Characteristics of Vertical Coordination in the Hungarian Wine Sector

In our paper, we analyse the vertical coordination forms between vine grape producers and wine producer-merchants; and examine the characteristics of the contractual relationships and contract design in the Hungarian wine sector on the basis of the New Institution Economics theory. In this theoretical framework, we analyse the determinant factors in development of different coordination forms concerning the transactions on vine varieties for wine production. We have carried out interviews with the actors and we examine the contracts of the greatest Hungarian quality wine producer and merchant societies, which represent the majority of the production and wine export. We make statistical analysis of data base of 40 vine and wine enterprises in order to form a general picture from the actors of the Hungarian wine industry. We present the size, the ownership and the financial situation (revenue, Cash Flow, P/L etc.) We also describe the state and market regulations in relation with the wine industry and their role in the development of the different vertical co-ordination forms. We underline that the wine production in Hungary can be described with a relatively low profitability and slow return. This phenomenon arises not only from the costly production system, but from high transaction costs and inefficient existing governing structures. We show that the uncertainty is extremely high in the sector, especially in the field of price fluctuation, quality of row materials, commercialisation and respect of obligations assumed in the contracts. The motivation system of analysed contracts in most cases is not based on the price mechanism and we find a slight price differentiation in relation with quality of wine-grape. In most cases the assurance of wine-grape purchase means sufficient motivation to vine-growers. We show as well that vine-growers are not well organised at the level of negotiations with wine-producers and merchants. Their power to enforce interests is rather weak. The lack of confidence, asymmetrical information and the existence of opportunistic behaviour result in a very low level of investments and in an inefficient structure, although an efficient one would be indispensable for the quality wine production.