Int. J.

Production Economics 152 (2014) 4956

Contents lists available at ScienceDirect

Int. J. Production Economics

journal homepage: www.elsevier.com/locate/ijpe

A sustainable vegetable supply chain using plant factories in Taiwanese

markets: A NashCournot model
Ming-Che Hu a, Yu-Hui Chen b, Li-Chun Huang c,n
a

Department of Bioenvironmental Systems Engineering, National Taiwan University, No. 1, Section 4, Roosevelt Road, Taipei 10617, Taiwan
Department of Agricultural Economics, National Taiwan University, No. 1, Section 4, Roosevelt Road, Taipei 10617, Taiwan
c
Department of Bio-Industry Communication and Development, National Taiwan University, No. 1, Section 4, Roosevelt Road, Taipei 10617, Taiwan
b

art ic l e i nf o

a b s t r a c t

Article history:
Received 30 August 2012
Accepted 29 January 2014
Available online 4 February 2014

Sustainable plant factory systems are able to provide steady and high-quality plants to markets while
using less labor, water, nutrition, and pesticides. A plant factory is a controlled environment for plant
production systems with articial light, temperature, humidity, carbon dioxide, water supply, and
cultivation solution. This paper focuses on the entry and competition of a plant factory supply chain in
vegetable markets, using a NashCournot model to simulate this competition. The Lagrangian multiplier
method is used to derive KKT optimality conditions for the model. Combining the optimality conditions
yields a linear complementarity problem (LCP), which is solved by GAMS and PATH. A case study of the
plant factory supply chain in nine Taiwanese vegetable markets is presented. The research simulates the
impact of the location of plant factories, number of rms, and different market demands. The results
show that total production and prots of the plant factory supply chain increase as transportation costs
decrease. In addition, the producer surplus, consumer surplus, and total surplus of the plant factory
supply chain in Taiwanese markets improve when factories are located close to the markets. A sensitivity
analysis is conducted which shows the impact of market share and production cost on the plant factory
supply chain. While the case study focuses on the Taiwanese agricultural commodity production, the
methodology and analysis procedures have generalizability to similar plant production industry
problems in other contexts.
& 2014 Elsevier B.V. All rights reserved.

Keywords:
Plant factory
Supply chain
Taiwanese vegetable market
NashCournot model
Optimality condition

1. Introduction
1.1. Background
Plant factories are sustainable and environmental plants growing systems because less water, nutrition, pesticides, and labor are
consumed for plant cultivation. The systems control lighting,
temperature, humidity, water, the concentration of carbon dioxide,
etc. in order to create an articial and efcient cultivation
environment in an indoor space (Morimoto et al., 1995; Seginer
and Ioslovich, 1999; Alfaro and Rabade, 2009; Winter Green
Research, 2010; Ahumada and Villalobos, 2011). In plant factory
systems, plants are grown consistently all year round by means of
integrated high technology systems with efcient energy, natural,
and labor resources input. Hence, plant factories are sustainable
and articially controlled environment systems which are able to
stably produce high-quality vegetables.

Corresponding author. Tel.: 886 2 33664418; fax: 886 2 23635879.

E-mail addresses: mchu@ntu.edu.tw (M.-C. Hu), yhc@ntu.edu.tw (Y.-H. Chen),
lihuang@ntu.edu.tw (L.-C. Huang).
http://dx.doi.org/10.1016/j.ijpe.2014.01.026
0925-5273 & 2014 Elsevier B.V. All rights reserved.

Due to the high start-up cost of plant factories, the plant factory
system is most often used to cultivate crops that have a high-prot
return. High-prot vegetables cultivated by plant factory systems
in Taiwan, Japan, and China include seedlings, herbs, fruits, and
vegetables for consumers who are willing to pay the higher prices
for these goods. In this paper, we analyze the entry of a plant
factory supply chain in vegetable markets and, in addition,
simulate competitive behavior among plant factories in these
markets.
In this research, we analyze entry into vegetable markets and
plant factory production competition in the markets by formulating a NashCournot competition model (Hobbs, 2001; Gabriel and
Fuller, 2010; Arnold and Minner, 2011; Chung et al., 2012; Shamir,
2012). Accordingly, KKT optimality conditions of the NashCournot
model are derived by applying the Lagrangian multiplier method.
Combining KKT equations presents an LCP model. The LCP is a
model that searches a real n-tulip vector variable, x, such that
(Ax B)Z 0, x Z0, and xT(Ax B) 0, where A is a real n  n matrix
and B is a real n-tulip vector. When the perpendicular condition of
(Ax B) and x is denoted by ? , the LCP can be formulated as
[0r x] ?[(Ax B) Z0]. In this paper, the LCP model is solved using
the PATH solver and the GAMS. GAMS is an optimization modeling

50

M.-C. Hu et al. / Int. J. Production Economics 152 (2014) 4956

language for solving large, complex problems (Rosenthal, 2010).

The PATH solver utilizes the most efcient algorithm for solving
the LCP model (Ferris and Munson, 2000). Finally, we determine
the market equilibrium solution of the NashCournot model using
both the GAMS and the PATH solver.
This paper is organized in the following manner. Section 2
discusses related literature. Section 3 formulates the NashCournot competition model of plant factory production in vegetable
markets. Then, KKT conditions are derived using the Lagrangian
multiplier method. Accordingly, the mixed LCP model for plant
factory systems is built and solved by the GAMS and PATH solver.
Section 4 presents a case study in Taiwanese vegetable markets,
and Section 5 presents the conclusions.
1.2. History of the plant factory systems in Taiwan
In Taiwan, plant factory technology is relatively new but has
attracted interest from both the industry and academia. The rst
plant factory was established by Risecare Company in 2010,
although they only provide a limited range of leafy vegetables.
National Taiwan University installed a new plant factory in the
campus in 2011, providing a facility for experts to conduct
cultivation experiments in a clean and warm house environment.
Furthermore, such techniques are also being tested by National
Yilan University and National Chung Hsing University. The Taiwan
Plant Factory Industry Development Association was established in
May 2011, with approximately 40 organization members interested in plant factory technology and derived products. Most of
these members form a part of the lighting technology, agricultural
automatics, and agricultural cultivation technology industries,
particularly the LED lighting system industry. The members intend
extending their business into the eld of plant factory cultivation
systems, albeit using different business strategies. For example,
Genesis Photonics Inc. and Everlight Electronics Co. Ltd, both LED
technology companies, plan to have their own plant factories. Hon
Hai Precision Ind. Co. Ltd. cooperates with the National Taiwan
University for developing plant factory technology in vegetable
cultivation. The current goal is to use the vegetables grown from
their plant factories to satisfy the dietary need of their employees,
a total of 1,300,000 people around the world. Their long-term goal
is to commercialize their plant factory-grown vegetables and to
obtain a 49% share of the market. Furthermore, Hon Hai Precision
Ind. Co. Ltd. plans to cooperate with a university for developing
vegetable cultivation technology for plant factories; the company
has a long-term goal of obtaining a 49% share of the market for
plant factory-grown business. Academic organizations have also
contributed their resources to the development of plant factory
technology. National Taiwan University, leading in plant factory
technology in Taiwan, launches the products, including lettuce
grown using the system, into the market. As a result of the high
cost of plant factory technology, most investment in Taiwan is in
the cultivation of plants with high economic value, such as lettuce,
seedlings, or herbs used as raw material for the bio-technology
industry. Some horticultural companies in Taiwan are planning to
use plant factories to grow cut owers. The high costs also mean
that most plant factory vegetables target consumers who are
willing to pay higher prices for these goods. There are also
companies in Taiwan that plan to apply plant factory technology
to urban horticulture. This will allow households in urban areas to
use the factories and facilities to grow their vegetables without the
need for soil, which is always in limited supply in these areas.
Five companies from the industries of lighting equipment,
building planning, and material service have launched plant
factories. The major products of Wang Yong Hydroponics Materials
Co. Ltd. are lettuce, pak choi, Lactuca sativa Linn, and so on. Wang
Yong Hydroponics Materials Co. Ltd. already has an enclosed

environmental control plant factory. It also provides LED plant

factory equipment, LED articial light, and 3-D cultivation systems.
Zhu Wang Agriculture Corporation focuses on the equipment,
cultivation beds, and organic fertilizer, which are essential parts
of the plant factory industry. Furthermore, Zhu Wang Agriculture
Corporation operates as a direct selling store, assisting farmers to
construct LED plant factories and accelerating the know-how
transfer of the produce sales procedure in order to expand the
market for LED plant lights. Ting Mao Development Co. Ltd focuses
on LED plant-growing lighting, farm and commercial plant factories, medium and large plant factories, small plant factories,
family-type layer plate gardens (customized), family balcony-style
gardens, and desktop plant light kits as gifts. Zhan Ye International
Co. Ltd. sells equipment for fully enclosed plant factories and
growing chambers for home leisure planting. The main products
grown in its plant factories are lettuce, pak choi, baby bok choy,
spinach, crown daisy, coriander, and so on. Pacic Life Resort
Development Co. Ltd. sells the vegetables grown from the plant
factories. As mentioned earlier, the main crops cultivated by the
plant factories of these ve companies in Taiwan focus mainly on
vegetables that have a high economic value.
The cultivation technology for plant factories has been developed in Taiwan and the relevant products are ready to launch to
the market. However, most published research concentrates on
technology development of the plant factory itself, while only
limited reports focus on investment benets. This paper analyzes
the strategy for entering the plant factory industry. Technology
alone is not enough to encourage investment in the industry.
There also needs to be a market benet to back up the total input
(Kruseman and Bade, 1998).

2. Literature review
In this paper, we formulate NashCournot and LCP models for
analyzing the competitive interaction between plant factories in
Taiwanese vegetable markets. NashCournot and LCP models have
been used in other research to simulate competition in economic
and energy markets. Gabriel and Fuller (2010) formulated a
stochastic LCP model to simulate quantity competition in uncertain energy markets. They modied the Benders decomposition
method in order to solve the stochastic LCP model. Hobbs (2001)
established a NashCournot competition model to analyze bilateral and POOLCO electric power markets. This model examined the
interactive behavior among power generation rms, transmission
grid owners, and market clearing conditions in the energy markets. In addition, a NashCournot model was built to determine
the impact of biomass co-ring on market equilibrium in the
Taiwanese power market (Hu et al., 2011).
With respect to plant factory production systems, optimization
models and algorithms have been utilized for determining optimal
controlling strategies (Tzilivakis et al. 2005; Pandey et al., 2007;
McGuire, 2008; Amorim et al., 2012; Eben-Chaime et al., 2011;
Flores and Villalobos, 2013). In addition, economic analyses have
also been conducted to analyze plant factory production performance. Van Straten et al. (2000) analyzed optimal strategies of
temperature, moisture, and carbon dioxide control for crop growing in greenhouses. Canakci and Akinci (2006) developed a
dynamic optimal control model for greenhouse production in
Turkey. Their model determined optimal strategies for cost and
energy consumption for vegetable production in greenhouses. Jan
de Wit Company analyzed strategies for the production and
trading of lily owers and built a linear programming model for
decision support (Caixeta-Filho et al., 2002). Morimoto et al.
(2003) established a dynamic optimization model to maintain
water content in fruit during storage; their research used a neural

M.-C. Hu et al. / Int. J. Production Economics 152 (2014) 4956

network and genetic algorithm to determine the best temperature

for tomato storage. Francisco and Ali (2006) formulated a multiobjective problem and their model calculated the tradeoff
between price-induced risk, yield-induced risk, labor employment, and net return. Morimoto et al. (1995) established a
dynamic optimization with a Kalman lter model and presented
the optimal water controlling strategies for plant physiological
processes.

51

Coefcients
Ai

price intercept of linear demand curve for market i [NTD/

Mg]
quantity intercept of linear demand curve for market
i [Mg]
transportation cost from plant factory j to market i for
company f [NTD/Mg]
production cost of plant factory j for company f [NTD/
Mg]
production capacity of plant factory j for company f [Mg]

Bi
C1j
C2fj

3. Methodology

Pfj

In this section, we formulate a NashCournot quantity competition model for the sustainable plant factory supply chain in
Taiwanese vegetable markets. The model assumes that there are
several companies in the market and each company owns multiple
plant factories. The NashCournot model establishes the prot
maximizing problem for each company. Then, the LCP model and
KKT conditions are derived using the Lagrangian multiplier
method. Then, the LCP model is established on the GAMS platform
and solved using the PATH solver.
In the vegetable market, a company f produces xfj vegetables in
a plant factory j. The company f delivers tj from plant factory j to
market i, and sells s in market i. The total sales of vegetables in
market i is g sgi . Inserting the total sales into the linear inverse
demand curve yields the market price (Ai  g sgi  Ai =Bi ),
where Ai and Bi are the price and demand intercepts of the linear
demand curve for market i. Then, the total revenue of company f is
i sf i  Ai  g sgi  Ai =Bi . In addition, the total transportation
cost and production cost are ij t f ij  C1f ij  and j xf j  C2f j ,
respectively. Hence, the total prot for company f is calculated in
Eq. (1). We denote the production capacity of plant factory j for
company f as Pfj. The production capacity constraint of plant
factory j for company f is formulated in Eq. (2). The transportation
cost of the vegetables from the plants to the market is calculated in
Eq. (3). The total sales of company f in market i are estimated in
Eq. (4) and the non-negativity constraints are listed in Eq. (5).
Therefore, the prot maximizing problem for company f in the
vegetable production market is formulated in Eqs. (1)(5), where
the indices, variables, and coefcients are as given below
"
!#



max i sf i  Ai  sgi  Ai =Bi

In order to solve the prot maximizing problem, KKT optimality

conditions are derived using the Lagrangian method and optimal
solutions are calculated. We denote fj, fj, and fj as the Lagrangian
multipliers for production capacity, factory transportation, and
market transportation constraints in the model, respectively. The
Lagrangian function is established in Eq. (6). Taking the derivative
of the Lagrangian function with respect to each variable yields the
KKT conditions. The KKT conditions displayed in Eqs. (7)(12)
establish an LCP model for simulating the NashCournot competition of plant factory companies in the vegetable production
market. In order to obtain an equilibrium solution in the markets,
the LCP model is formulated on the GAMS software and analyzed
using the PATH solver. The model demonstrates the competition
between plant factory production companies. Each company
maximizes total prot by selecting optimal production and transportation plans. The market equilibrium is derived and a case
study is conducted in next section. In this research, the competition model, production constraints, transportation constraints, and
market equilibrium are general and can be applied to other
different business situations

 t f ij  C1f ij   xf j  C2f j 
ij

xf j  P f j r 0

8j

xf j t f ij 0

8j

s:t:

 t f ij sf i 0

8i

8 i; j

xf j ; t f ij ; sf i Z 0

"

ij

!
 f j 

companies, f, g 1,,F
markets, i1,,i
plant factories, j1,,J

xf j ; t f ij ; sf i ; f j Z 0
f j ; f i unrestricted

t f ij sf i
j

8 i; j
8 i; j

KKT conditions of company f for xfj Z0 are

"
#
 f j f j C2f j Z 0
"

8j
#

xf j   f j f j C2f j 0

8j

KKT conditions of company f for tj Z0 are

"
#

"

8 i; j
#

t f ij   f i f j C1f ij 0

f i Ai sgi sf i  Ai =Bi

 xf j t f ij  f i 

8 i; j

KKT conditions of company f for s Z0 are

"
!#

Variables
xfj
tj

xf j  P f j  f j 

 f i f j C1f ij Z 0

Indices
f, g
i
j

Lxf j ; t f ij ; sf i ; f j ; f j ; f i
!#
"
#
"
#





sf i  Ai  sgi  Ai =Bi
 t f ij  C1f ij  xf j  C2f j

max

production of the plant factory j for company f [Mg]

transportation from the plant factory j to market i for
company f [Mg]
sales in market i for company f [Mg]

"

sf i  f i  Ai sgi sf i
g

Z0

8i
#

 Ai =Bi 0

8i

52

M.-C. Hu et al. / Int. J. Production Economics 152 (2014) 4956

Table 1
Market equilibrium of plant factory production without transportation cost.
Total number of rms

Revenue (NTD)

Production cost (NTD)

Prot (NTD)

Producer surplus (NTD)

Consumer surplus (NTD)

Total surplus (NTD)

2
3
4
5
6
7
8
9
10

15,964,500,000
9,645,212,000
6,598,655,000
4,878,038,000
3,801,069,000
3,076,490,000
2,562,202,000
2,181,813,000
1,891,110,000

3,547,664,000
2,660,748,000
2,128,598,000
1,773,832,000
1,520,427,000
1,330,374,000
1,182,555,000
1,064,299,000
967,544,800

12,416,836,000
6,984,464,000
4,470,057,000
3,104,206,000
2,280,642,000
1,746,116,000
1,379,647,000
1,117,514,000
923,565,200

24,833,672,000
20,953,392,000
17,880,228,000
15,521,030,000
13,683,852,000
12,222,812,000
11,037,176,000
10,057,626,000
9,235,652,000

24,833,600,000
31,430,100,000
35,760,500,000
38,802,600,000
41,051,500,000
42,779,800,000
44,148,700,000
45,259,300,000
46,178,300,000

49,667,272,000
52,383,492,000
53,640,728,000
54,323,630,000
54,735,352,000
55,002,612,000
55,185,876,000
55,316,926,000
55,413,952,000

Table 2
Sensitivity analysis for market share of plant factory production.
Total number of rms

15% of market share

2
3
4
5
6
7
8
9
10

35% of market share

Prot (NTD)

Producer surplus (NTD)

Total surplus (NTD)

Prot (NTD)

Producer surplus (NTD)

Total surplus (NTD)

3,920,450,000
2,205,253,000
1,411,362,000
980,112,600
720,082,700
551,313,300
435,605,600
352,840,500
291,603,800

7,840,901,000
6,615,760,000
5,645,449,000
4,900,563,000
4,320,496,000
3,859,193,000
3,484,845,000
3,175,565,000
2,916,038,000

15,681,800,000
16,539,400,000
16,936,300,000
17,152,000,000
17,282,000,000
17,366,400,000
17,424,200,000
17,465,600,000
17,496,200,000

25,679,500,000
14,444,700,000
9,244,605,000
6,419,864,000
4,716,635,000
3,611,174,000
2,853,273,000
2,311,151,000
1,910,042,000

51,358,900,000
43,334,100,000
36,978,400,000
32,099,300,000
28,299,800,000
25,278,200,000
22,826,200,000
20,800,400,000
19,100,400,000

102,718,000,000
108,335,000,000
110,935,000,000
112,348,000,000
113,199,000,000
113,752,000,000
114,131,000,000
114,402,000,000
114,603,000,000

KKT conditions of company f for fj Z0 are

 xf j P f j  Z 0

8j

f j   xf j P f j  0

8j

10

KKT conditions of company f for fj are

"
#
 xf j t f ij 0

8j

4. Results and discussion

11

KKT conditions of company f for are

"
#
 t f ij sf i 0

8i

12

Variables
fj
fj

company. The associate KKT optimality conditions are derived and

presented in Eqs. (6)(12). The procedures are general and can be
applied to all production competition scenarios.

Lagrangian multipliers of production capacity constraint

of plant factory j for company f [NTD/Mg]
Lagrangian multipliers of factory transportation constraint of plant factory j for company f [NTD/Mg]
Lagrangian multipliers of market transportation constraint of market i for company f [NTD/Mg]

The model can be applied to specic market of plant factory

production and other general situations. Eq. (1) calculates total
prot for a single company and the structure can be applied to
similar situations. However, the high installation, energy, and
transportation cost for agricultural commodity production considered in Eq. (1) is specic for plant factory production markets.
In addition, the basic structure of production capacity and transportation constraints in Eqs. (2)(5) is general to other industries.
Notice that the data of existing capacity and the investment of new
plant factory are specic and should be provided for solving Eqs.
(2)(5). Furthermore, the model presents a general framework to
analyze the production competition in the market. Eqs. (1)(5)
establish the prot maximizing problem for each participating

This section analyzes the NashCournot competition of the

sustainable plant factories production system in Taiwanese vegetable markets. A case study of the plant factory supply chain in
nine Taiwanese vegetable markets is also presented. The market
demand curves of a plant factory in nine representative Taiwanese
vegetables market are derived. We assume organic vegetable
consumers are the potential buyers for plant factory product in
the market. According the survey of this research, the average
price of organic vegetables is approximately 150220 NTD/kg in
the market. In addition, the annual consumption of organic
vegetables in Taiwanese markets is collected. The model is run
under the assumption that plant factories supply 25% of organic
vegetable consumption. Then, the total vegetable demand of plant
factories is calculated for nine Taiwanese markets. Given that the
linear demand elasticity is  0.15 in the Taiwanese organic
vegetable market, the linear inverse demand functions of plant
factories are established. Furthermore, this research assumes the
production cost of vegetables in plant factories to be 100 NTD/kg.
The model assumes symmetric plant factory companies in the
market; scenarios with different numbers of companies are also
simulated. In Table 1, the results show that revenue and production costs of each company are 15.96 billion NTD and 3.55 billion
NTD in a duopoly scenario. The revenue and production cost
decrease to 1.89 billion NTD and 0.97 billion NTD in a tencompany scenario. The prot for each company decreases from
12.42 billion NTD (duopoly case) to 0.92 billion NTD (ten-company
case) because of the increasing number of companies in the
market. Accordingly, the producer surplus decreases from 24.83

M.-C. Hu et al. / Int. J. Production Economics 152 (2014) 4956

53

Table 3
Sensitivity analysis for production cost of plant factory production.
Total number of rms

2
3
4
5
6
7
8
9
10

90 NTD/kg production cost

110 NTD/kg production cost

Prot (NTD)

Producer surplus (NTD)

Total surplus (NTD)

Prot (NTD)

Producer surplus (NTD)

Total surplus (NTD)

12,654,500,000
7,118,135,000
4,555,606,000
3,163,615,000
2,324,289,000
1,779,534,000
1,406,051,000
1,138,902,000
941,240,900

25,308,900,000
21,354,400,000
18,222,400,000
15,818,100,000
13,945,700,000
12,456,700,000
11,248,400,000
10,250,100,000
9,412,409,000

50,617,800,000
53,386,000,000
54,667,300,000
55,363,300,000
55,782,900,000
56,055,300,000
56,242,100,000
56,375,600,000
56,474,500,000

12,181,400,000
6,852,060,000
4,385,318,000
3,045,360,000
2,237,407,000
1,713,015,000
1,353,493,000
1,096,330,000
906,057,500

24,362,900,000
20,556,200,000
17,541,300,000
15,226,800,000
13,424,400,000
11,991,100,000
10,827,900,000
9,866,966,000
9,060,575,000

48,725,800,000
51,390,400,000
52,623,800,000
53,293,800,000
53,697,800,000
53,960,000,000
54,139,700,000
54,268,300,000
54,363,500,000

Table 4
Payback periods for different numbers of companies in the vegetable market
(years).

Table 5
Location of plant factories in Taiwanese markets.
Firm

Number of companies

2
3
4
5
6
7
8
9
10

Location of plant factories

Interest rate
0%

1%

2%

3%

4%

0.4855
0.8035
1.1745
1.5888
2.0389
2.5191
3.0247
3.5521
4.0981

0.4891
0.8108
1.1873
1.6095
2.0703
2.5641
3.0868
3.6348
4.2054

0.4927
0.8181
1.2003
1.6306
2.1024
2.6105
3.1512
3.7213
4.3185

0.4963
0.8255
1.2135
1.6522
2.1353
2.6585
3.2182
3.8120
4.4381

0.5000
0.8329
1.2269
1.6741
2.1691
2.7080
3.2880
3.9073
4.5649

billion NTD (duopoly case) to 9.24 billion NTD (ten-company case).

On the other hand, the consumer surplus rises from 24.83 billion
NTD (duopoly case) to 46.18 billion NTD (ten-company case).
The rise of consumer surplus is because of the result of the
increasing competition among the companies and the decreasing
equilibrium price. Consequently, the total surplus of the market
grows from 49.67 billion NTD to 55.41 billion NTD.
The sensitivity analyses of market share and production cost
are performed. In Table 2, the results show that the decrease of
market share lowers rm prot and producer surplus. On the
other hand, increase of market share rises rm prot and producer
surplus. For example of duopoly case, lowering market share from
25% to 15% deducts rm prot by 8.50 (12.42  3.92) billion NTD
and producer surplus (from 24.33 to 7.84 billion NTD). While
market share expands from 25% to 35%, rm prot increases from
12.42 to 25.68 billion NTD and producer surplus grows from 24.33
to 51.36 billion NTD for higher market share rises. Table 3 shows
the result of sensitivity analysis for production cost. The rm
prot, producer surplus, and total surplus rise while production
cost drops. Meanwhile, the increase of production cost decreases
rm prot, producer surplus, and total surplus.
Next, we discuss the payback period of investment in a plant
factory. If we assume a plant factory company earns a uniform
series of annual prots, then Eq. (13) calculates the payback period
of the present investment

 

PI AP  1 IRPP  AP = IR  1 IRPP ;
13
where PI, AP, IR, and PP are the present investment, annual prot,
interest rate, and payback period, respectively. Table 4 shows the
payback periods of factory investment ranges from 0.5 years
(a two-company scenario) to 5 years (a ten-company scenario).
Next, we analyze the impact of transportation costs by simulating different locations of plant factories in a ve-rm scenario in
Taiwanese vegetable markets. In order to compare different

Firm
Firm
Firm
Firm
Firm

1
2
3
4
5

Taipei
Taipei
Miaoli
Chiayi
Yilan

Taichung
Taoyuan
Taichung
Tainan
Hualien

Tainan
Hsinchu
Nantou
Kaohsiung
Taitung

production locations, three factory locations of Firm 1 are scattered uniformly in Northern Taiwan (Taipei), Central Taiwan
(Taichung), and Southern Taiwan (Tainan). Firms 2, 3, 4, and
5 are assumed to be located separately in Northern Taiwan, Central
Taiwan, Southern Taiwan, and Eastern Taiwan, respectively. The
detailed locations of Firms 1, 2, 3, 4, and 5 are displayed in Table 5
and Fig. 1. Hence, the location of plant factory production in the
vegetable markets of the ve major cities is addressed in Table 6.
Furthermore, the location of plant factory production in countylevel markets is compared in Table 7.
Because Firm 1 has three plant factories in the North, Central,
and South, Firm 1 is able to deliver its produce easily to each
market. Vegetables sold by Firm 1 in Taipei city, New Taipei city,
northern county, and eastern county markets are grown in the
plant factory in the Taipei area. The vegetables of Taichung city and
central county markets are provided by the central factory in the
Taichung area. Furthermore, the Tainan factory supplies vegetables
to Tainan city, Kaohsiung city, and the southern county markets.
Since the factories of Firm 2 are located in the north, vegetables
sold by Firm 2 in the markets of Taipei city, New Taipei city, the
northern county, and the eastern county are delivered from
factories in Taipei and Taoyuan. Otherwise, the markets in
Taichung city, Tainan city, Kaohsiung city, the central county, and
the southern county are supplied by factories in Hsinchu. Firm
3 delivers vegetables from Miaoli to the markets in Taipei city, New
Taipei city, the northern county, and the eastern county. Furthermore, vegetables transported to Taichung city and the central
counties are produced in the plant factories of Taichung; the
remainder is provided by factories in Nantou. Because the factories
of Firm 4 are in southern Taiwan, the vegetable demand of Tainan
city, Kaohsiung city, the southern county, and the eastern county
are met by factories in Tainan and Kaohsiung. Furthermore, the
factories of Chiayi contribute the majority of the vegetable
production in order to meet the remainder of the market demand.
Firm 5 owns eastern plant factories; thus, demand in Taipei city,
New Taipei city, Taichung city, the northern county, and the central
county is met by the factories in Yilan. The factories of Taitung
grow vegetables for Taichung city, Kaohsiung city, and the southern county markets; the factories of Hualien supply the eastern
county.

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M.-C. Hu et al. / Int. J. Production Economics 152 (2014) 4956

consumers are normally willing to pay. A consumer surplus is the

monetary gain to consumers when the market price is less
than they would be willing to pay. The total surplus is the
total welfare, which is the sum of the producer surplus and
consumer surplus. As the number of plant factories increases,
the transportation costs and production costs decrease. Then
consumer surplus, producer surplus, and total surplus increase.
Specically, when each rm has only one factory, the producer
surplus is 15,450,200,000 NTD; the consumer surplus is 38,623,
500,000 NTD; and the total surplus is 54,073,700,000 NTD. These
gures rise to 15,476,600,000 (producer surplus); 38,690,500,000
(consumer surplus); and 54,167,100,000 (total surplus) when the
number of factories increases to four per company.

5. Conclusions

Fig. 1. Location of cities and plant factories in Taiwanese markets.

Table 8 shows the market equilibrium of the ve plant factories.

Firm 1 is expected to sell the highest amount of vegetables and earn
the highest prot of 3.13 billion NTD. The reason is that Firm 1, with
factories in northern, central, and southern Taiwan, has the lowest
transportation cost of 12.80 million NTD. In addition, the results
show that Firms 2 and 3 make second highest prot of 3.10 billion
NTD. Since the population and market demand are concentrated in
the northern part of Taiwan, the factories of Firm 2 located in
the north have lower transportation costs of 28.49 million NTD.
In contrast, the three factories of Firm 3 are located in the middle
of Taiwan, so transportation to all markets is convenient and
therefore their transportation costs are also low (28.40 million
NTD). Firms 4 and 5 are located in southern and eastern Taiwan, and
so the factories are relatively far from most vegetable markets.
Accordingly, Firms 4 and 5 pay the highest transportation costs of
35.29 million NTD and 42.61 million NTD, respectively. Hence,
Firms 4 and 5 earn the lowest prots of 3.08 billion NTD and 3.07
billion NTD, respectively.
Tables 9 and 10 compare the impact of the number of plant
factories on market equilibrium, consumer surplus, producer
surplus, and total surplus. A producer surplus is the benet
to a producer for selling products at a price that is higher than

In this research, we analyzed the quantity of competition for

sustainable supply chain of plant factory in vegetable markets.
Combining the prot maximizing problems of plant factory
companies yields a NashCournot competition model. In the
model, every company seeks to maximize prot subject to production, transportation, and market demand constraints. Then,
KKT conditions of prot maximizing problems were derived using
the Lagrangian multiplier method. Accordingly, merging the KKT
conditions and the model establishes an LCP model. The model is
formulated on GAMS software and solved using the PATH solver.
Furthermore, we conducted a case study for Taiwanese vegetable
markets. Nine markets were considered, including markets in ve
major cities and four county-level areas.
The results simulated sustainable plant factory production market, compared different locations for plant factories in a ve-rm
scenario, and then quantied the impact of transportation costs in
the Taiwanese vegetables markets. First, increasing competition
shrinks rm prots from 12.42 billion NTD (two-rm case) to 0.92
billion NTD (ten-rm case). The producer surplus decreases by 15.59
billion NTD and the consumer surplus increases by 21.35 billion NTD.
Therefore, the total surplus increases by 5.76 billion NTD, and the
payback periods of factory investment increase from 0.5 years (tworm scenario) to 5 years (ten-rm scenario). Next, under market
equilibrium when each rm has ve plant factories, Firm 1with
factories in northern, central, and southern Taiwanhas the lowest
transportation costs of 12.80 million NTD and therefore the highest
prot of 3.13 billion NTD. Firm 5, with the highest transportation cost
of 42.61 million NTD, earns the lowest prot of 3.07 billion NTD. In
addition, the results show that increasing the number of plant
factories reduces transportation distance and transportation costs
and therefore yields higher social welfare. In this case, the producer
surplus, consumer surplus, and total surplus rise by 26 million NTD,
67 million NTD, and 93 million NTD, respectively.
The signicant contribution of this paper contains three parts,
including geospatial analysis of LCP model, investigation of new
emerging and important industry of plant factory production, and
case study and sensitivity analysis of plant factory production in
Taiwanese vegetable markets. The transportation cost and management of plant factory production are important factors and must be
considered. In previous studies, LCP models were used to simulate
market competition but few of them discussed spatial relationship
of the LCP model. Hence, the rst major contribution of our research
is to analyze the geospatial relationship between plant factory
supply and demand by formulating the spatial LCP model of plant
factory production. In the model, the transportation cost and spatial
location are considered. In the results, the locational and strategic
delivery management of plant factory systems is presented. Plant
factories are articially controlled environment systems which are
able to stably produce high-quality vegetables with less water,

M.-C. Hu et al. / Int. J. Production Economics 152 (2014) 4956

55

Table 6
Production of plant factories in the markets of Taiwan's ve major cities.
Firm

Location of plant factories

Firm 1
Firm 1
Firm 1
Firm 2
Firm 2
Firm 2
Firm 3
Firm 3
Firm 3
Firm 4
Firm 4
Firm 4
Firm 5
Firm 5
Firm 5
Total

Taipei
Taichung
Tainan
Taipei
Taoyuan
Hsinchu
Miaoli
Taichung
Nantou
Chiayi
Tainan
Kaohsiung
Yilan
Hualien
Taitung

Taipei city (kg)

New Taipei city (kg)

2,661,111

Taichung city (kg)

Tainan city (kg)

Kaohsiung city (kg)

5,018,095
1,995,739

1,303,329
1,357,782

2,481,821
2,536,274

2,647,475

4,992,381

1,985,511

1,776,431

2,197,500

1,753,199

2,165,625

1,763,805

2,177,500

1,995,739
2,626,263

4,952,381

1,985,511
1,776,431
2,201,250

2,642,172

4,982,381

1,966,193

13,238,131

24,963,333

9,928,693

1,753,199
8,823,064

2,173,750
10,915,625

Table 7
Production of plant factories in county-level markets.
Firm
Firm 1
Firm 1
Firm 1
Firm 2
Firm 2
Firm 2
Firm 3
Firm 3
Firm 3
Firm 4
Firm 4
Firm 4
Firm 5
Firm 5
Firm 5
Total

Location of plant factories

Northern Taiwan (kg)

Taipei
Taichung
Tainan
Taipei
Taoyuan
Hsinchu
Miaoli
Taichung
Nantou
Chiayi
Tainan
Kaohsiung
Yilan
Hualien
Taitung

1,463,056

Central Taiwan (kg)

Southern Taiwan (kg)

Eastern Taiwan (kg)

217,813

878,125
1,598,788
704,301
758,754

217,813
873,625

1,577,879

1,457,222

217,250
878,125
1,587,424

1,445,556

873,625
1,598,788
216,688

1,452,639

865,125
221,063

7,281,528

4,368,625

1,577,879
7,940,757

1,090,625

Table 8
Market equilibrium of ve plant factories, including transportation costs.
Firm
Firm
Firm
Firm
Firm
Firm

1
2
3
4
5

Revenue (NTD)

Production cost (NTD)

Transportation cost (NTD)

Total cost (NTD)

Prot (NTD)

4,921,639,000
4,896,543,000
4,896,831,000
4,885,678,000
4,874,031,000

1,780,666,000
1,771,591,000
1,771,692,000
1,767,649,000
1,763,440,000

12,799,889
28,488,388
28,400,823
35,287,895
42,614,005

1,793,466,000
1,800,080,000
1,800,093,000
1,802,937,000
1,806,054,000

3,128,174,000
3,096,463,000
3,096,738,000
3,082,741,000
3,067,977,000

Table 9
The impact of number of plant factories on market equilibrium.

Table 10
The impact of number of plant factories on economic surplus.

Number of
plant
factories

Market
revenue (NTD)

Market
production
cost (NTD)

Market
transportation
cost (NTD)

Market total
cost (NTD)

1
2
3
4

24,512,700,000
24,485,300,000
24,474,700,000
24,467,000,000

8,848,667,000
8,853,265,000
8,855,038,000
8,856,338,000

213,875,200
165,992,700
147,591,000
134,001,100

9,062,543,000
9,019,258,000
9,002,629,000
8,990,339,000

nutrition, pesticides, and labor consumption. Plant factories are

emerging and sustainable production systems for future plant
cultivation. In Asia, plant factory systems in Taiwan, Japan, and
China already cultivated high-prot seedlings, herbs, fruits, and
vegetables for consumers. However, previous studies focused on
controlling technologies and strategies of plant factories; few of

Number of plant
factories

Producer surplus
(NTD)

Consumer surplus
(NTD)

Total surplus
(NTD)

1
2
3
4

15,450,200,000
15,466,000,000
15,472,100,000
15,476,600,000

38,623,500,000
38,663,600,000
38,679,100,000
38,690,500,000

54,073,700,000
54,129,700,000
54,151,200,000
54,167,100,000

them concerned the entry of the plant factory supply chain in

vegetable markets. The second major contribution of this paper is to
analyze the penetration of plant factory systems in the agricultural
commodity markets and then assess the potential of the plant
factory production industry. Plant factory systems are emerging
plant production industry in the future. None of the previous

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M.-C. Hu et al. / Int. J. Production Economics 152 (2014) 4956

studies analyzed or simulated the entry of plant factory systems in

agricultural markets. Therefore, the third major contribution of this
research is to conduct a case study and sensitivity analysis of plant
factory production for various supply and demand scenarios in
Taiwanese vegetable markets. A case study of the plant factory
supply chain in nine Taiwanese vegetable markets is provided.
Further, the sensitivity analyses of market share and production
cost are performed. In the results, the geospatial relationship
between plant factory supply and demand is presented and
discussed.
In this research, we formulate a NashCournot competitive
model and then the model is applied to an interesting application
domain plant, factory production systems. Notice that the methodology of the competition model can be applied to specic
market of plant factory production and other general situations.
The case study simulated the competition of plant factories,
compared different locations for plant factories in a ve-rm
scenario, quantied the impact of transportation cost, and then
conducted sensitivity analysis in the Taiwanese vegetables markets. Optimal production strategies for plant factories and greenhouses have been determined in the previous studies. However,
the economic competition of plant factory production has never
been analyzed. Therefore, the signicant contribution of this
research is the application of the NashCournot model to the
sustainable plant factory supply chain. A NashCournot competitive model is formulated for an agricultural commodity production
system. Then, rst-order optimality conditions of the optimal
models are derived using the Lagrangian multiplier method. Next,
combining KKT conditions yields an LCP model, which is solved
using the GAMS and PATH solver. Taiwanese vegetable market data
is collected, and a case study of the NashCournot competitive
model is conducted in Taiwanese markets. Future topics of the
study include a formulation of a stochastic LCP model for vegetable markets, a multi-objective analysis of plant factory production, and facility location problems for a plant factory system.
Acknowledgments
The authors would like to thank the anonymous referees and
editors for their thoughtful comments and suggestions. The authors
are responsible for the accuracy of the information presented in this
paper and for all opinions expressed herein. This research was
funded by the National Science Council of Taiwan under Grant NSC102-2313-B-002-054-MY3, NSC-100-2313-B-002-056, and NTU99R50019-5.
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