ru les for tran sm ittin g information within th e firm and for th e most
p a rt th e y collect m arket information on an ad hoc b asis.

C H A P T E R VI

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
FOR FUTURE RESEARCH

A.

G en eral C onclusions
T h is re s e a rc h had two b ro ad g o a ls .

T h e f i r s t was to d e s c rib e

o n e ty p e o f problem , o b so le sc e n c e , a s it re la te s to th e d a ta sy stem s
and as it im pacts th e d ecision m aking p ro c e ss e s o f firm m an a g ers in
th e M ichigan p ro c e ss e d p otato in d u s tr y .

T h e seco n d m ajor o b je c tiv e

w as to d ev elo p an d implement a m ethodology fo r e v a lu a tin g inform ation
sy ste m s o p e ra tin g in th e M ichigan p ro c e ss e d p o tato in d u s tr y .
o b je c tiv e s a r e re la te d to th e ab o v e m ajor g o a ls:

S e v e ra l

(1) to d e s c rib e th e

m ark e t s t r u c tu r e s and o p e ra tio n a l a s p e c ts o f e x c h a n g e a t th e
g ro w e r-p ro c e s s o r level in th e M ichigan p ro c e sse d p o ta to in d u s tr y ;
(2) to d e s c rib e th e p u b licly s u p p o rte d inform ation s e r v ic e s , th e
p r iv a te inform ation se rv ic e s a n d th e inform al inform ation sy stem
o p e ra tin g w ithin th e M ichigan p ro c e s s e d p o tato i n d u s tr y ; (3) to
id e n tify im p o rtan t m a rk e tin g d e cisio n s m ade by p o tato p ro c e ss in g
firm s; (4) to e v a lu a te th e s u p p o rtin g inform ation sy stem by re la tin g
sp e cific m arket d ecisio n s to sp e cific ty p e s an d s o u rc e s of d a ta ;
(5) to s u g g e s t im provem ents in th e p u b lic ly s u p p o rte d s ta tis tic a l
s e rv ic e s p ro v id e d th e M ichigan p ro c e ss e d p o tato i n d u s tr y , a n d
(6) to t e s t th e a p p lica b ility of th e inform ation system parad ig m
an d to re v is e o r e x te n d it w h ere p o ss ib le .

139

140

At the o u tse t, it should be pointed out th at th e generality of
inferences draw n from th is stu d y is somewhat limited because a case
study approach was adopted.

Moreover, given the relatively small

number of firm s, although comprising the total population within
the sta te of Michigan, the re su lts may not be directly applicable to
the national processed potato in d u stry .

In addition, in Michigan

th ere a re only two freezers and nine chippers (eight chippers p a rti­
cipated in this s tu d y ).

The analysis of th e firm s' evaluation of

various ty p es of m arket information was done using th e Linkert
scaling method. Since scaled questions do not result in cardinal,
but ra th e r in ordinal re su lts with no basis of com parability, one
cannot assign levels of significance to observed d ifferences, for
example, between freezers and ch ip p e rs. T his leaves one with a
substantial amount of d escrip tiv e material but a limited potential for
extensive analysis.

N evertheless, th e re a re some conclusions from

this stu d y which have implications for th e following defined areas
of concern:

th e firm decision environm ent, stru c tu ra l change in

the processed potato in d u stry , agricultural economic resea rch , public
statistical agencies, th e method used h ere, and fu tu re research .
This stu d y began with th e premise th at one of th e major
problems of an information system is statistical obsolescence.

Given

the nature of al[ information system s, th is fundamental problem is
seen as stemming from two so u rces:

(1) changes in th e policy agenda,

and (2) changes in the reality being track ed by th e information system
(Bonnen, 1975).

141

In th e context of th e m arket, th e p h rase "policy agenda" is
taken to mean "decision a g en d a ." A nd, th e re fo re , th is stu d y was
concerned with th e ty p e s , n a tu re , and changes in th e decision agenda
of processed potato firm s th at might re n d e r th e su p p o rtin g inforsystem obsolete.

T he need to stu d y th e decision agenda was found

not only n ecessary to illu stra te obsolescence in th e information system ,
b u t it was also n ecessary to indicate th e relativ e value of different
ty p es o f information to th e decision m aker.

T h u s, th ro u g h o u t th e

co u rse of th is d isse rta tio n , th e following prem ise has been a rg u e d :
information obtains its value only in th e context of a specific decision.
As a re s u lt, th e decision process of th e firm became a prim ary area
of in q u iry .
A lthough decision is an integ ral p a rt of economics, microeconomic
th eo ry does not provide a tr u e th eo ry of management decision making
at th e firm level. T h e re fo re , th e behavioral th eo ry of th e firm has
been employed to stu d y th e decision environm ent o f processed potato
firm s.
For th e most p a r t, one would expect th e decision agenda for
p riv ate m arket firms to remain fairly constant o v er time.

T his is

to be expected because th e firm , unlike public in stitu tio n s, is p ri­
marily concerned w ith th e p u rs u its of limited "well defined" objec­
tiv e s.

Public decision m akers, on th e o th e r h a n d , a re concerned

with a m ultitude of o bjectives—efficiency, e q u ity , grow th, balanced
b u d g e ts, national s e c u rity , to list a few. M oreover, changes in
political power a lte r th e em phasis placed on each of th e se o b jectives.
In a relative se n se , th e firm sails in still w a ters.

But from time to

time, it experiences extrem ely rough w aters th a t rock th e boat and
make decision less c le a r.

142

Recent years have been tough times for the business community
in general.

Inflation has had a trem endous impact on the firm's

ability to plan and thus make decisions concerning pricing, expan­
sion, and disinvestm ent. Many apprehensive feelings were voiced
throughout the interview process.

Quite a few managers had never

operated a business during inflationary periods and as such registered
concern about its effect on th e ir decision processes.
Statistical systems also become obsolete when fundamental
changes occur in reality of th e market which make it more difficult
for the statistical agency to collect d ata.

Sometimes the agency does

not even recognize the change when it evolves slowly. Within the
processed potato in d u stry , changes in market s tru c tu re are th e major
facto rs contributing to statistical obsolescence.
Perhaps the most noticeable change in th e potato in d u stry is
th e g reat shift away from fresh toward processed o u tlets in potato
m arkets.

This change has implications for the market channels,

market functions, and many economic aspects of exchange. Each of
them, in tu r n , have implications for our public statistical system .
For many years th e producer had one major outlet for his
potatoes, the fresh m arket.

But with th e grow th in the potato pro­

cessing in d u stry over th e past two decades, th e spectrum of possible
m arketing channels has widened significantly. Along with these new
m arketing alternatives arises the need for information to meet the
new set of m arketing decisions faced by p ro d u cers. Also, some
decisions a re no longer faced or have become less im portant and
th erefo re so have related information needs.

This phenomena has

occurred in many segm ents of o u r food se cto r. And for the most
p a rt, public statistical agencies have responded appropriately to

143

th is ch an g e by re p o rtin g s ta tis tic s on th e new p ro d u c ts th a t flow
th ro u g h th e various c h a n n e ls.

T his tre n d is likely to co n tin u e as

consum er demand for th e more convenient p ro ce ssed food e x p a n d s.
USDA's sta tistica l agencies have g en erally a d a p te d well to
th is so rt of change and have e stab lish ed th e n e c e ssa ry in stitu tio n al
m echanisms to deal e ffectiv ely w ith th is phenom ena.

For exam ple,

u s e r w orkshops co n d u cted by E S S -S tatistic s a re well su ite d fo r
id en tify in g th e chan g es in m arketing c h an n els and th e new s ta tis ­
tical n eed s of th e in d u s tr y .

T his is th e ty p e of feedback an y s ta tis ­

tical system should seek in o rd e r to reta in c re d ib ility w ith its d ata
u se rs.

T his mechanism p ro v id es "feedback" from th e u s e rs of

s ta tis tic s to th e m anagers o f th e sta tistic a l a g e n c y .

When en g ag ed in

th is e ffo rt, how ever, a sta tistic a l ag en cy n eed s to develop c rite ria
fo r d eciding on th e adoption of c h an g e s in sta tistic a l pro g ram s which
a re su g g e ste d by th e v a rio u s m arket p a rtic ip a n ts .

It a p p e a rs th a t

in some c a se s th e in d u s try th ro u g h its v a rio u s in d u stria l asso ciatio n s
could and should p ro v id e fo r c e rta in of its own d a ta n e e d s.
ideas a re d u b io u s in term s o f cost e ffe c tiv e n e ss.

Some

O th e rs b e n efit a

q u ite narrow segm ent o f th e food m ark etin g system an d th e b e n e fits
a re alm ost, if n o t, e n tire ly c a p tu re d by food m ark etin g firm s.

In

o th e r c a se s th e re a re major social r e tu r n s to co n su m ers an d th e
p u b lic and public inv estm en ts in d a ta a re ju s tifie d .

H ow ever, at

th is po int we lack su itab le c rite ria fo r d ecid in g su c h tra d e -o ff s .
T he second im portant consequence th a t th is c h a n g e in potato
m arket o rg an izatio n has for o u r p ublic s ta tistic a l ag en cies is th a t
it a lte r s th e d istrib u tio n o f m arketing fu c n tio n s a t th e f i r s t h a n d le r
level betw een th e th re e major a c to rs —g ro w e rs, b r o k e r s , and p ro c e s s o rs .

144

Market organization changes cause m arketing functions to be defined
differently, sometimes discontinued, and oftentim es exchanged between
the acto rs.

For example, at one time many of th e m arketing

functions—from production to tra n sp o rtin g produce to m arket—were
performed by th e p ro d u cer.

But as specialization in agricultural

marketing intensified th ese activities were spun off th e farm to
oth er market participants (and vice v e rs a ).

The degree to which

th is has occurred varies across geographical m arkets, across market
channels, and even across individual firms (both producer and pro­
cessor) . T his brings up the question w hether th ese changes are
reflected in c u rre n t statistical agency procedures to collect and
compile data series on prices received by grow ers.

Perhaps a

fu rth e r question to consider is could or should statistical agencies
respond to these changes.
ESS-Statistics has, for example, recently responded to the
shifting m arketing functions in potatoes by examining a new data
series (proposed by a farm er organization) which would rep o rt a
synthetic farm gate price o f potatoes by su b tra ctin g out of th e first
transaction price any m arketing functions perform ed by the grow er.
This price concept b rin g s up im portant questions about th e m erits
of any synthetic sta tistic .

What decisions does th is information

facilitate? How accurate an indicator of farm level prices would
th is statistic be? Are th e re d an g ers in rep o rtin g prices th at are
not market determ ined? A re E SS -S tatistics price series designed
to make sta te comparisons?
It is difficult to conceive of any d irect decision needs th at a
synthetic farm gate potato price would se rv e .

In contracting or

145

b id d in g , m arket p a rtic ip a n ts a re su rely sophisticated enough to
u n d e rs ta n d and discount th e se v ariatio n s in m arketing functions
(especially as th e y affect th e ir own costs) perform ed by potato
farm e rs.

If th e m arket already d isco u n ts for th is phenomena an d ,

as re p o rte d in th is s tu d y , if p ro ce sso rs do not now find USDA p rices
v e ry useful in th e ir decisio n s, one is at a loss to know what practical
value a "farm gate" potato p rice concept would have e ith e r fo r p ro ­
c e sso rs o r g ro w e rs.

K lein's evaluation o f potato grow er information

needs does not su g g e st any u rg e n t grow er decision u se s for a
sy n th e tic farm g a te p rice e ith e r in th e case of pro cessin g o r fre sh
m ark ets.

M oreover, costing out m arket functions from a m arket

determ ined f irs t tra n sa c tio n p rice may g re a tly d isto rt th e signalling
a b ility , if a n y , of th e re p o rte d m arket determ ined p rice se rie s.

Price

is d eriv e d from th e interaction of supply and demand fo rces in th e
m arket place.

Cost is a major component on th e supply sid e .

To

s u b tr a c t out cost on a p e r un it b asis would re s u lt in a concept with
little m eaning.

M oreover, c o stin g out m arketing functions could,

especially in an inflationary p e rio d , re s u lt in an agency periodically
re p o rtin g n eg ativ e p ric e s—which only u n d e rlin es th e questio n of what
th e concept behind su ch a p rice means and what real world u ses
it might h av e.

Finally, th e prim ary p u rp o se o f ESS p rice d ata a re

to p ro v id e m easures of m arket perform ance especially when combined
with q u a n tity sold to p ro v id e a farm income m easu re.

In th is u se , a

sy n th e tic farm g a te p rice would u n d e rs ta te farm er income and d is to rt
th e m easure of farm er w elfare.
A nother s tru c tu ra l ch an g e in th e potato in d u stry which has
implications for public sta tistic a l system s focuses on th e exchange

146

m echanism .

As th e in d u s tr y s h ifts from f r e s h tow ard p ro c e ss e d

m a rk e ts, th e p rim a ry e x c h a n g e m echanism s a r e also sh ifte d from an
"open system " to one th a t is c lo sed .

T h e e x c h a n g e m echanism w hich

tra d itio n a lly tr a n s f e r r e d fre s h p ro d u c e , a term inal m a rk e t, re s u lte d
in a situ a tio n w here th e public sta tis tic a l a g e n t could d ire c tly o b s e rv e
an d re p o rt th e p r lc e s th a t p rev a ile d in th e m a rk e t.

B u t a s m ore p ro ­

d u c t moved th ro u g h th e p ro c e sse d p o tato m a rk e t, th e e x c h a n g e
m echanism s w ere a lte re d to meet th e n e ed s of th e p o tato p ro c e ss in g
firm s.

T h e new ex ch a n g e m echanism , c o n tr a c ts , m akes it d iffic u lt

to o b tain a c c u ra te p ric e d a ta sin ce th e flow of inform ation in th e
e x ch an g e p ro c e ss is hig h ly tailo red to th e individual firm a n d is
closed to th e p u b lic .

T h is ty p e o f s tr u c tu r a l c h a n g e r e p r e s e n ts a

se rio u s problem fo r th e p ublic sta tistic a l sy stem b e c a u se it inv o lv es
th e fundam ental q u e stio n o f p ro p e rty r ig h ts to inform ation—a q u e stio n
th a t is y e t to be re so lv e d .
In th e c o n te x t o f th e p otato in d u s tr y s h ift from f r e s h to p ro ­
c e ss e d m ark e ts we find e v en more fundam ental s tr u c tu r a l c h a n g e .
In M ichigan betw een 1964 a n d 1974 th e nu m b er o f p o tato g ro w e rs
d eclin ed from 3154 to 860, while d u rin g th is p e rio d , p o tato a c re a g e
p e r farm in c re a se d from 12 to 47 a c re s (H a rris o n ).

From all indica­

tio n s p ro c e ssin g firm s have also declin ed in nu m b er w hile in c re a s in g
in siz e .

T h e se s tr u c tu r a l c h a n g e s an d o th e rs s u g g e s t th e n eed fo r

some fundam ental a d ju stm en t in o u r s ta tis tic a l in s titu tio n s .

If a d e ­

q u a te inform ation is to b e available fo r m onitoring m ark et developm en ts
a n d m eeting p u b lic a n d p riv a te d ecision n e e d s , a new focus in o u r
r e s e a rc h an d d a ta collection in s titu tio n s is n e e d e d .

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B . Market S tru c tu re , Procurem ent Behavior
and Information: T he R esults
T his research approach, in effect, held m arket s tr u c tu r e and
firm behavior co n stan t, and then evaluated information in th e context
of th e firm s' decison environm ent.

More specifically, th is stu d y

evaluated ty p es and sources o f m arket information ag ain st th e firm s'
m arketing decisions.

C u rre n t m arket price inform ation—farm level

p rice q u o tes, wholesale p rices, and quotes on input prices were
given high ra tin g s by most of th e firm s.

Historical p rice information

and estim ates of fu tu re p rice w ere, on th e whole, ra te d low er. Within
th e n o n -price information categ o ries, all ty p e s of cost information
were most often rated useful by potato p ro ce sso rs.

P rices, how ever,

stan d well above all o th e r ty p es of information in th e ir value in p ro ­
cesso r decisions.
B ro k ers and dealers were rate d as th e most useful source of
p rice information by p ro ce sso rs.
information transm ission.

B rokers perform th e function of

They a re m arket p a rtic ip a n ts and th ere fo re

th ey a re subjected to recourse by p ro d u cer or p ro cesso r if th ey
transm it faulty inform ation.

USDA p rice re p o rts w ere considered by

the p ro cesso rs as th e next most useful source of p rice inform ation.
Given th e public good c h aractistic of inform ation, it can be assum ed
th a t o th e r sources such as new spapers, radio, and T .V . relied
heavily on USDA p rice data as a source.
Price information was given higher ra tin g s when considered in
specific decisions th a t involved d ire c t exchange of goods in th e m arket.
It is in te restin g to note th at price information was rated v e ry low by
p ro cesso rs when making decisions about quality of raw p ro d u c t.

Also,

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p rice information was rate d low in specific decisions related to expanding
o r building new p la n ts.

B ecause p rice informati n was rate d low in

th is in stan c e, it is assum ed th a t a single sta tistic could not provide
enough information for th is se t of complex decisions.
Two elem ents o f m arket s tr u c tu r e , size o f firm and ty p e o f
firm w ere used to evaluate inform ation in th e p ro cessed potato
in d u s try .

C ross tab u latio n s ran k in g th e u sefu ln ess of various ty p e s

and so u rces o f information w ere em ployed.

With re sp e c t to information

ty p e s , fre e z e rs generally ra te d most ty p e s of inform ation h ig h er than
did c h ip p e rs .

M oreover, fre e z e rs ra te d h ig h est information ty p e s

th a t w ere related to th e p rocurem ent side of th e firm .

C h ip p e rs, on

th e o th e r h an d , rate d pro d u ct m arket inform ation h ig h e r.

T h is clearly

re fle cts th e relativ e dom inance in decision m aker concern for pro d u ct
m arket problem s in th e case of c h ip p e rs and procurem ent problem s in
th e case of fre e z e rs.
Both fre e z e rs and c h ip p e rs recognized b ro k e rs as th a t most impor­
ta n t so urce o f m arket inform ation.

For th e most p a rt, ag ain , fre e z e rs

ten d e d to ra te sources on th e procurem ent side h ig h er and c h ip p e rs
ra te d p ro d u ct side m arket inform ation sources h ig h e r.
F re ez ers and c h ip p e rs w ere also ask ed to ran k th e u sefu ln ess
o f p rice inform ation in m aking specific d ecisio n s.

F re ez ers rate d

p rice inform ation "m oderately useful" to "v ery useful" fo r th e ir
d ecisio n s.

For c h ip p e rs, p rice information ran k e d th e h ig h est when

decid in g in which geographical m arket to b u y .

T he re s u lts indicate

th a t c h ip p e rs ra te p rice inform ation as "ra re ly useful" when making
q u ality d ecisio n s.

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T h is s tu d y also exam ined th e re la tio n sh ip betw een siz e o f firm
a n d ty p e o f inform ation.

As was e x p e c te d , ta rg e firm s ra te d most

inform ation ty p e s a s " v e ry u sefu l" to "m oderately u s e f u l."

One

in te re s tin g re s u lt is th a t la rg e r firm s ra te d su p p ly d ecision inform a­
tio n h ig h e r com pared to small and medium firm 's e v a lu a tio n .

T he

h ig h ra tin g o f su p p ly inform ation may s u g g e s t th a t la r g e r firm s
r e q u ire more co n tro l o v e r th e s ta b ility in su p p ly o f th e ir raw p ro d u c ts
th a n do small and medium sized firm s.
h ig h e r v alue on su p p ly inform ation.

A nd a s s u c h , th e y place a

All firm siz e s c ite d b ro k e r s /d e a le r s

as a " v e ry u sefu l" so u rc e o f p ric e inform ation.
In m aking sp ecific d e cisio n s, all firm sizes ra n k e d p ric e in fo r­
m ation as " v e ry u sefu l" to "m oderately u sefu l" in m aking d ecisio n s
re la te d to d ire c t ex ch a n g e o f g o o d s.

H ere a g a in , p ric e inform ation

was ra n k e d low in m aking d ecisio n s about th e q u a lity o f raw p ro d u c t
to p u r c h a s e .
Elem ents o f firm b eh av io r an d how th e y re la te to m arket in fo r­
m ation was also o f c o n ce rn in th is s tu d y .

A d is tin c tio n was made

betw een firm b e h av io r th a t a ris e s from and is in flu e n ce d b y m arket
s t r u c tu r e , and b e h a v io r th a t stem s from th e firm 's en v iro n m en t
(g en e ral m arket c o n d itio n s ). T he la tte r b e h a v io r is p rim arily
in flu en ced by u n c e rta in ty o r lack o f inform ation.

T h is c a te g o ry o f

b e h av io r g e n e ra lly involves r is k m anagem ent p ra c tic e s .

Within each

g ro u p , sp ecific elem ents w ere d isc u sse d in th e lig h t of th e im plications
fo r inform ational need o f th e firm , o th e r firm s in th e m a rk e t, an d th e
p u b lic sta tis tic a l a g e n c y .

U nder th e b eh av io r o f th e firm c o n tra c tin g ,

p ric in g , and q u a lity co n tro l w ere c o n s id e re d .

U n d e r th e r is k m anage­

m ent p ra c tic e s th e d isc u ssio n in clu d ed (1) why do firm s v e rtic a lly
in te g r a te , (2) b ro k e r v e rs u s b u y e r, a n d (3) inform ation h a n d lin g r u le s .

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Generally, the firm attem pts to reduce th e risk by employing
any number of the above elements of behavior. Whenever a m arketing
practice becomes too risk y , the firm avoids th is activity by attem pting
to shift it toward another market participant.
This research examined th e usefulness of publicly provided
information in an oligopoly m arket, th e Michigan processed potato
in d u stry .

From the theory of cost and benefits of information across

d ifferen t market s tru c tu re s , as developed in C hapter II, one can
draw some inferences about the provision of public information in th e
Michigan processed potato in d u stry .

First of all, th is m arket stru c tu re

is p erh aps th e most difficult one in which to a sse ss th e directional
d istrib u tion of costs and benefits to private and social investm ents
in information.

Let us firs t consider cost d istrib u tio n s.

The theory

su g g e sts th at the cost of data accessibility for th e firm declines as
one d e p arts from competitive conditions. We reason th u s because,
as th e m arket grows more monopoloid, the firm can obtain an estim ate
o f various param eters of the en tire m arket by examining its internal
operations in relation to th e m arket.

The larg e st firm has th e g rea test

advantage in th is , and th e smaller less. T his follows from th e basic
s tru c tu re of an in d u stry with few firm s.

F u rth e r, a firm in this

m arket can reduce the cost of information for decision making by
employing any number of risk management practices and stan d ard
operating procedures.

On the o th er hand, public statistical agencies

without th e cooperation of the oligopoly firm experiences relatively
high cost of collecting m arket information. T his, in p a rt, explains why
public statistical agencies do not collect v e ry much information for
facilitation of m arkets in concentrated in d u strie s.

F u rth e r, th e use of

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c o n tra c ts th a t a re tailored for each firm ad d s to th e h etero g en eity of
tra n s a c tio n , and to th e public co st of collecting m arket inform ation.
One m ust also co n sid er th e social b en efits of in v estin g in infor­
mation in oligopoly m ark ets.

A side from th e difficulties of accounting

fo r social b en efits of public investm ents in inform ation, th e direction
of social benefits of publicly supp lied m arket inform ation a p p e a rs to
d iv e rg e in oligopoly m arkets betw een r e tu r n s to (1)
tio n , and (2) public policy and reg u la to ry pro g ram s.

m arket facilita­
As pointed ou t

in C h a p te r II, th e b en efits of public information in m ark ets th a t
ap p ro ach th e com petitive model a re realized prim arily in gains from
facilitating m arket coordination.

B ut as one moves away from competi­

tiv e m arkets to su b sta n tia lly c o n ce n tra te d o n e s, th e benefit o f public
inform ation ta k e s th e form o f re tu rn s to various ty p e s o f public policy
which often re q u ire inform ation on th e perform ance of th e m arket.
With th e case o f th e Michigan p ro cessed potato in d u s try , we found
little evidence of m arket coordination problem s th a t can be improved
by simply providing more m arket inform ation—especially p rice d a ta .
A lso, public policy issu es w ere o f th e n a tu re which su g g e s t th a t
more sta tistica l information would not add su b sta n tia lly to social
b e n e fits.

T h e re is a need for re se a rc h to tra c k and b e tte r u n d e rsta n d

th e effe cts of th e ch an g es ta k in g place in m arkets such as th is .
On m arket s tr u c tu r e and p ro cu rem en t, one can o ffe r th e following
conclusions:
1.

An evaluation of p rice inform ation ag ain st specific decisions

made by potato p ro cessin g firm s su g g e sts th a t only c u rre n t p rice
inform ation d ire c tly related to th e ex change o f goods is valued highly
by th e firm .

T he re s u lts also indicate th a t only th e m arket can p rovide

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th is ty p e of p rice inform ation to meet th e firm 's decision n e ed s.

So

called " th ird p a rty " information sources for th e most p a rt a re valued
lower.

USDA was considered by p rocessing firm s to be th e most

reliable non-m arket source of inform ation.
2. S tru c tu ra l c h a ra c te ristic s of th e processed potato m arket
do have an impact on how various ty p e s of m arket inform ation a re
v alu ed .

In th e main, p ro ce sso rs a cro ss d iffe re n t m arket s tr u c tu r e

elem ents rate d b ro k e rs a s th e most useful so u rce of inform ation.
3.

Elements of firm procurem ent behavior do have an impact on

th e d istrib u tio n and value of m arket information to th e firm , o th e r
firms in th e m arket and public sta tistica l ag en cies.

T he firm as an

a d ap tiv e in stitu tio n can a d ju st its behavior by employing risk m anage­
ment p rac tic es to o p e ra te u n d e r u n c e rta in ty o r to tr a n s fe r m arket
fu n ctio n s when th e risk becomes too g re a t.
4. A tangential questio n th a t ran th ro u g h th is re se a rc h e ffo rt
was what a re th e potentials for USDA to improve its sta tistica l
se rv ice s to p ro cesso rs and c o n v erse ly , how can p ro c e sso rs aid in
im proving public statistical p ro d u c ts .

While some p ro c e sso rs indicated

th a t th e y cooperated by filling o u t s ta te cro p re p o rtin g q u e stio n n a ire s,
most p ro ce sso rs th o u g h t th a t th e y and th e USDA could do little to
improve public m arket inform ation.
C.

Implication for Public R eporting System
It should f irs t of all be noted th a t USDA's sta tistic a l agencies

w ere not d esig n ed d irec tly to se rv e th e informational needs o f food
p ro c e ss o rs, th e focal g ro u p in th is s tu d y .

In fa c t, th e inform ational

n eed s of th is g ro u p of firms a re p e rh a p s in h eren tly a lower p rio rity
on th e ir sta tistica l agenda th an a re p ro d u ce r n e e d s.

B ut th e reality

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of th e situ atio n , th e problem of statistical obsolescence, makes it
possible for one to draw some inferences from th is stu d y for the
public statistical system whose prim ary mission developed some y ears
ago and has not fundam entally changed,

in creasin g ly , th e decisions

made by p ro cesso rs affect th e e n tire food system and th u s the
activ ities of processors impact th e public statistical agencies. With
th e trem endous change in m arket organization, new ty p e s of problems
a ris e , and th e re fo re , th e need for information for both p riv ate and
public decisions in creases.
Perhaps one of th e most im portant public data se ries is th a t of
p ric e s. While it is questionable w hether or not th is data se ries can
significantly a lte r th e firm 's behavior, re su lts of th is stu d y indicate
th a t public p rice data se rie s, n e v erth eless, ran k second in u sefu ln ess
in p ro ce sso r's decision m aking. Most of th e b en efits of th e se p rice
re p o rts go unnoticed because information can easily be reproduced
by o th e r in stitu tio n s and d istrib u te d as th e irs w ithout many m arket
p a rticip a n ts knowing th e connection between th e various so u rc es.
R esults of th is stu d y indicate th a t nonprice data se ries a re also
q u ite im portant to p ro ce sso rs.

Crop estim ates and p lanting intentions

a re two major data se ries published by E S S -S tatistics.

T he informa­

tional content of prices is being reduced by changes in m arket s tru c ­
tu r e and p ricing mechanisms.

The ability of p rice to perform its

signaling function so th a t reso u rces a re efficiently allocated has been
red u ced .

C onsequently, nonprice information increases in value to

th e decision m aker.

T his is p articu larly tr u e in ag ric u ltu ral m arkets

w here p rice elasticities a re such th a t small changes in supply can
d rastically affect m arket p ric e s.

If a m arket p articip an t in th e potato

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in d u stry waited to react to changes in m arket p ric e s, he would be
placed at a d isadvantage compared to th e p articip an t who had p rior
d irect information about changes in th e size o f th e c ro p .
Because of inflationary p re s s u re s , th e cost of m arketing has
risen rapidly in recent y e a rs.

Many m arketing serv ices a re in fact

becoming more costly th a n th e p e r unit value of th e raw p ro d u ct.
M arketing d a ta , in most c ase s, a re not rep o rte d by th e public sta tis­
tical agencies, d espite th e ir im portance to th e food system .

For

example, tran sp o rta tio n makes up ten p ercen t of all food-m arketing
c o sts.

Data published on food tran sp o rta tio n is rep o rted by th e

In te rsta te Commerce Commission.

U pchurch a s s e rts th a t food

hauling is, for th e most p a rt, by u n reg u lated c a rrie rs w here th e re
is no complete and con sisten t body of d a ta .

Cost information on

tran sp o rta tio n of processed food would be o f value to th e in d u stry
as well as th e public se cto r.
Improved information on an o th er area th a t would be of value
to both p riv ate and public secto r decisions involves g rad e s and
sta n d a rd s in th e potato in d u stry .

R esearch on th is problem area can

p erh a p s b est be perform ed by AMS with ESS cooperation.

C onsistent

g rad e s and sta n d a rd s tailored to processing uses could g rea tly
enhance th e exchange of p ro d u c ts between p ro d u ce rs and p ro ce sso rs.
D. A ppraisal of th e Information System
Paradigm : Methodological Implications
T his stu d y has employed th e information system paradigm in th e
analysis of m arket information in th e Michigan processes potato
in d u s try .

H ere th e s tre n g th s and w eaknesses of th is framework

a re d isc u sse d .

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P e rh a p s th e g re a te s t s tr e n g th of th e fram ework lies in its
a b ility to aid th e re s e a rc h e r in defin in g problem s.
c la rity to a complex s e ttin g .

It help s b rin g

T he fram ew ork is applicable to most

inform ational problem a re a s a t b o th a micro and macroeconomic level.
It is p a rtic u la rly su ited for th a t ty p e of re s e a rc h w here th e problem
is ill-d efin ed an d th e em phasis o f th e re s e a rc h is a t least p a rtly
to a rtic u la te th e problem b e tte r .
A n o th er s tre n g th o f th e paradigm , a s exem plified by th is s tu d y ,
is th a t it can easily be combined with v ario u s c o n cep ts from th e o rie s
w hich aid in sh ed d in g lig h t on th e re s e a rc h problem .

T he fram ew ork

is an epistem ological taxonom y, not a m ethodology, which allows it
flex ib ility .

For exam ple, in th is stu d y th e inform ation system s p a ra ­

digm was combined with co n cep ts from neoclassical th e o ry , in stitu tio n al
economics and from in d u stria l o rg an izatio n .
T he inform ation system paradigm does not help one w ith th e
fundam ental p arad o x of inform ation:

decision m akers cannot place a

v alu e on inform ation u n til th e y have u sed it.

T h e re fo re , decision

m ak ers1 evaluation o f inform ation ty p e s and so u rc e s is limited to th e ir
realm o f e x p e rie n c e w ith e x istin g inform ation ty p e s an d so u rc e s .
T he fram ew ork relies on th e com plete specification o f th e u s e rs
decision en vironm ent to id en tify em erging inform ational n eed s of
decision m ak e rs.

T h is is an em pirical m atter w hich is o ften d ifficu lt

to a s s e s s .
A n o th e r lim itation of th e fram ew ork is th a t it does not p ro v id e
d ecision ru le s so th a t, for exam ple, tra d e -o ffs can be made betw een
com peting d a ta u s e r s .

T h e fram ew ork does not help th e re s e a rc h e r

in p re s c rib in g w hich ty p e s of inform ation should be publicly s u p p o rte d
an d which ty p e should b e su p p o rte d by th e p riv a te m ark et.

All

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th is hinges on th e fact th a t th ere remain serious problems in placing
a value on d ifferen t uses of data and on th e distribution o f benefits.
The above characterization of the information system paradigm
are germ ane to its application to almost any problem. T here a re ,
how ever, some specific insights and difficulties arising directly
from the application of th is framework to the p articu lar problem in
this research .
Previous stu d ies have identified difficult problems in applying
th e information system paradigm .

Riemenschneider stated th at th e

problem of identifying th e universe of data u se rs was critical to
his stu d y of th e USDA farm income data system .

Klein also alluded

to the problem of identifying data u se rs in his stu d y of th e potato
price data series in Michigan. Because the data u se rs in th is stu d y
were a relatively definitive group, identifying or obtaining a frame
did not p resen t a problem as much as th e re was a problem of
identifying and validating th e decision environm ent ( i .e ., specifying
a specific list of decisions) of the u se r. Specifying th e decision
environm ent of a modern day firm is difficult for at least two
reasons:

(1) lack of theoretical explanation for firm management

decisions, and (2) conceptual problems of defining th e phrase
"m arketing decisions."
As pointed out earlier, microeconomic theory serv es as a
limited guide to th e management decisions of the firm . T herefore,
th is theory could not be totally relied upon in developing a se t of
decisions against which to evaluate various ty p es and sources of
m arket information.

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The second concern deals with the conceptual problem of what
a re m arketing decisions. Almost any decision made by pro cesso rs
would in some way d irectly or indirectly affect th e demand o r supply
of th e m arket p ro d u c t. As a re s u lt, choices of decisions to include
in th e decision set must conform to some definition which operational­
izes the concept of m arket decisions. T his stu d y adopted L azer's
concept of m arketing decision.

He notes th a t

m arketing decisions a re often made from a d ifferen t basic
p ersp ectiv e than decisions in th e organizational a reas . . .
The p ersp ectiv e of th e m arket place is adopted and th e
m arketing executive trie s to perceive his altern a tiv e s and
decisions th ro u g h th e eyes of consum ers.
T his concept of m arketing decision provides some basis for selecting
some ty p es of decisions while rejecting o th e rs .
The above two concerns had a bearing on th e methodology
employed in th is stu d y .

T he procedure th a t was followed involved

developing a set of p re-selec ted m arketing decisions made by potato
processing firm s.. A combination of economic th eo ry and L azer's
concept of m arketing decisions w ere used in developing th is p re-selected
list of decisions.

T he list of decisions was th en validated in a pilot

su rv e y and with an open ended question posed to plant m anagers in
th e ta rg e t g ro u p .

By allowing th e firm m anager and o th e r know­

ledgeable m arket p a rticip a n ts to modify th is p re-selec ted decision
se t, th e p rocedure tak e s on a norm ative a sp e c t.

It has th e advantage

of identifying o th er decisions which may not otherw ise be recognized
by th e o ry .

By th e end of th is ex ercise, v ery few changes o c cu rred

in th e p re-selec ted list of decisions. T hat leaves th is validation
pro ced u re open to question because it was expected th a t th e list
would be modified o r e x ten d ed .

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M oreover, it is difficult to determ ine w hether th e decision
se t u sed to evaluate information ty p e s and sources re p re se n te d a
complete list of m arketing decisions made by potato p ro c e sso rs. A lso,
th e decision set was not p rio ritized so th a t one could assig n im portance
to one ty p e of decision o v er a n o th e r.

T h u s, we have a decision set

th a t is assum ed to be re p re se n ta tiv e of th e firm decision environm ent
and th a t is assum ed to contain a list of decisions th a t a re equally
w eighted.
T h is method not only involved th e evaluation of ty p e s and
so u rces of inform ation ag ain st specific firm m arketing d ecisions, a
p ro ce d u re whose im portance is implied by th e information system
paradigm , b u t also stra tifie d firm s along elements of m arket s tru c ­
t u r e , as defined by in d u strial organization th e o ry .

Hence, th is

p ro ce d u re in te g rate d two intellectual fram ew orks.

The s tru c tu ra l

v a riab les used in th is stu d y w ere firm size and ty p e of firm .

T hese

elem ents of m arket s tru c tu re in th e Michigan processed potato in d u stry
w ere relatively easy to operationalize.

B ut th e re a re sev eral o th e r

elem ents of m arket s tru c tu re which may have an impact on th e d is tr i­
bution and value (to th e decision m aker) o f information th a t could be
in co rp o rated in th is analysis such as various dim ensions o f p ro d u c t
d iffe re n tia tio n .

For th e most p a rt, th e approach only se rv e s to form

an association betw een selected elements of m arket s tr u c tu r e and th e
value of information to decision m akers.

It does not specify th e

d e sire d s tru c tu ra l (in stitu tio n al) arrangem ent th a t will p rovide m arket
inform ation of value to th e decision m akers.

To do so would involve

th e in stitu tio n al questio n of specifying in detail th e elem ents o f m arket
s tr u c tu r e which will yield th e d e sired informational flows to m arket

159

and n o n -m ark et decision m ak ers.

T he ap p ro ach applied h e re m erely

illu stra te d th e directional impacts o f selected elem ents o f m arket s tr u c ­
tu r e on th e value o f inform ation.

B ut it is a n e c e ssa ry f ir s t s te p in

th e developm ent o f ideas about th e specification o f a model o f m arket
s tr u c tu r e im pacts on th e inform ation d e sire d by decision m ak ers.
T his re s e a rc h a p p ro ach involved a f u r th e r in te g ratio n o f th e
I /0 fram ew ork w ith th e inform ation system s paradigm b y tra c in g
o u t th e p ro b ab le relatio n sh ip s betw een selected elem ents o f th e firm 's
p ro cu rem en t b eh av io r an d m arket inform ation.

H ere a g a in , th is

ap p ro ach is limited to th e explanation of directio n al im pacts o f
v a ria b le s (th a t is, th e impact of th e b ehavior o f th e firm on m arket
in fo rm ation).

As in th e c ase with m arket s tr u c tu r e and inform ation,

d irectio n al im pacts a r e a n e c e ssa ry f irs t s te p in an aly zin g firm
b e h av io r an d inform ation.

E stablishing th is re la tio n sh ip is d iffic u lt.

One cannot hold c o n sta n t many o f th e o th e r v a ria b le s which may also
influence th e value and d istrib u tio n o f information to th e firm 's decision
m aker.

T h is a n aly sis basically in fe rre d from th e e x is tin g p ro cu rem en t

b e h av io r an d ris k a rra n g em e n t p rac tic es o f potato p ro c e ssin g firm s
th e likely im pacts on inform ation d istrib u tio n and v alue fo r th e firm
its e lf, o th e r firm s in th e m arket and public sta tistic a l a g e n c ie s.

T h is

ap p ro a ch could g re a tly be enhanced if a m ethod w ere available to
m easure d ire c tly th e im pacts o f th e firm pro cu rem en t beh av io r on th e
v alu e an d d is trib u tio n of m arket inform ation.
E.

Im plications fo r A g ric u ltu ra l Economists
O ut o f th is s tu d y flow c e rta in im plications for a g ric u ltu ra l

econom ists.

B ecause much o f th e problem solving and su b je ct

m atter re s e a rc h of a n y field o f stu d y is larg ely c o n stra in e d by th e

160

s tre n g th s and w eaknesses of its th e o ry , the comments which follow
will ad d ress th e limitations of economic th eo ry , in its application to
information system s research .
As a resu lt of th is research experience it became abundantly
clear th at in its c u rre n t level of developm ent, neoclassical economics
makes but a limited contribution toward the solution of informational
problem s. The theory re s ts upon assum ptions th a t avoid the problem
o f information.

Lack of theoretical development in th is area is perhaps

responsible for the inactivity of applied research (problem solving
and subject m atter) on information system s. As th e costs of producing
information increase, questions concerning th e derived benefits
(value) of information services will a rise more freq u en tly .

Economics

has yet to provide a practical framework for valuing information, a
critical input into both public and p riv ate decisions.

If we are to

deal with many of the p resen t day and emerging problems facing our
public statistical system , we must fu rth e r develop our economic
theory base.
A nother area which lacks applicable economic theory development
is th at o f management decision th eo ry o f th e modern firm. The modern
firm makes economic decisions on resource allocation, p rices, o u tp u t,
quality of p ro d u ct, and any num ber of m atters.

C yert and March

note th at th e re is a "disparity between th e process by which business
decisions appear to be made by complex organizations in the real world
and th e way in which th ey are explained by economic th e o ry ." T hus
fa r, much of th e research conducted by agricultural economists has
involved firms (the farms) in m arkets th at a re com petitive.

Increasingly

th is is no longer th e case for agricultural m arkets; they a re growing

161

more concentrated and less com petitive. The firms which make up
th e food and fiber m arkets from production u n its to retail o u tlets
a re becoming more complex.

This su g g e sts th at agricultural

economists cannot totally rely on th e ir c u rre n t economic theory
base to solve many em erging problems of our food and fib er system .
F.

F u rth e r R esearch
T his research involved a case stu d y which ad d re ssed some

a sp ects of valuing information at a given m arket level in th e
Michigan processed potato in d u stry .

A case stu d y was u n d ertak en

because th is approach could best te st an unproven methodology on
a limited scale with th e minimum resource requirem ents.

From th is

e x p erien ce, th e following o bservations a re offered for fu tu re resea rch
on m arket information system s.
F irst of all, many conceptual and theoretical asp ects of the
paradigm need fu rth e r w ork.

As noted in C hapter II, no all encom­

p assing framework ex ists for dealing with th e problems of inform ation.
P erhaps th e g re a te st possibility o f stre n g th e n in g th e information
system paradigm e x ists in in teg ratin g it with o th e r conceptual fram e­
w orks.

Even th is proposition re q u ire s more investigation.

At its c u rre n t stag e of developm ent, th is framework could be
u sefully applied to some ag ricu ltu ral m arketing resea rch problem s.
For example, several em erging institutions within a g ricu ltu ral m arkets
have trem endous implications for th e use, value, and d istrib u tio n
of inform ation.

A stu d y o f various pricing in stitu tio n s, p articu larly

as p racticed in cooperatives, would be a fertile area of re se a rc h .

APPENDIX

APPENDIX A
QUESTIONNAIRE DIRECTED TO PROCESSED POTATO FIRMS

The purpose of th is questio n n aire is to provide information on
th e major c h a rac teristics of th e Michigan processed potato in d u stry .
T he answ ers will be used to determ ine how potatoes a re bought and
sold in th e m arket. All information you provide will be kept con­
fidential. No identities o f individuals' resp o n ses will be revealed
in th e rep o rt derived from th is stu d y .
SECTION I: Economic C h arac te ristic s of th e Processed Potato In d u stry
1.

Please indicate th e major use of potatoes in your firm.
c h ip p in g

f r e e z in g ______

o t h e r ____________________

2. What is th e average volume (cwt) o f potatoes your firm handles in
a y ear?_____________________________________________________
3. What o th er commodities a re processed by your firm?
A. _______________________

D._____________________________

B.

E. ____________________________

C.

F. ____________________________

4.

Potato p ro d u cts re p re se n t what proportion of your total s a le s ?

5.

By what method do you obtain raw p ro d u ct (potatoes) ? If more than
one means of acquiring raw p ro d u ct is u se d , please indicate th e
proportion of potatoes acq u ired by each m ethod.
C o n tra c ts:
Written
Oral
Own or Rent Land
Grower Cooperative
B roker
Farm er's M arket
O ther P rocessors
O ther ( s p e c if y

6.

%
%
%
%
%
%
%
%

)

If you co n tract with grow ers d ire c tly , how many grow ers are
involved?
___________

163

%

164

7. What is th e distance of raw pro d u ct (potatoes) supplies from your
p ro cessing plant (s) ?
D istance

%of Raw Product

Less than SO miles
______%
______%
%
51-100
______%___ ______%
%
101-200
%
%
%
over 200
______%
______%
%
Location of Plant______________
_________ __________
8.

Indicate th e p ercen t of pro d u ct sold to th e various b u y e rs.
National retail food chains
Regional retail food chains
Local retail food chains
C ooperative and buying group
Wholesalers
In stitu tio n s
Governmental agencies
Food m anufacturers

%
%
%
%
%
%
%
%

9. What proportion of your firm 's processed o u tp u t (potato) sold to
chain retail o u tle ts is m arketed as p riv ate la b e l? ________%
10.

How many processing plants do you o p e ra te ? ___________
Which o f th e following functions a re perform ed by your firm after
you have taken title to th e potatoes?
W ash
S to r a g e ______
G ra d e
O ther (specify) ____________
Pack
None of th e a b o v e __________
T ran sp o rt (from th e farm to the
processing plant) ______

165

11. From which of th e major p o tato p ro d u ctio n a re a s do you b u y your raw
p ro d u c t?
M anistee
%
Mecosta
%
Montcalm
%
Monroe
%
Bay
%
Red R iv er Valley
%
O th e r (sp ecify ) ________
%
O th e r (sp ecify) ________
%
O th e r (sp ecify ) ________
%
%
O th e r (sp ecify ) ________
SECTION I I : Inform ation S o u rc e s , M arketing Decisions and U ses of
M arket Inform ation (E valuation)
1.

What a re y o u r most im portant m arketing d ecisions?

2.

What a re your so u rc es of m arket inform ation?

3.

What is y o u r p rim ary u se o f p ric e inform ation?

4.

What ty p e s o f d ata do you feel b e st s u it y o u r decision making need s?

5. Various ty p es of information a re available to aid m anagers in decision
making. Please indicate how useful th e following ty p es of information
are to you when you make m arketing decisions. Check one category
for each ty p e of information.
Very Moderately Rarely
Type of Information Useful
Useful
Useful
Price Information
____
____
Potato price quotations ____
C u rren t contract prices ____
____
____
Wholesale prices
____
____
____
Retail prices___________ ____
____
____
Potato fu tu re s prices
____
____
____
R eports of potato prices
for p ast year_________ ____
____
____
Potato price forecasts
____
____
____
Supply Information
____
____
Intentions to plant______ ____
Estimates of acres
planted, harvested
and yields
____
____
____
Volume of potato
____
____
____
shipm ents
Estimates of stock
(carryover)_______________
____
____
G rade-size d istribution
of potatoes delivered
to processors
____
____
____
Demand information
Population tre n d s_______ ____
____
____
Income tre n d s__________ ____
____
____
Consumer profile data
____
____
____
Demand estim ates
____
____
____
Cost information
Cost of production
____
____
____
Cost of processing
by product
____
____
____
T ran sp o rtatio n cost by
product
____
____
____
M arketing cost by
pro duct
____
____
____
Labor
Wage rates
Labor availability

I do not use because
Not Useful Not Aware
____
____
____
____
____

____
____
____
____
____

____
____

____
____

____

____

____

____

____

____

____

____

____

____

____
____
____
____

____
____
____
____

____

____

____

____

____

____

____

____

167

6. Price information can be secu red from various so u rces. From th e
following list please indicate which sources of information you find
to be useful to you in making m arketing decisions.
Source

Very
Useful

a . Radio and T .V .
____
b . N ew spapers
____
c . Magazines
____
d . U niversity publications
____
e . USD A economic publications
____
f. USDA crop re p o rts
____
g . C onsultation with perso n s
in governm ent o r
u n iv ersity __________________ ____
h . Commercial m arketing
serv ices____________________ ____
i. B an kers and lending
in stitu tio n s_________________ ____
j. Retail sto re s
____
k . Potato d e a le rs, b ro k e rs,
s h ip p e rs, e tc .
____
I. O ther p ro cesso rs_____________ ____
m. O th er sources (specify)
____

Moderately
Useful

Rarely
Useful

Not
Useful

____
____
____
____
____
____

____
____
____
____
____
____

____
____
____
____
____
____

____

____

____

____

____

____

____
____

____
____

____
____

____
____
____

____
____
____

____
____
____

7. From which of th e sources above do you g e t most o f your m arket
inform ation, rank f ir s t to last 1-6 (list lette rs) ?
1.
2.

______

3.

n. ______
5.
6.

168

8.

P ublished o r re p o rte d economic p rice d a ta may be helpful in making
many m arketing decisions. Please indicate how useful th e data you
receiv e a re when you make th e following decisions. Check one
c ateg o ry for each ty p e of decision.

T y p e o f Decision

V ery
Useful
Size o f p lan t (expansion)
____
Number o f p la n ts (to build)______ ____
V ariety o f potato to b u y _________ ____
When to buy potatoes
(tim ing of p u rch ase)
____
G eographical m arket from
which to buy potatoes
(location)___________________________
M arket in which to sell
p otatoes
____
Q uality of raw p ro d u ct
____
P ricin g of raw p ro d u ct___________ ____
P ricing of p ro cessed p ro d u ct
____
9.

M oderately.
Useful
____
____
____

R arely
Useful
____
____
____

Not
Useful
____
____
____

____

____

____

____

____

____

____
____
____
____

____
____
____
____

____
____
____
____

Does y o u r firm perform its own d ata an aly sis?
To what deg ree?

Yes

No

10. A p ro c e sso r and grow er plan jointly th e ir m arketing s tra te g ie s,
co o rd in ate p rice s tr u c tu r e s and exchange inform ation betw een each
o th e r ab o u t th e ir plans and goals.
Do you believe th a t it should b e perm itted?
Yes

No

No opinion

Do such actions e v e r have d esirab le m arket consequences?
Yes

No

No opinion

C ases su ch as th is p robably occu r fre q u e n tly .
S tro n g ly a g re e
D isagree

A gree
S tro n g ly d isa g re e

No opinion

169

11. Two p ro c e ssin g firm s ex ch an g e inform ation ab o u t sales plans and
p ric e s sc h e d u le s.
Do you believe th a t it should be p erm itted ?
Yes

No

No opinion

Do su c h actions e v e r have d e sira b le m arket co n seq u en ces?
Yes

No

No opinion

C ases su ch a s th is p robably o c cu r fre q u e n tly .
S tro n g ly a g re e

A gree

D isagree

No opinion

S tro n g ly d isa g re e

12.

Is th e r e a need to im prove inform ation in th e p ro c e sse d potato
in d u s try ? If so , what im provem ents in th e inform ation would
you su g g e s t re le v a n t to y o u r decision m aking n eed s?

13.

For each o f th e statem en ts given below , in dicate by checking th e
most a p p ro p ria te re sp o n se given in fro n t o f each sta te m e n ts.
S A =strongiy a g re e
D =disagree
SA

A

A =agree

N= no opinion

SD =strongly d isa g re e
N

D

SD
Inform ation is a major so u rc e o f
pow er in th e m arket p ro c e ss .

____

____

____

____

We could fully sh a re inform ation (on
p ric e s , p ro d u c tio n , c o s ts , c o n ce rn s
and p lans) which we have with
g ro w e rs an d th e ir o rg an izatio n s
w ithout p u ttin g us a t a com petitive
d isa d v a n ta g e .

■
____

____

____

____

We solicit su ch inform ation (on p ric e s ,
p ro d u c tio n , c o s ts , c o n c e rn s an d p lans)
a c tiv e ly .

14a. Do you subscribe to any commercial m arketing s e rv ic e s ?

Yes

b. If so, which ones?

15. Please list o th er m arketing information th at you pay for (such as
U niversity m arketing n ew sletters, commodity new sletters, o r farm
magazines) and indicate w hether they help you do a b e tte r job
of m arketing.
Name of new sletter, magazine, etc.

Annual cost Help with m arketing
Yes
-

SECTION III:

Economic Behavior and the C ontracting Process

1. Would you briefly describe th e b argaining/contracting process
between your firm and grow ers o r grow er organization.

2._How long has your firm been involved in contracting?
_______ y e a rs.

No

D u rin g th is tim e, h a v e new te rm s o f tr a d e b een a d d e d to c o n tr a c ts ?
1.

_____ Yes

2.

_____ No

F o r w hich o f th e follow ing te rm s o f tr a d e do you c u r r e n tly c o n tra c t.
Which o f th e s e te rm s o f tr a d e do you b eliev e c o n tra c tin g sh o u ld ta k e
p lace ?
P rice
Tim e o f p ay m en t
Q u ality s ta n d a r d s
Q u ality m easu re m e n ts p ro c e d u re s
D eliv ery s c h e d u le s
P ro v isio n o f tra n s p o rta tio n
W eighting p r o c e d u re s
Raw p ro d u c t h a n d lin g p ro c e d u re s
L en g th o f c o n tra c t
R e sp o n sib ilitie s a n d r ig h ts d u rin g p ro d u c tio n
_ _ _ P ric es fo r p ro v isio n on p ro d u c tio n in p u ts
S p ra y in g a n d d u s tin g
P la n tin g tim e
H a rv e s tin g tim e
U se o f irrig a tio n eq u ip m en t
O th e r (p le a se sp e c ify )

Who m akes th e fin al decisio n on w h e th e r to a c c e p t o r re je c t term s
o f tr a d e ?

What p ro c e s s is inv o lv ed h e re ?

172

6.

Is th e p ric e fo r w hich you b a rg a in (raw p ro d u c t) ?
A firm p ric e
P egged to some m ark e t p ric e
P egged to c o st of p ro d u c tio n (g ro w e r's)
Pegged to c o st o f p ro c e ss in g (p ro c e sso r)
A form ula p ric e d e p e n d e n t upon p ro d u ctio n levels
P rice len d e r dom inate firm
O th e r (p lea se sp e cify )

7.

How would you c h a ra c te riz e th e b a rg a in in g p ro c e ss in te rm s of th e
re la tio n sh ip betw een g ro w e r a n d p ro c e ss o r (you may ch eck more
th a n o n e ) .
A d v e rs a ry re la tio n sh ip w ith c o n sid e ra b le conflict
T o u g h , b u t w ith m utual re s p e c t an d a cc ep tan c e
Dominated by p ro c e s s o rs
O th e r (p le a se sp ecify )

8.

What p ro c e d u re s a n d c rite r ia you employ to e n s u re fo r p ro d u c t q u a lity ?

173

QUESTIONNAIRE DIRECTED TO POTATO
SHIPPERS, DEALERS, AND BROKERS
1. What percent of your shipm ents (potatoes) a re m arketed tablestock
%, processed ( c h ip

%o r f r o z e n

%) ?

2.

List processing firms in th e sta te th a t you freq u en tly deal with.

3.

Do you co n tract for raw potatoes? Please d escribe your contracting
process ( see Section III if y e s ) .

4.

Is th e price for which you bargain
a firm price
_____ pegged to some m arket price
pegged to th e cost of production (grow er)
a formula price
o th er (please specify)

17*1

5.

V arious ty p e s of
m aking. Please
a re to you when
fo r each ty p e of

inform ation a re available to aid m anagers in decision
indicate how useful th e following ty p e s o f information
you make m arketing decisions. Check one category
inform ation.

V ery M oderately R arely
T y p e of Inform ation Useful U seful
Useful
Price Inform ation
Potato p rice q u o tatio n s ____
____
____
C u rre n t c o n tra c t p rice s _____
____
Wholesale p rice s
____
_____
Retail p ric e s
____
____
Potato fu tu re s p ric e s
R ep o rts of potato p rice s
fo r p a st y e ar
_____
_____
Potato p rice fo re c a sts
___________
S upply Inform ation
In ten tio n s to p lant
___________
Estim ates of a c re s
p la n te d , h a rv e ste d
and yields
Volume of potato
shipm ents
_____
Estim ates of stock
(ca rry o v e r)___________________
G rad e-size d istrib u tio n
of potatoes delivered
to p ro ce sso rs
_____
Demand Inform ation
Population tr e n d s
____
Income tre n d s
____
Consum er profile d ata
Demand estim ates
C ost Information
Cost of production
C ost o f pro cessin g
by p ro d u ct
T ran sp o rta tk m co st by
p ro d u ct
M arketing cost by
p ro d u ct
Labor
Wage ra te s
Labor availability

_____
___ _
____

I do not use because
Not Useful Not Aware
____

____

____
____
____
_____

____
____
____
____

___________________
~ ____
_________

____
____
____

____
_____

_____

________

____

____

____

____

____

____

____

____

____

____
____

____
____

____
____

____
____

____
______

____
____
_______________

____
____

____
____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

175

6.

P ric e inform ation can b e s e c u re d from v ario u s s o u rc e s . From th e
follow ing list p lease indicate which so u rc es o f inform ation you find
to b e useful to you in m aking m ark etin g d e cisio n s.

S o u rce

V ery
Useful

a . Radio an d T .V .
____
b . N ew spapers
____
c . M agazines
____
d . U n iv e rsity p u b licatio n s
____
e . USDA economic pu b licatio n s
____
f. USDA c ro p re p o rts
____
g . C o n sultation with p e rso n s
in go v ern m en t o r
u n iv e rs ity ___________________ ____
h . Commercial m ark etin g
se rv ic e s_____________________ ____
i. B a n k ers a n d lending
in stitu tio n s
j. R etail s to re s
k . Potato d e a le rs , b ro k e rs ,
s h ip p e rs , e tc .
____
I. O th e r p ro c e ss o rs______________ ____
m. O th e r so u rc es (sp e cify )
____

7.

M oderately
Useful

R arely
U seful

Not
Useful

____
____
____
____
____
____

____
____
____
____
____
____

____
____
____
____
____
____

____

____

____

____

____

___

____
____

_____

______
____
____

•
____
____

____
____

From which o f th e so u rc e s above do you g e t m ost o f y o u r m arket
inform ation, ra n k f i r s t to la st 1-6 (lis t le tte rs) ?
1. ______
2.

3.

______

4.

_______

5.
6.

APPENDIX B
List o f In terv iew s

Name o f O rganization

D ate
Nov.
Nov.
Nov.
Nov.

9
15
27
28

Dec. 11
F eb . 14
F eb . 15

USDA-MSU
MSU
M5U
M ichigan Potato In d u s try
Commission
M ichigan Potato In d u s try
Commission
National Potato Council
U S D A -S tatistics

M arch 28 C hief W abasis Potato
G row ers C ooperative
A ssociation
A pril 1
Mid Am erica Potato Co.
A pril 1
M rs. B ees Potato C hip Co.
A pril 3
O re -ld a
A pril 9
Made R ite
A pril 15 Be Mo
A pril 22 B e tte r Made
A pril 23 New E ra
A pril 23 F rito Lay
A pril 24 S u p e rio r
May 15
C hief W abasis Potato
G row ers C o o p erativ e
A ssociation
May
May
May
May

20
20
21
21

May 21
May
May
May
May

28
28
29
29

Individual (s)
Interv iew ed

Location

L a rry Hamm
Tom P ierson
G eorge Stackw ick
Roy K aschyk

E ast L ansing
E ast L ansing
E ast L ansing
L ansing

S ta te P ro c e sso rs

B rig h to n

W ashington, D .C
Dan LaPointe
R o b ert H. A xvio, W ashington, D.C
Jo h n L ange, a n d
Bill Wilken
L a rry Je n se n
M cBride

G rand R apids
G rand R apids
G reenville
Bay C ity
Kalamazoo
D etroit
D etroit
Allen P ark
D etroit
M cBride

Bay C ity
Bay C ity
Six Lakes
Edmore
S ta n to n

Ja ck Mall
Made R ite
G eorge Tow ne P ro d u ce
Potato M arket S e rv ice
R obert M cCrea Potato
S h ip p e r
New Era
S u p e rio r

D etroit
D etroit
D etroit
D etroit

B e tte r Made
F rito Lay
176

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