June 17, 2022
I’m continuing to work on a paper with a student from my Org Econ course. Our aim is to explore the ways that CSA farmers offer credible commitments to CSA members in the absence of formal contracts. But in recently digging into the institutional specifics, I was hit with another observation. CSA farmers offer a “pig in a poke.”
Sellers offer a “pig in a poke” when they refuse buyers inspection prior to purchase. Yoram Barzel describes this arrangement:
“On occasion, sellers may even offer buyers "a pig in a poke." There is no difficulty in opening the poke to inspect the pig. When trust can be created cheaply enough, trusting consumers will offer a higher average price for the entire batch when inspection is not allowed, and this arrangement will prevail. In some cases inspection might damage the commodity. In other cases, however, the arrangement is deliberately contrived at a cost of resources.
This may explain why apples are often sold in opaque bags filled in advance by the seller. The consumer spends less time per apple on inspection than when choosing them individually. He obviously will not buy the bag unless he believes that on average he gets a better buy; thus the seller's "fairness" becomes a factor in his decision. It is predicted that sellers catering to transient trade will sell a smaller fraction of their apples by the bag and will sort them into more uniform grouping than will sellers whose credentials are well established.”
What a bizarre selling arrangement.
Many instinctively chalk this sort of thing up to market power—much like Williamson’s “inhospitality tradition” in antitrust. But as Barzel argued, the “pig in a poke” facilitates a reduction in transaction costs. Specifically, it stops buyers from engaging in excessive measurement, which is a costly activity. As he puts it:
“Operating within the framework of competitive markets, it is argued that information on the quality of goods that inspection would have generated is deliberately suppressed. On occasion, sellers may even offer buyers "a pig in a poke." There is no difficulty in opening the poke to inspect the pig. When trust can be created cheaply enough, trusting consumers will offer a higher average price for the entire batch when inspection is not allowed, and this arrangement will prevail. In some cases inspection might damage the commodity. In other cases, however, the arrangement is deliberately contrived at a cost of resources.”
A few key points here. 1. Sellers suppressing information reduces measurement costs. 2. This works best when sellers have established a reputation of refraining from “cheating,” possibly through brand-name investments. 3. Competition forces sellers to pass these measurement cost savings along. 4. He goes on to argue that the a.) price sellers receive is higher b.) and the price buyers pay is lower than the case where information is not suppressed.
Back to CSAs. Not only do they eschew formal contracts, but they also (typically) offer a “pig in a poke” to CSA members. Usually on a weekly basis, CSA members receive an allotment of produce that they played no explicit role in selecting. If they disapprove of a weekly allotment, they have immediate recourse. (Obviously, in the “long run,” they can “exit” the CSA for some other option).
This arrangement prevents sorting and selection among produce. It also eliminates the bargaining and haggling over prices that would accompany spot market transactions. Until someone convinces me otherwise, I’d say the CSA offers a classic illustration of a “pig in a poke.”