IDEAS home Printed from https://ideas.repec.org/p/ags/nc194o/232839.html

The Measurement and Determinants of Vertical Coordination: A Transactions Cost Approach

Author

Listed:
  • Frank, Stuart D.
  • Henderson, Dennis R.

Abstract

There is increased interest in vertical coordination as a more comprehensive industry structural variable than the traditional vertical integration measure. Vertical coordination includes not only vertical integration but all other vertical coordinating structures. Previous studies of vertical industrial organization did not examine the role of non-market exchange mechanisms outside the domain of vertical integration. The concept of a vertical coordination variable incorporating all coordinating structures bridges the gap in the dichotomy of market versus ownership coordination. There is an extensive literature examining the factors affecting vertical integration. More recently, attention has focussed on transactional inefficiencies as a primary motivation for vertical integration. However, little empirically has been done to examine the economic motivations for vertical coordination. This paper proposes an innovative measure of vertical coordination and examines the determining factors motivating the use of vertical coordinating structures. The vertical coordination measure incorporates product flow interdependencies between vertically related firms/industries plus coordinating structures utilized in the transfer of control. Coordinating structures examined include: 1) spot markets, 2) market specification contracts, 3) production management contracts, 4) resource providing contracts, and 5) integration. To explain the food industries' incidence of vertical coordination due to transactional inefficiencies, several industrial characteristics affecting transaction costs are examined. These factors include future demand growth and uncertainty, market power, product and technical differentiation, flow economies, and firm size and specialization. Based on four progressively comprehensive specifications of vertical coordination, the empirical analysis confirms the hypothesis that transaction costs are a primary motivation for vertical coordination. The most comprehensive vertical coordination measure incorporating product flow linkages and coordinating structures performed very well. The transaction cost factors most influential were those related to research and development, internal costs, flow economies, and input supplier concentration. Moreover, a comparison of the vertical coordination and vertical integration measures revealed the significance of the use of coordinating structures as a response to transactional inefficiencies.

Suggested Citation

  • Frank, Stuart D. & Henderson, Dennis R., 1990. "The Measurement and Determinants of Vertical Coordination: A Transactions Cost Approach," Occasional Papers 232839, Regional Research Project NC-194: Organization and Performance of World Food Systems.
    • Handle: RePEc:ags:nc194o:232839
    DOI: 10.22004/ag.econ.232839
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/232839/files/nc194-op-08.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.232839?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Mighell, Ronald L. & Jones, Lawrence A., 1963. "Vertical Coordination in Agriculture," Agricultural Economic Reports 307164, United States Department of Agriculture, Economic Research Service.
    2. M. A. Adelman, 1955. "Concept and Statistical Measurement of Vertical Integration," NBER Chapters, in: Business Concentration and Price Policy, pages 281-330, National Bureau of Economic Research, Inc.
    3. Laffer, Arthur B, 1969. "Vertical Integration by Corporations, 1929-1965," The Review of Economics and Statistics, MIT Press, vol. 51(1), pages 91-93, February.
    4. Levy, David T, 1985. "The Transactions Cost Approach to Vertical Integration: An Empirical Examination," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 438-445, August.
    5. Reimund, Donn A. & Martin, J. Rod & Moore, Charles V., 1981. "Structural Change in Agriculture: The Experience for Broilers, Fed Cattle, and Processing Vegetables," Technical Bulletins 157701, United States Department of Agriculture, Economic Research Service.
    6. George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 59(3), pages 185-185.
    7. MacDonald, James M, 1985. "Market Exchange or Vertical Integration: An Empirical Analysis," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 327-331, May.
    8. Krause, Kenneth R., 1987. "Corporate Farming, 1969-82," Agricultural Economic Reports 308034, United States Department of Agriculture, Economic Research Service.
    9. Blair, Roger D. & Kaserman, David L., 1983. "Law and Economics of Vertical Integration and Control," Elsevier Monographs, Elsevier, edition 1, number 9780121034801.
    10. Ravenscraft, David J, 1983. "Structure-Profit Relationships at the Line of Business and Industry Level," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 22-31, February.
    11. Maddigan, Ruth J, 1981. "The Measurement of Vertical Integration," The Review of Economics and Statistics, MIT Press, vol. 63(3), pages 328-335, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frank, Stuart D. & Henderson, Dennis R., "undated". "Vertical Coordination: A Transactions Cost Approach," 1990 Annual meeting, August 5-8, Vancouver, Canada 270876, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Bhuyan, Sanjib, 2003. "What Determines Vertical Mergers in U.S. Food Manufacturing Industries?," 2003 Annual meeting, July 27-30, Montreal, Canada 22146, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Aekapol Chongvilaivan & Jung Hur, 2012. "Trade Openness and Vertical Integration: Evidence from the U.S. Manufacturing Sector," Southern Economic Journal, John Wiley & Sons, vol. 78(4), pages 1242-1264, April.
    4. Sanjib Bhuyan, 2002. "Impact of Vertical Mergers on Industry Profitability: An Empirical Evaluation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 20(1), pages 61-79, February.
    5. Fronmueller, M. P. & Reed, R., 1996. "The competitive advantage potential of vertical integration," Omega, Elsevier, vol. 24(6), pages 715-726, December.
    6. Bhuyan, Sanjib, 2001. "Impact Of Vertical Mergers On Food Industry Profitability: An Empirical Evaluation," 2001 Annual meeting, August 5-8, Chicago, IL 20469, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Florian Kaiser & Robert Obermaier, 2020. "Vertical (Dis‑)Integration and Firm Performance: A Management Paradigm Revisited," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 72(1), pages 1-37, February.
    8. Barkema, Alan & Drabenstott, Mark & Cook, M. L., 1993. "The Industrialization of the U.S. Food System," Food and Agricultural Marketing Issues for the 21st Century - FAMC 1993 Conference 265920, Food and Agricultural Marketing Consortium (FAMC).
    9. Luigi Pascali, 2009. "Contract Incompleteness, Globalization and Vertical Structure: an Empirical Analysis," Boston College Working Papers in Economics 727, Boston College Department of Economics.
    10. Luis Suarez-Villa & Wallace Walrod, 1997. "Operational Strategy, R&D and Intra-metropolitan Clustering in a Polycentric Structure: The Advanced Electronics Industries of the Los Angeles Basin," Urban Studies, Urban Studies Journal Limited, vol. 34(9), pages 1343-1380, August.
    11. Davide Vannoni, 1994. "Perche' Le Matrici Intersettoriali Per Misurare L'Integrazione Verticale ?," CERIS Working Paper 199403, CNR-IRCrES Research Institute on Sustainable Economic Growth - Torino (TO) ITALY - former Institute for Economic Research on Firms and Growth - Moncalieri (TO) ITALY.
    12. Martinez, Steve & Zering, Kelly, "undated". "Vertical Coordination and Consumer Welfare: The Case of the Pork Industry," Agricultural Economic Reports 262048, United States Department of Agriculture, Economic Research Service.
    13. Martinez, Stephen W., 2002. "Vertical Coordination Of Marketing Systems: Lessons From The Poultry, Egg, And Pork Industries," Agricultural Economic Reports 34051, United States Department of Agriculture, Economic Research Service.
    14. Dan Huang & Luxun Liu, 2014. "Micro-determinants of vertical integration: Evidence from China," Asia Pacific Journal of Management, Springer, vol. 31(2), pages 377-396, June.
    15. Henderson, Dennis R. & McCorriston, Steve & Sheldon, Ian M., 1993. "Vertical Coordination: Concept, Practice, Theory and Policy Implications for the Agro-Food Sector," Occasional Papers 233157, Regional Research Project NC-194: Organization and Performance of World Food Systems.
    16. S. Montresor & G. Vittucci Marzetti, 2006. "Outsourcing and structural change: shifting firm and sectoral boundaries," Working Papers 566, Dipartimento Scienze Economiche, Universita' di Bologna.
    17. Rakesh Basant & Pulak Mishra, 2019. "Impact of Vertical Integration on Market Power in Indian Manufacturing Sector During the Post-Reform Period," Journal of Industry, Competition and Trade, Springer, vol. 19(4), pages 561-581, December.
    18. Krickx, Guido A., 1995. "Vertical integration in the computer mainframe industry: A transaction cost interpretation," Journal of Economic Behavior & Organization, Elsevier, vol. 26(1), pages 75-91, January.
    19. Kildegaard, Arne & Williams, Pete, 2002. "Banks, systematic risk, and industrial concentration: theory and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 47(4), pages 345-358, April.
    20. Davide Vannoni, 1999. "Empirical Studies of Vertical Integration: the Transaction Cost Orthodoxy," CERIS Working Paper 199903, CNR-IRCrES Research Institute on Sustainable Economic Growth - Torino (TO) ITALY - former Institute for Economic Research on Firms and Growth - Moncalieri (TO) ITALY.

    More about this item

    Keywords

    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:nc194o:232839. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.