Chapter 15 Food processing and distribution: An industrial organization approach

Researchers in economics and strategy have long been interested in understanding the determinants of firm performance. We apply the relatively novel approach of hierarchical linear modelling (HLM) to a large panel of food economy firms to shed new light on the long‐standing debate about the relative importance of industry, corporate parent and business unit effects on firm profits. Our results suggest that business unit and corporate effects are more relevant than industry effects in explaining firm performance differences in the food economy. In addition, we also explore the effect of specific strategic factors on performance within each level of analysis. In particular, we find that business‐segment size, industry barriers to entry, corporate diversification, R&D intensity, capital intensity and resource availability are significant predictor variables that explain firm performance differences. Given the relatively important role of corporate effects and the positive influence of corporate strategic variables on business unit performance, our findings suggest that the environment provided by corporate parents significantly affects business unit profitability. In other words, corporate strategy does matter and thus should continue to draw attention from scholars interested in explaining profitability in the food economy.

Section: Variance Componentscontrasting

confidence: 56%

Sources of Firm Performance Differences in the US Food Economy

Mondelli¹,

Chaddad²

2012

“…Some research on the characteristics of food markets suggests that these markets are typically oligopolistic (Sexton and Lavoie, 2001;Sheldon and Sperling, 2003), allowing the exercise of market power by downstream industries. It is not surprising that among the arguments 4 that have been provided to account for asymmetric price movements the most commonly cited is the presence of market power in retail and/or processing industries (see, for example, McCorriston et al, 1998McCorriston et al, , 2001.…”

Section: Asymmetric Price Transmission -Existing Theories and Empiricmentioning

confidence: 99%

“…In this paper we contribute to the literature by further attempting to link the presence/absence of price transmission asymmetries to market characteristics in a specific sector. We focus on the role of market structure, a factor which is commonly mentioned as an underlying reason for asymmetries in price transmission (McCorriston et al, 1998(McCorriston et al, , 2001Sexton and Lavoie, 2001). Interestingly, researchers have not reached a consensus with respect to the relationship between market structure and the pattern of price adjustments along the marketing chain.…”

Section: Introductionmentioning

confidence: 99%

Does Market Structure Influence Price Transmission in the Agro‐food Sector? A Meta‐analysis Perspective

Bakucs¹,

Fałkowski²,

Fertő³

2013

There exists a large literature on price transmission in agro‐food sectors. However, a great majority of empirical studies focus on the existence of asymmetry and, by and large, do not investigate the reason for its presence or absence. This is in sharp contrast to the theoretical literature that provides a number of explanations of why we should expect (a)symmetry. In response, this paper investigates the reasons for asymmetric price transmission in the agro‐food chain, using meta‐analysis of existing studies. Our focus is on the organizational and institutional characteristics of the agro‐food supply chain. Our findings suggest that asymmetric price transmission in farm–retail relationships is more likely to occur in sectors/countries with more fragmented farm structure, higher governmental support and more restrictive regulations on price controls in the retail sector. On the other hand, more restrictive regulations on entry barriers in the retail sector and the relative importance of the sector tend to promote symmetric farm–retail price transmission. The latter is also more likely in the presence of a strong processing industry.

“…In this section, we outline the classic model in agency theory (see Gibbons, 2005, for a recent discussion). The classic agency model has been widely applied to describe the contractual relationships between the various entrepreneurs in the supply chain of a traded commodity (see Sexton and Lavoie, 2001, for a survey). To derive the optimal hedge ratio, however, we extend the model by having the risk-averse entrepreneurs reduce their risk by hedging with futures contracts.…”

Section: Modelmentioning

confidence: 99%

Time‐varying Hedge Ratios: A Principal‐agent Approach

Kuwornu

Kuiper

Pennings

et al. 2005

We use the classic agency model to derive a time-varying optimal hedge ratio for low-frequency time-series data: the type of data used by crop farmers when deciding about production and about their hedging strategy. Rooted in the classic agency framework, the proposed hedge ratio reflects the context of both the crop farmer's decision and the crop farmer's contractual relationships in the marketing channel. An empirical illustration of the Dutch ware potato sector and its futures market in Amsterdam over the period 1971-2003 reveals that the time-varying optimal hedge ratio decreased from 0.34 in 1971 to 0.24 in 2003. The hedging effectiveness, according to this ratio, is 39%. These estimates conform better with farmers' interest in using futures contracts for hedging purposes than the much higher estimates obtained when price risk minimisation is the only objective considered. Copyright 2005 Blackwell Publishing Ltd.