Cost Structure and Vertical Integration between Farming and Processing
AbstractIn several food-producing sectors, we observe vertical integration between the farming and processing stages. The salmon industry, which has motivated this paper, has seen a rise in large vertically integrated companies over the last decade, with direct ownership of production activities including hatcheries, fish processing and exporting. Both the farming and processing stages have become more capital intensive, which has led to a steeper U-shaped average cost (AC) curve. In this paper we present a theoretical link between this technological shift and vertical integration: in a repeated game model of relational contracting, we show that when the AC curve is sufficiently steep, then processors and farmers are more likely to vertically integrate. The reason is that steep AC curves make it costly to deviate from the optimal production scale, which in turn makes processors more vulnerable to hold-up and opportunistic behaviours from its suppliers. Copyright (c) 2008 The Authors. Journal compilation (c) 2008 The Agricultural Economics Society.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Agricultural Economics.
Volume (Year): 59 (2008)
Issue (Month): 2 (06)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0021-857X
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- Larsen, Thomas A. & Asche, Frank, 2011. "Contracts in the Salmon Aquaculture Industry: An Analysis of Norwegian Salmon Exports," Marine Resource Economics, Marine Resources Foundation, vol. 26(2).
- Sandberg-Hanssen, Thor-Erik & Mathisen, Terje Andreas, 2011. "Factors facilitating intermodal transport of perishable goods - Transport purchaser’s viewpoint," European Transport \ Trasporti Europei, ISTIEE, Institute for the Study of Transport within the European Economic Integration, issue 49, pages 75-89.
- repec:ags:mareec:133346 is not listed on IDEAS
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