Milk adulteration testing and impact of farmers efficiency heterogeneity: a strategic analysis

Driven by economic motives, dairy farmers adulterate milk to increase its perceived quality, posing a serious risk to consumer health. We analyse a milk supply chain in which smallholder dairy farmers can adulterate milk and explore the feasibility of selling it to end consumers through an aggregator. Using a non-cooperative sequential game between the aggregator and farmers, we examine the impact of two testing strategies offered by the aggregator to curb adulteration - (i) individual (testing milk procured from each farmer individually) and (ii) composite (testing the milk after aggregating the portions procured from all the farmers). Our analyses reveal that the aggregator can control milk adulteration by judiciously using testing and penalty mechanisms. We find that a higher market price (aggregation effect), fetched by the aggregator because of its bargaining power owing to the consolidation of milk supplies, is essential for its operation. It leads to higher revenue for the aggregator and expands the zone in which it is profitable for the aggregator to operate. However, our results show that the efficiency heterogeneity among farmers, which leads to the less efficient farmers free-riding on the more efficient ones, has a detrimental effect on the aggregator operation. We also explore the impact of external uncertainties on the supply chain and observe that the composite testing strategy becomes more profitable for the aggregator when external uncertainties increase. Our results provide important policy recommendations for aggregators adopting optimal testing strategies.