Food Industry Management Article Review

As it stems from the article, food industry is characterized with both horizontal and vertical integration. Horizontal coordination/ integration means that companies, located at the same stage of supply chain, coordinate their activities (namely, economic stages of production and marketing) or even form corporate giants together. In turn, vertical coordination/integration takes place, when similar activities are performed by companies, located at the different levels of supply chain. An integration can be useful to increase technical efficiency (getting the most output from the unit of input), as well as economic efficiency (determining the most profitable level of output). Horizontal integration is also useful for exploiting the advantages of economies of scale. The reasons for vertical integration include unreliability of markets (“vertical market failure”), higher market powers of companies at a specific stages and artificial rising of barriers to entry. Importantly, both vertical and horizontal modes of coordination/integration are damaging for competition within an industry, especially from individual farmers; standpoint.
The vertical and horizontal coordination/integration have both positive and negative effects for consumers. On the one hand, these trends help to keep prices low due to significant effects of the economy of scale. On the other hand, consumers are deprived of the right to choose due to the lack of competition.
Transaction costs are the ones, concerned with an economic exchange. As proposed rules allow farmers to challenge big food processors in courts easily and eliminate inequality between large and small producers, the transaction costs of running horizontally and vertically integrated companies will rise due to two factors. Firstly, big food processors will become exposed to paying compensations to farmers. Secondly, they will not be granted more favourable conditions from packers. Thus, the changes will also make costs higher for consumers, allowing for more effective farmers’ participation at the market.