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Subsector Analysis and
Vertical Coordination
Subsector Analysis
U What is a subsector? X Shaffer: “The vertical set of activities in the production and distribution of a closely related set of commodities.”
U Vertical view of industrial organization
U Catalyst: Rapid changes in vertical coordination for U.S. ag commodities
What is Subsector
Organization?
U Vertical Coordination
X The “harmonization” of the vertical economic stages of production and marketing in a subsector
U Economic Stage of Production
X Williamson: Technologically separable production process X Any operating process capable of producing a saleable product or service (i.e. a value adding process)
Performance Questions
U What impact does alternative vertical organization of subsectors have on performance?
U Why one organizational form over another?
U How do changes in basic conditions lead to changes in subsector organization?
For Example.....
U Beef Subsector Organization
X 1700's X 1900's X Present
U Grain/cereal production
X Developed countries X Developing countries
Why not the Spot Market?
U Biological production cycles
U Product Perishability
U Uncertainty
U Fixed investment
Subsector Performance
Dimensions
U Resource Allocation
U Transaction Costs
U Dynamic Stability
U Equity
U Market and Information Accessibility
The Agri-Food System
Marketing Channel
Agricultural Input Suppliers
Agricultural Producers
Assemblers
Food Processors/Manufacturers
Wholesalers
Retailers
Consumers
Coordinating Mechanisms
U Terminal markets
U Direct marketing
U Electronic markets
U Contract coordination X Market specification X Production management X Resource-providing
U Cooperatives, Alliances, Networks
U Integration
Necessary Transaction
Components
U Negotiating the deal
U Transfer of ownership
U Establishing a price
U Physical delivery to the buyer
U Monitoring and enforcement of contract terms
Coordinating through
“markets”....
U Terminal markets
X Central assembly of buyers and sellers
U Direct marketing
X Direct negotiation between buyer and seller
U Electronic markets
X Electronic auction determines prices X Direct shipment from buyer to seller
Contract Coordination
U Market Specification X Cattle X Potatoes
U Production Management X Organic produce X Premium Beef
U Resource Providing X Poultry X Hogs
Strategic Alliances
U Mutuality in.......
X Objective identification X Decision making processes X Sharing risks and benefits
U Relationship focused
U H.E.B.-Wegman’s-Meijer Alliance
X Strong Regional Grocery Retailers X Why ally?
Formal Cooperation
U Presence of a formal organization that has a distinct identity from the parties involved
U Requires equity commitment
U Joint ventures, Cooperatives
Policy Issues
U Protecting attributes through the system X Food safety X Quality attributes
U Temporal coordination
X Timing of supply and demand X Information’s role
U Thin markets
U Market power
