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Cost Structure and Vertical Integration between Farming and Processing

  • Ola Kvaløy
  • Ragnar Tveter�s

In 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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Article provided by Wiley Blackwell in its journal Journal of Agricultural Economics.

Volume (Year): 59 (2008)
Issue (Month): 2 (06)
Pages: 296-311

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Handle: RePEc:bla:jageco:v:59:y:2008:i:2:p:296-311
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  1. Maija Halonen, 2002. "Reputation And The Allocation Of Ownership," Economic Journal, Royal Economic Society, vol. 112(481), pages 539-558, July.
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  7. Martinez, Stephen W., 1999. "Vertical Coordination in the Pork and Broiler Industries: Implications for Pork and Chicken Products," Agricultural Economics Reports 34031, United States Department of Agriculture, Economic Research Service.
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