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Neoclassical explanations of vertical organization and performance of food Industries

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  • Ronald W. Cotterill

    (The University of Connecticut, Food Marketing Policy Center, Department of Agricultural and Resource Economics, Storrs, CT 06269-4021)

Abstract

This paper examines the exercise of market power in vertical marketing channels in a more general and novel fashion than prior research. Neoclassical models arising from the work of Adam Smith, George Stigler, Harold Demsetz, and John Spengler are presented in juxtaposition to the more commonly advanced agency theoretic explanation of vertical organization and performance. The paper develops a structural model of price transmission in a channel that has differentiated product oligopolies at two stages. Increasing concentration at successive stages creates a problem of double marginalization. Vertical trading partners reduce it by avoiding vertical Nash (arms length) pricing via the use of trade promotions and other coordination methods such as private label. Finally, the rise in retail buyer concentration, six supermarket chains now control 52.6% of supermarket sales in the U.S., portends a possible shift to the European model wherein food retailers develop and promote their own brands. [EconLit Citations: L13,Q13]. © 2001 John Wiley & Sons, Inc.

Suggested Citation

  • Ronald W. Cotterill, 2001. "Neoclassical explanations of vertical organization and performance of food Industries," Agribusiness, John Wiley & Sons, Ltd., vol. 17(1), pages 33-57.
  • Handle: RePEc:wly:agribz:v:17:y:2001:i:1:p:33-57
    DOI: 10.1002/1520-6297(200124)17:1<33::AID-AGR1002>3.0.CO;2-S
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    References listed on IDEAS

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    1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    2. Cotterill, Ronald W. & Franklin, Andrew W. & Ma, Li Yu, 1996. "Measuring Market Power Effects in Differentiated Product Industries: An Application to the Soft Drink Industry," Research Reports 25229, University of Connecticut, Food Marketing Policy Center.
    3. Gerstner, Eitan & Hess, James D, 1991. "A Theory of Channel Price Promotions," American Economic Review, American Economic Association, vol. 81(4), pages 872-886, September.
    4. Ronald W. Cotterill, 1999. "Jawboning cereal: The campaign to lower cereal prices," Agribusiness, John Wiley & Sons, Ltd., vol. 15(2), pages 197-205.
    5. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347-347.
    6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    7. Cotterill, Ronald W., 1994. "Scanner Data: New Opportunities For Demand And Competitive Strategy Analysis," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 23(2), October.
    8. Slade, Margaret E, 1995. "Product Rivalry with Multiple Strategic Weapons: An Analysis of Price and Advertising Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 445-476, Fall.
    9. Cotterill, Ronald W, 1986. "Market Power in the Retail Food Industry: Evidence from Vermont," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 379-386, August.
    10. Salop, Steven C & Scheffman, David T, 1983. "Raising Rivals' Costs," American Economic Review, American Economic Association, vol. 73(2), pages 267-271, May.
    11. Cotterill, Ronald W., 1998. "Estimation of Cost Pass Through to Michigan Consumers in the ADM Price Fixing Case," Research Reports 25148, University of Connecticut, Food Marketing Policy Center.
    12. Cotterill, Ronald W., 1994. "Scanner Data: New Opportunities for Demand and Competitive Strategy Analysis," Agricultural and Resource Economics Review, Cambridge University Press, vol. 23(02), pages 125-139, October.
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    Citations

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    Cited by:

    1. Hellberg-Bahr, Anneke & Pfeuffer, Martin & Steffen, Nina & Spiller, Achim & Brümmer, Bernhard, 2010. "Preisbildungssysteme in der Milchwirtschaft Ein Überblick über die Supply Chain Milch," 54th Annual Conference, Goettingen, Germany, September 17-19, 2014 187442, German Association of Agricultural Economists (GEWISOLA).
    2. Gomez, Miguel I. & Rao, Vithala R. & Yuan, Hong, 2008. "Effects of Horizontal and Vertical Market Power on Trade Promotion Budget and Allocation in the US Supermarket Industry: An Experimental and Empirical Analysis," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6247, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Sanjib Bhuyan, 2005. "An empirical evaluation of factors determining vertical integration in U.S. food manufacturing industries," Agribusiness, John Wiley & Sons, Ltd., vol. 21(3), pages 429-445.
    4. Gomez, Miguel I. & Rao, Vithala R. & Yuan, Hong, 2009. "A Market Experiment on Trade Promotion Budget and Allocation," Working Papers 55928, Cornell University, Department of Applied Economics and Management.
    5. Wandel, Jürgen, 2011. "Integrierte Strukturen im Agrar- und Ernährungssektor Russlands: Entstehungsgründe, Funktionsweise, Entwicklungsperspektiven und volkswirtschaftliche Auswirkungen. Band I und II," Studies on the Agricultural and Food Sector in Transition Economies, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), volume 63, number 63.
    6. Ronald W. Cotterill, 2003. "Perspectives on Global Concentration and Public Policy," Food Marketing Policy Center Research Reports 075, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    7. Goddard, Ellen W. & Freebairn, John W. & Griffith, Garry R., 2003. "Issues in evaluating generic promotion in the food chain," 2003 Conference (47th), February 12-14, 2003, Fremantle, Australia 57871, Australian Agricultural and Resource Economics Society.
    8. Tirtha Pratim Dhar & Ronald W. Cotterill, 2002. "Price Transmission in Differentiated Product Market Channels: A Study of the Boston Fluid Milk Market and the North East Dairy Compact," Food Marketing Policy Center Research Reports 067, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.

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