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Vertical Coordination by Contracts in Agribusiness - An Empirical Research in the Hungarian Dairy Sector


  • Gabor G. Szabo

    () (Hungarian Academy of Sciences, Institute of Economics)

  • Krisztina Bardos

    () (Public Foundation for the Progress of the Industry)


In some cases spot markets failure to govern to whole or a part of the marketing channel effectively and contractual relations are gaining more importance. It is especially true in case of agricultural markets, since these markets became more differentiated and market players are vulnerable in most of the cases. Examination of Hungarian dairy sector is an actual issue, so that one could understand how contractual systems work in the situation when crises appear thanks to governance insufficiency. Our research’s aims are to present a theoretically structured framework of contracting arrangements of milk producers based on Transaction Cost Economics’ (TCE) predictions and economics of contracting and an empirical analysis of the key determinants of governance structure between farmers and dairy processors in Hungary. The source of the research is a theoretical argument based partly on review of Hungarian and international literature on relevant market channels, economics of contracting and governance structures. These gave the theoretical determinants of testable prepositions. In the framework of a postal survey in the second quarter of 2005 we carried out a survey among milk producers. A total of 300 questionnaires containing closed and open questions were sent out for milk producers, 65 of them could have been evaluated. The results have been structured, electronically converted for applying SPSS-software. The data base has been analysed by employing multivariate techniques (cluster analysis, linear regression, multidimensional scaling, etc). First, to be able to decide the number of clusters, we applied a hierarchical clustering. The formation of starting clusters was made by giving the number of the future groups which based on hierarchical cluster method and dendrogram. Hence asset specific investment, price determination and bargaining power proved to be significant in dividing the cases into three groups focusing on governance structure. We revealed the main characteristics of clusters focusing on con-tracting attributes. Groups’ means comparison obtains the result that there is no significant difference in partner change, neither in the whole sample nor in the sub-groups. Unlike from this, the reasons for selling to a particular buyer are different in the clusters, the most important factors are reliability, valid contract and the ones based on geographic reasons. The variables mentioned above were suitable for further investigations, so with the help of linear regression we attempted to see their effect on the contract period. Taking into consideration the t-values of the variables, neither asset specific investment and bargaining power, nor price determination have role in the explanation of contract period. Since the variables applied in the whole survey measure same theoretical concepts, we had the possibility to reduce their number by multidimensional scaling. The aim of this scaling is to gain information about the differences among the respondents reducing the dimensions of the variables. The goodness of fit was good in case of three and two dimensions, so we found that the six-dimensional space can be reduced into two or three dimensions without giving up the differences among cases.

Suggested Citation

  • Gabor G. Szabo & Krisztina Bardos, 2005. "Vertical Coordination by Contracts in Agribusiness - An Empirical Research in the Hungarian Dairy Sector," IEHAS Discussion Papers 0515, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  • Handle: RePEc:has:discpr:0515

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    References listed on IDEAS

    1. Silke Boger, 2001. "Quality and contractual choice: a transaction cost approach to the polish hog market," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 28(3), pages 241-262, October.
    2. MacDonald, James M. & Perry, Janet E. & Ahearn, Mary Clare & Banker, David E. & Chambers, William & Dimitri, Carolyn & Key, Nigel D. & Nelson, Kenneth E. & Southard, Leland W., 2004. "Contracts, Markets, and Prices: Organizing the Production and Use of Agricultural Commodities," Agricultural Economics Reports 34013, United States Department of Agriculture, Economic Research Service.
    3. M. den Ouden & Aalt A. Dijkhuizen & Ruud B.M. Huirne & Peter J.P. Zuurbier, 1996. "Vertical cooperation in agricultural production-marketing chains, with special reference to product differentiation in pork," Agribusiness, John Wiley & Sons, Ltd., vol. 12(3), pages 277-290.
    4. Brosig, Stephan & Hockmann, Heinrich (ed.), 2005. "How effective is the invisible hand? Agricultural and food markets in Central and Eastern Europe," Studies on the Agricultural and Food Sector in Transition Economies, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), volume 31, number 93018.
    5. George W. J. Hendrikse & Cees P. Veerman, 2001. "Marketing Co-operatives: An Incomplete Contracting Perspective," Journal of Agricultural Economics, Wiley Blackwell, vol. 52(1), pages 53-64.
    6. Kilmer, Richard L. & Lee, Jonq-Ying & Carley, Dale H., 1994. "Factors Influencing Farmers' Selection Of A Milk Handler," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 26(02), December.
    7. Michael E. Sykuta & Michael L. Cook, 2001. "A New Institutional Economics Approach to Contracts and Cooperatives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(5), pages 1273-1279.
    8. Jill E. Hobbs, 1997. "Measuring the Importance of Transaction Costs in Cattle Marketing," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1083-1095.
    9. Gow, Hamish R & Swinnen, Johan F M, 1998. "Up- and Downstream Restructuring, Foreign Direct Investment, and Hold-Up Problems in Agricultural Transition," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 25(3), pages 331-350.
    10. Staatz, John M., 1989. "Farmer Cooperative Theory: Recent Developments," Research Reports 52017, United States Department of Agriculture, Rural Development Business and Cooperative Programs.
    11. Peterson, H. Christopher & Wysocki, Allen F., 1997. "The Vertical Coordination Continuum And The Determinants Of Firm-Level Coordination Strategy," Staff Papers 11817, Michigan State University, Department of Agricultural, Food, and Resource Economics.
    12. Klaus Drescher, 2000. "Assessing aspects of agricultural contracts: An application to German agriculture," Agribusiness, John Wiley & Sons, Ltd., vol. 16(4), pages 385-398.
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    Cited by:

    1. Szabó, Gábor G. & Popovics, Péter, 2009. "Possible Ways of Market Coordination and Integration in the Hungarian Dairy Sector," Journal of Rural Cooperation, Hebrew University, Center for Agricultural Economic Research, vol. 37(1).

    More about this item


    Contracts; dairy sector; governance structure; vertical co-ordination; agribusiness; producers’ group; co-operation; transaction cost economics; Hungary;

    JEL classification:

    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure


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