Government Regulation Under The Bargaining Power Of The Main Game

With the deepening of enterprise degree of specialization, Sanlu Group will outsource production of milk, thus creating information asymmetries and externalities. The bilateral game in the milk industry, the milk of dairy operators can monitor the level of effort, or monitor the output of dairy farmers. Dairy farmers can also choose the endogenous variables, namely, the milk with same quality or the milk with different quality, for the farmers who produce milk with same quality not only have to accept the low-priced given by the market, but also face the ability of bargaining power of milk manufacturer. If farmers choose to produce differentiated milk, then get a high bargaining power, sell high. However, in a purely market environment, the dairy farmers can not obtain a normal profit and then fraud.Government can take some regulations such as limit price, subsidies and strict quality control to ensure normal operation of the market. Under the limit price strategy, information asymmetries will be presence, so the milk manufacturer will verify the farmers, and supervise the farmers to produce qualified milk. Under the environment of subsidies, the milk manufacturer with high bargaining power will force the farmers to receive normal profits, thus making subsidies transfer to the milk manufacturer. In the case of strictly control of the quality, the milk manufacturer will create an incentive-compatible condition so that farmers can produce qualified milk.Government regulation is to create an incentive-compatible market condition, the elimination of information asymmetries, adverse selection to eliminate the market, increasing market efficiency, and then the market steadily will be maintained.