Milk Marketing Channel Choice

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.