A vertical coordination analysis of meat distribution in the food service industry
Authors:   , Jones Michael Alan 
Published: February 2025

The market channel for meat, after the packer stage, is divided into two basic alternate channels or segments. Of these two market channels, the largest consists of those meat products distributed for sale in retail grocery outlets. The smaller, which represents about one-third of the total dollar value of meat products sold, is made up of meat products which are sold to food service operations for away-from-home preparation and consumption. This is a study of the latter of these two market channels. The focus of the study is on firms in the final two stages of the food service market channel for meat, and the vertical coordination between these two stages. The first of these two stages, or sellers in this case, was designated the distribution stage. These intermediary firms purchase meat from packers, fabricate it, and process it if necessary, to the needs of food service users. They then serve as purveyors or suppliers to food service operations (restaurants, cafeterias, hospitals, etc.). The latter of the two stages, or buyers in this case, consists of the various types of food service operations who prepare and serve the meat. This study has two objectives. The first is to characterize the organization of the market, including structure and market channels, as well as to describe vertical coordination, behavior, and performance. The second objective is to test the hypothesis that a relationship exists between the degree of "tightness" of vertical coordination and economic efficiency. Primary data were collected through use of a questionnaire administered by personal interviews with relevant management personnel representing firms from both stages studied. Separate questionnaires were developed for each stage. A stratified random sample of observations was taken from those food service operations located in the Metropolitan Kansas City, Missouri, area. Almost the entire population of firms at the distributor stage was obtained in the sample. Regarding the horizontal structure of the market, it was concluded that both stages were characterized by monopolistic competition, however, features of oligopoly and pure competition were present. Participants were price-makers, products were differentiated, sellers were aware of the behavior of their competitors, and some degree of market concentration existed among sellers. Price inelasticity of demand was found to exist regarding individual sellers price actions. However, as in pure competition, many buyers existed meaning no particular one could exert a significant influence on the market. No domination existed among firms at either stage. Significant barriers to entry did not exist, and some degree of nonprice competition existed. A variety of types of vertical coordination exist in this market. Buyers range from small independent firms using market exchange as a means of coordination, to fully vertically integrated corporately owned "chain" operations. Between these extremes, coordination consists of contractual arrangements varying in type and degree of specification. As to the extent of vertical integration between the distributor-operator stages of the industry, this study indicated that not enough was present to have caused the market to deteriorate to an anticompetitive extent. Over half of the volume was transacted through competitive market exchange in what appeared to be a "healthy" market. Actually, a relatively small percent of meat was distributed through completely integrated firms. Contracts using formula pricing represented a relatively small portion of exchange, likewise. Regarding the second objective, an efficiency ratio was developed using time spent on the buying function per week and prices paid by buyers, to compare efficiency between three types of vertical coordination: market exchange, contractual integration of limited degree, and vertically integrated firms. To determine the existence of a relationship between type of coordination and efficiency, a regression model was used. The relative magnitudes of the efficiency coefficients generated for each of the three types of coordination supported the hypothesis. Though more efficiency was indicated for the two groups having tighter forms of coordination, a low significance level was not obtained, probably due to small sample size.