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Cost Structure and Vertical Integration between Farming and Processing

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  • Ola Kvaløy
  • Ragnar Tveterås

Abstract

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.

Suggested Citation

  • Ola Kvaløy & Ragnar Tveterås, 2008. "Cost Structure and Vertical Integration between Farming and Processing," Journal of Agricultural Economics, Wiley Blackwell, vol. 59(2), pages 296-311, June.
  • Handle: RePEc:bla:jageco:v:59:y:2008:i:2:p:296-311
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    References listed on IDEAS

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    7. T. Bjørndal & K. G. Salvanes, 1995. "Gains From Deregulation? An Empirical Test For Efficiency Gains In The Norwegian Fish Farming Industry," Journal of Agricultural Economics, Wiley Blackwell, vol. 46(1), pages 113-126.
    8. 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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    Cited by:

    1. Misund, Bård, 2015. "Financial Ratios and Prediction on Corporate Bankruptcy in the Atlantic Salmon Industry," UiS Working Papers in Economics and Finance 2015/9, University of Stavanger.
    2. Asche, Frank & Misund, Bard & Oglend, Atle, 2015. "The Spot-Forward Relationship in the Atlantic Salmon Market," UiS Working Papers in Economics and Finance 2015/16, University of Stavanger.
    3. 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.
    4. Tsakiridis, Andreas & Hanrahan, Kevin & Breen, James & Wallace, Michael & O’Donoghuea, Cathal, 2016. "Feed substitution and economies of scale in Irish beef production systems," 149th Seminar, October 27-28, 2016, Rennes, France 244769, European Association of Agricultural Economists.
    5. Straume, Hans-Martin, 2015. "Trade costs and Norwegian salmon export," Working Papers in Economics 06/15, University of Bergen, Department of Economics.
    6. Asche, Frank & Larsen, Thomas A. & Smith, Martin D. & Sogn-Grundvåg, Geir & Young, James A., 2015. "Pricing of eco-labels with retailer heterogeneity," Food Policy, Elsevier, vol. 53(C), pages 82-93.

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