Seasoning a Monopsonic Processor for Collective Action amongst Pepper Producers in Costa Rica

The small-scale pepper producers in the El Roble settlement Costa Rica face a monopsonistic market. Only one processing firm is buying the fresh pepper bunches. The processor has all bargaining power to decide on the price paid to the farmers and the quality selection criteria. The rejection rates are high, which is why farmers decided to market their pepper collectively. They started organizing the selection and transport of pepper and entered into group contracts with the firm. We use a non-linear integer simulation model to predict the price level and contractual form (individual or group contracts) which maximises the income of the firm and farmers under three conditions, namely, monopsony (firm holds all bargaining power), monopoly (producers hold all bargaining power in a group contract), and joint profit maximisation (firm and producers have equal bargaining power in the group contract). Our results show that in all scenarios a group contract is chosen for the high supply season, whereas individual contracts are chosen only in the low supply season assuming joint profit maximisation. The major outcome of this study is that when transaction costs are taken into account, and under high frequency of transaction, the firm would benefit from bulking the contracts and procurement of inputs even when this would decrease its bargaining power.