A Comparative Analysis of Transaction Costs in Collective and Individual Marketing of IC in Kakamega County, Kenya

Market institutional support in majority of the Sub Saharan Africa has been poor, leading to thin, imperfect markets coupled with high transaction costs. For majority of actors in the food markets,  transaction costs are high in factor and output markets and hence market perfomance is poor. It has been observed that high transaction costs have been undermine the exchange process by cutting down the returns to farmer investments giving rise to atomized rural markets with little rural urban linkage. A lack of rural urban linkage has in turn led to withdrawal of the farmers from the markets and ultimately result to subsistence production which is a low risk investment. Additionally, at times tapping into new commercial opportunities created by market liberalization.

Use of collective action by farmer marketing groups is seen as institutional innovation that reduce transaction costs and enhance market coordination. Realizing the potential of farmer marketing groups in mitigating the effects of imperfect markets by promoting economic coordination in liberalized markets depends on their ability to reduce transaction costs and improve competitiveness. This is achieved by effectively conveying market information, defining and enforcing property rights and mobilizing producers to improve their participation in the markets.

IC rearing has played a major role in the livelihoods of close to 90% of smallholder farmers in Kenya and therefore, overcoming transaction costs may result in higher farm household incomes and ultimately improved livelihoods.With this regard, InCIP conducted a study in Kakamega County of Western Kenya to analyze the sources of transaction costs in market development within the framework of group marketing of indigenous chicken and the contribution of famer marketing groups in reducing these costs.  The study was conducted by Mr. Simon Gicheha an Msc student at Egerton University.

Analysis of Variance (ANOVA) was used to determine the differences in transaction costs incurred by farmers at collective and individual marketing. From this study we find out that transaction costs are closely related to the choice for a market arrangement where farmers choose the most rewarding arrangement in terms of expected transaction costs. The transaction costs observed in this study were more of the resultant of the choice made to either participate in IC marketing through farmer marketing groups or at an individual level. A comparative approach was adopted where analysis of variance was used to explain the partial difference between individual and collective marketing of Indigenous Chicken.

Different elements of transaction costs were compared between the two marketing arrangements. A two-sample Kolmogorov-Smirnov test was first conducted to test for equality of the distribution function with the results shown in the table below.

Table: A two-sample Kolmogorov-Smirnov test

Transaction costs considered were transport costs, costs of information from different sources and costs of bargain. The costs of bargain was calculated in terms of minutes spent before a transaction was executed and then converted to wage rate per hour. Results showed that group marketing generally incurred lower transaction costs compared to individual marketing. The mean difference between the two marketing arrangements was significant for costs of bargain, transport costs, cost of information from government sources, Non-Governemnetal organizations and newspapers.

¹***Significant at 1%, **5% and *10%

²Standard errors in parentheses.

³f-statistics reported for comparison of transaction costs

⁴Distance measured in Kilometres

Source: Survey data

Collective marketing incurred lower bargaining costs compared to individual marketing. IC Groups have reservation prices at which they sell their chicken based on the information they harbour regarding the prevailing market prices and therefore leave little room for bargaining. This saveson time they spend before reaching an agreement with the buyers. Individual farmers however are relatively flexible and may take more time bargaining with buyers.

Farmers selling their IC in groups faced lower transport costs compared to individual farmers measured in terms of distance to the nearest livestock market. Marketing groups were observed to cover an average distance of 2.4 Km compared to individual farmers who covered an average distance of 4.8 Km. They also reduce the transport costs further by pooling their chicken together and transport to the market as one batch. 

Further, farmers marketing in groups were better able to access the market information from government sources. The same applies to private sector support through NGO‘s which prefer to work with groups than individuals. Collective action has been described as taking various forms including the development of institutions, resource mobilization, coordination of activities and most importantly information sharing. There is realisation among the extension service practice that information channeled through groups has more impact in terms of reaching and benefiting a larger number of farmers.

Cost of market information from newspapers was also lower in IC farmer marketing groups incurring an average of Ksh 1 less than individual farmers. Market Information obtained from a newspaper by one farmer is relayed to all the group members as opposed to an individual farmer who has to incur the cost of buying the newspaper alone.

Contracts in marketing of indigenous chicken among the smallholder farmers do not exist and therefore related costs such as contract enforcement and monitoring could not be captured.

The results generally indictate that farmers marketing chicken in groups incurred lower transaction costs than individuals in marketing of  IC. This emphasizes the important role played by groups in promoting marketing of IC. Group marketing was effective in relaying market information from majority of information sources to farmers. However, there was no significant differences in the cost of accesing information from radio, phones, research institutions and magazines. This is because, these are the most widely used and accesible sources of information by farmers. The study reccomends the need to improve interactions between research and extension by involving farmers in mechanism through which they gather, obtain and synthesise the available market information to make informed marketing decisions.

One way in which this could be done is through establishment of farmer call centres where farmers can call to enquire a wide range of information on IC. These call centres should be localised to address issues related to a particular agro-ecological situation for example prevalent poultry diseases in a particular area and mitigation mechanisms.

This will create sustainability and also greatly reduce the related costs. Reduced transaction costs reflect a higher margin by chicken farmers which is key to livelihood improvement.