| Quality issues in milk - arising primarily from deliberate adulteration by milk farmers - have been widely reported in several developing countries. In a milk supply chain, a collection station purchases milk from a number of farmers, mixes the milk, and then sells it to a large urban dairy firm (that then sells the processed milk to end consumers). Broadly speaking, three main forces in the milk supply chain lead to the low quality of milk: high testing costs, free-riding among farmers, and harmful competition among stations for supply.;The goal of this study is to provide recommendations that address the quality problem with minimal testing. Interestingly, some intuitive interventions - such as providing stations with better infrastructure (e.g., storage and refrigeration facilities) or subsidizing testing costs - could hurt the quality of milk under competing collection stations. To save testing costs we utilize mixed testing, where the milk combined from multiple farmers is tested once. However, mixed testing makes the system vulnerable to free-riding among farmers. We counter free-riding by applying a credible threat of individual testing (while not its actual use in equilibrium). We examine two structures based on the ordering of individual and mixed testing: pre-mixed individual testing (first test a fraction of farmers individually and then perform a mixed test on the remaining farmers) and post-mixed individual testing (first test the mixed milk from all farmers and then test a fraction of farmers individually). While pre-mixed individual testing can be socially harmful, a combination of post-mixed individual testing and other incentives can help improve the quality of milk. We then propose two interventions to combat the harmful competition among stations. The novelty of our proposals lies in utilizing the force of competition to solve a problem created by ompetition: The incentives in our proposals provide a new tool for the stations to compete and convert the harmful effect of competition (quality reduction) into a beneficial one (quality improvement), and result in a socially-beneficial equilibrium outcome - all the farmers provide high-quality milk and each (competing) station conducts only one mixed test and no further testing. . |
