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Journal cover: China Agricultural Economic Review

China Agricultural Economic Review

ISSN: 1756-137X

Online from: 2009

Subject Area: Economics

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Perishability as a determinant of vertical coordination: The case of the US egg, poultry, and pork industries

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Title:Perishability as a determinant of vertical coordination: The case of the US egg, poultry, and pork industries
Author(s):Chu-Ping Lo, (Department of Agricultural Economics, National Taiwan University, Taipei, Taiwan)
Citation:Chu-Ping Lo, (2010) "Perishability as a determinant of vertical coordination: The case of the US egg, poultry, and pork industries", China Agricultural Economic Review, Vol. 2 Iss: 1, pp.49 - 62
Keywords:Agriculture, Contracts, Food products, United States of America, Vertical marketing
Article type:Research paper
DOI:10.1108/17561371011017496 (Permanent URL)
Publisher:Emerald Group Publishing Limited
Acknowledgements:The financial support provided by the National Taiwan University is gratefully acknowledged. All errors are the author's responsibility.

Purpose – The purpose of this paper is to present a simple model to demonstrate how a trade-off between incomplete contract distortions and excessive governance costs determine an agricultural firm's organizational choices.

Design/methodology/approach – In this paper, it is argued that the perishable nature of products exaggerates the incomplete contract distortion, such that products with a short biological production cycle (e.g. eggs) are likely to be operated under vertical integration, products with a medium cycle (e.g. poultry) are likely to be operated under product contracts, and products with a long cycle (e.g. pork) are likely to be operated under marketing contracts.

Findings – This model helps explain why vertical integration dominates the US egg industry, why product contracts are prevalent in the turkey industry, and why marketing contracts have become common in the pork industry. The implications from this model are also applicable to other sectors and other countries, including China's agricultural sectors.

Originality/value – This paper illustrates that perishable products are more vulnerable to opportunism, because the incomplete contract distortion is exaggerated by the perishable nature of the products. However, a local government can reshape firms' choices of vertical coordination by improving its legal infrastructure to reduce the incomplete contract distortions and then weaken the role of the perishable nature of products, so that contracting (product or marketing) may take place. Note that agricultural producers benefit more in selling their products through product/marketing contracts than spot markets.

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