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Transaction cost economics approach argues that transactions do not
occur in a frictionless environment. Transaction costs including
information, contract and enforcement costs arise in market
arrangements and influence market channel participation. Using
Tobit limited dependent variable analysis, data from obtained from
158 smallholder farmers sampled from Lilongwe milkshed area, Malawi
were used to determine the differences between transaction costs in
the formal and informal marketing channel and examine the market
channel choice determinants. Results showed that information costs
proxied by quality inspection had a positive influence on informal
milk marketing while payment delay, a proxy for negotiation costs
had a negative influence and the fear of non-sale had a positive
influence on informal milk marketing. Milk production had a
positive influence on informal marketing. Information and
negotiation costs were higher in the formal channel while the
informal channel had higher monitoring costs.
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