Transaction costs and vertical integration: An application to the Wine of Rioja

Marta Fernández-Olmos, Jorge Rosell-Martínez, Manuel A. Espitia-Escuer

Abstract

This article develops and tests a model of integration of the first stage of the wine value chain, i.e. the viticulture activity. The model, derived from the transaction cost analysis developed principally by Williamson, is formulated as a tobit function, which is estimated with data from the wine industry in the Rioja’s denomination of origin. The nature of the relationship between product quality and vertical integration is also established. Consistently with the transaction cost theory, integration is associated with increasing levels of asset specificity and uncertainty. Results also indicate that the winery size significantly affects make-buy choices. As expected, more vertical integration appears to be associated with higher product quality.

Keywords

Vertical integration; Wine industry; Transaction cost theory

Subject classification

L220, Q130.

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