Incentives and Impacts of Vertical Coordination in a Food Production-Marketing Chain: A Non-cooperative Multi-Stage, Multi-Player Analysis

Abstract

Vertical coordination in the form of contracts and integration is common where changing consumer preferences require producers to adapt to changing market situations that require a steady supply of quality controlled products. We identify two vertical coordination mechanisms that are common in the real world but often ignored by the literature due to their inherent complexity. Using economic models, we measure the incentives and impact of market agents’ strategic behavior and strategies along a hypothetical food production-marketing chain. Our results reestablish the importance and value of open market and contracts in a world where both are gradually replaced by consolidation and integration. We also find that in most types of vertical coordination there is a critical limit to the levels of coordination beyond which it is not profitable to coordinate. We recommend that competitive policies could focus more on market structure where independent firms thrive rather than on the degree of coordination per se.