Quality Signals and Agri-Food Chain Reactions

By Stefano Boccaletti Istituto di Economia Agro-Alimentare Universit Cattolica del S. Cuore 29100 Piacenza
sbocca@pc.unicatt.it

Tel: +39-0523-599228 Fax: +39-0523-599282 And Kostas Karantininis Department of Economics & Natural Resources The Royal Veterinary & Agricultural University (KVL) Rolighedsvej 23, DK-1958 Frederiksberg C Kbenhavn, DANMARK Tel: +45-3528-2276, Fax: -2295, Mob: +40-897237 e-mail: kok@kvl.dk, web: http://www.flec.kvl.dk/kok/

Keywords: Quality Assurance, PDO, Chain Organisation Summary In this paper we examine how dairy supply chains are organised in order to handle or as a response to quality signals. Several quality signals are examined, these include, PDO, private brands, and organic products. Several organisational forms and agri-food chain reactions are met in our 12 case studies from seven European countries. These organisations range from cooperatives, to private firms to umbrella organisations. They also include state agencies, as well as certification agencies. The variety of these organisational forms for similar types of quality signals, may appear paradoxical under the neoclassical lens, it is more normal however, if one adopts a broader institutional perspective.

Theoretical background Coase was probably the first to recognise that the way economic activities are organised relies on the level of transaction costs. This simple concept may help to understand why some transaction are governed by vertical integration, meanwhile at the other end of the possible organisational arrangements others are left to the marketplace. In particular, it is demonstrated that for a given transaction, the higher the transaction costs are, the higher is the degree of internalisation, i.e. of internal control operated by the firm. One of the key explanatory factors at the basis of the transaction costs theory is opportunism: without assetspecificity, Williamson (1985) argues that a market based governance structure would offer the necessary incentives to minimise costs; on the opposite, a fully internalised governance structure, such as vertical integration, would not offer the same incentives. In this case the problem of control at the different relevant stages becomes crucial for an efficient functioning of the structure. On the other hand, whenever idiosyncratic transaction-specific investments characterise the activity of the parties involved in the transaction, the possibility of ex post opportunistic behaviour arises, and then the market itself does not guarantee the solution to the hold-up problem typical of a double monopoly. Two possible solutions to the problem are vertical integration (Klein et al., 1978) or the design of complete contracts: the choice of either one or the other solution or an intermediate arrangement will depend on relevant economic factors such as economies of scale, product complexity, degree of asset specificity, ecc. In most cases, high specification costs make the writing of complete contracts rather unfeasible: they must guarantee that ex post parties earn a fair rate of return on their (specific) investments in order to promote ex ante those specific investments; but they must also guarantee ex post an efficient volume of trade therefore preventing monopolistic pricing behaviours. To give an example, whenever food products are differentiated and therefore rely on specific and uncertain quality characteristics, often referred to as experience or credence attributes (Nelson, 1970), then the definition of complete explicit contracts is impossible. If contracts are incomplete, then the parties may not have sufficient incentives for undertaking the necessary specific investments and final products may not fulfil the expected characteristics. Even in those cases where renegotiation is permitted, sub-optimal investments may still be a problem (Hart and Moore, 1988): ex post each party would try to appropriate the common surplus preventing the efficient realisation of trade. With these negative expectations, the necessary incentives for an efficient level of ex ante investments is missing. In this paper we examine the governance of contractual relations within the context of transaction costs economics, in particular of those transactions responsible for the achievement of proper quality standards in final products. We consider 12 case studies in the European dairy industry and we attempt to: - define the relevant stages for the definition of the specific product quality signalled by producers/organisations; - describe the transactions at each stage with particular emphasis on structure and contractual arrangements governing the transactions; - specify the transactions characteristics which may be thought to affect the type of governance structure chosen by the organisation within the framework of Williamsons transaction costs approach and further extensions offered in the literature. Williamsons model revisited Williamson (1986) defines a model which tries to explain which transactions are located where and what are the determinants of both different transaction types and locations. The model considers a three way classification of contracts: classical, neoclassical and relational categories of contract law.

Classical contracts. In these contracts, efficiency is achieved through the marketplace, which is able to coordinate prices and quantities of generally simple or standardised food and agricultural products, which can be defined as generic both in terms of supply and usage, i.e. with suppliers which are basically undifferentiated and with direct use or processing unspecific in terms of inputs (Williamson, 1989).. This arrangement characterised agricultural supplies in the past, but the change from a commodity-oriented food sector to a consumer oriented one has resulted in increasingly differentiated products, with profound modifications in the coordination activities (Streeter at al., 1991). Neoclassical contracts.In this case the principal has a strong interest in maintaining the relationship, but without the support of a third institutional party the transaction specific contractual costs may be very high. These contracts may for example refer to long term contracts involving some degree of asset specificity, where future contingencies are not identified and therefore where remedies and contractual adaptations are (imperfectly) implemented only when contingencies arise. In this case, simple classical contracting under a pure market governance structure would fail to offer the necessary provisions. The emerging governance structures may lead towards vertical integration or other contractual schemes which preserve trade between separate parties but provide for additional governance, i.e. with the intervention of a third party for arbitration. Clearly, with products showing increasing complexity, for example in terms of quality, such contractual schemes may become more and more incomplete, failing to guarantee the economic efficiency of the transaction. The possibility of existence of this type of contracts in the food industry is very much dependent on the institutional environment and on the regulations which characterise different food sectors. For example, whenever the evaluation costs of performance are very high and therefore some relevant clauses would not be included in contractual arrangements, the existence of a reliable third party offering its services in terms of product/process certification, assistance in disputes, etc., would make neoclassical contracting feasible. Relational contracts. As the degree of asset specificity, contract length and complexity increase even further, then transaction specific costly contractual arrangements tend to emerge. In this case, relational contracts imply a sort of continuous adaptation to the characteristics of the relationship, while in the previous case neoclassical contracts referred to the original agreement. These contracts imply either bilateral governance structures, where the autonomy of the parties is maintained and transactions are coordinated using explicit contracts, or unified fully integrated governance structures (vertical integration), where the parties merge into a unified governance structure. Summarizing, Williamson identifies three types of governance structures, each one attached to one of the contract types defined above: non transaction specific (classical contracts), semi-specific (neoclassical contracts) and highly specific (relational contracts). Moreover, the choice of the adequate form of governance structure depends on three main transactional parameters: uncertainty, frequency of transactions (occasional or recurrent) and investments specificity1 (specific, mixed, non specific). Whenever transactions involve non specific investments, as for example in the case of standardised products, the specific identity of the traders is not relevant: alternative buyers and sellers can be easily found and the coordination offered by market prices is enough to preserve from opportunism, both with occasional or recurrent transactions. On the other hand when some kind of specificity in the investments is required in order the transaction to be accomplished on an occasional basis, then the high set up costs that a highly specific government structure would involve cannot be supported. In this case neoclassical contracts represent the feasible instrument to ensure the continuity of the transaction. Following the traditional transaction costs approach, costs from implementation of highly specific governance structures, either bilateral or unified, can be cut down only with recurrent transactions. Uncertainty is also very important in affecting governance structures, even though Williamson did not include it directly in its matrix. He claims that when investments are mixed or idiosyncratic, as uncertainty increases, for example when transactions include a rather complex definition of quality: - for occasional non-standard transactions, negotiations rely on more elaborate arbitration systems; - for recurrent transactions, bilateral governance structures are replaced with unified ones.
1

Asset specificity refers to: site specificity, such as successive production stations; physical asset specificity, such as product specific equipments/plants; human asset specificity, stemming from learning by doing; dedicated assets, referred to discrete investments in unspecific plants; brand name capital (Williamson, 1989).

Another relevant variable interacting with those considered in Williamsons heuristic model, is trust, even though he recognises its importance. The relationship with the other variables could be heavily modified. In particular, whenever trust is the result of long term relationships, parties have an incentive to economise on governance (Dasgupta, 1988). In other words, heavy investments in bilateral trust may imply high exit costs from the transaction: to initiate a new relationship could result in new investments in trust and in a more complex governance structure for the parties involved, i.e. higher transaction costs. Whenever trust is present, relatively simple governance structures could do the job even with specific assets and relatively complex transactions. Contingencies may not be included in explicit contracts but instead could be part of informal implicit contracts. The fact that trust is built up over time makes the past length of the relationship an important proxy for it, but some authors (Heide and John, 1990) show that it is the expectation of long term commitment rather then past trading that matters in the degree of cooperation between parties. The shortcoming of the transaction costs approach is that it considers the minimisation of transaction costs as the only determinant of the type of governance structure, while the reality is way more complex and several other explanatory variables can be added to those identified above. Referring for example to agency theory, two relevant problems in a contractual relationship are adverse selection and moral hazard, and both these problems are particularly relevant in agro-food sectors. The first arises from the information asymmetry that usually characterises the parties involved in a contractual relationship, while the second originates from the difficulties that the principal has in observing the agents behaviour, i.e. from the possibility of a sub-optimal degree of effort (Milgrom and Roberts, 1992). In order to give a dimension to these two negative effects, the organisational approach to control suggests two possible measures (Eisenhardt, 1989): - the assessment of the agents behaviour (task programmability); - the assessment of outcomes (task separability). The first identifies the principals ability to read the activities operated by the agents directly, i.e. how the agent is doing his job. A high level of programmability indicates that a transaction is well understood by all parties and often repeated. In this case, the relationship does not require intense discussion and negotiations and it will be easily accomplished by impersonal coordination mechanisms. Therefore higher programmability means lower coordination requirements. The second refers to the analysis of the activities, i.e. to the possibility to infer from the outcome how things were carried out by the agent. Therefore, it shows the ability to determine and measure the value of the contribution of each agent and thus the reward that should be given to each participant in the transaction. Also higher separability means lower coordination requirements. If the principal has the capability to carry out both these activities at a good extent, then the problem of control arising from information asymmetries could be solved and the resort to complex governance structures unnecessary. Mahoney (1992) proposes a theoretical framework which merges both transaction costs from Williamsons approach and measurement costs from the agency approach. He excludes frequency based on the fact that when asset specificity is either high or low, the effect of frequency on governance structure is indeterminate. Moreover, also external uncertainties have an unclear effect on governance structure. The matrix he proposes includes three variables, asset specificity, task programmability and task separability, and allows for six different forms of vertical coordination: Spot market, relational contract, long term contract, clan, joint venture, hierarchy. Differentiation strategies in the European dairy industry The crucial factors for the determination of final quality are milk characteristics and processing methods. Uncertainty about possible contingencies stems directly from the degree of information asymmetry regarding quality at these stages. When quality depends on a high number of attributes which are either difficult to monitor or show high monitoring costs, then the outcome from the transaction becomes uncertain and opportunistic behaviours may result in moral hazard problems. The solution to these problems implies either costly governance structures or intervention by third parties. Vertical integration represents a potential solution, but its implementation costs are usually very high when it involves the agricultural production stage, due to some peculiar characteristics of agriculture: the atomistic structure, limited economies of scale, biological production processes, necessity of particular managerial capabilities, high value of land, etc. For these reasons processors try to avoid direct control of agricultural activities, instead contractual arrangements are usually defined, and the resort to external

certification and control bodies may reinforce the implementation of such contracts. In cheese production deliveries are usually recurrent, so frequency does not seem to be a relevant explanatory variable at least in this phase. The main characteristic of non industrial processed foods such as the cheese products considered in our analysis is that product differentiation within the same product group is generally quite difficult. In fact, the degree of product substitution in a fairly competitive market is very high and therefore the specification of a particular quality standard relies on two main factors: the definition of an institutional quality level usually linked to the geographical origin of the product, protected by law from external free riding behaviours, or investments in reputation by individual producers, usually sufficiently large size so that they can make the necessary investments in reputation, with the development of a firm specific quality usually signalled by means of registered trademarks. These two factors allow the definition of three strategic groups of firms/organisations depending on their quality differentiation strategies: - Firms differentiating through collective brands such as PDOs2; - Firms differentiating with their own brands/trademarks; - Firms differentiating with both collective and own brands. The cases included in this study can be classified into these three strategic groups. Designations of origin and other collective institutional quality signals. Collective reputation through designations of origin is common for traditional dairy products and allows to build a collective reputation for all the producers entitled to use a common commercial name which indicates the geographical provenience of the products. Clearly, in this case the objective of the governance structures which assure the final product quality has to undertake two main tasks: - to provide the necessary level for those quality characteristics which make the differentiation possible. For PDO products these characteristics are related to the geographical area where the production process takes place. The crucial stages refer to the supply of raw milk to processors and the supply of intermediate products at different levels along the production process. For these purposes, the dimension of the governance structure is essentially vertical either through direct vertical integration or explicit contractual arrangements. - To offer an adequate control system in order for the collective quality reputation to be maintained trough time, i.e. to avoid free-riding behaviours. Therefore, it is of great importance to define a proper governance structure in terms of horizontal relationship among producers of the same quality. This particular task is peculiar for production systems where the main objective is the preservation of a collective reputation. Trademarks and other company specific brands/marks. The name of the product represents a halo that summarises the specific quality characteristics which are intended to make the product different from competitors. The idea is to build specific reputation through intangible investments aimed to increase the product value perceived by final consumers. In this case, similarly to the previous one, the relevant stages for quality differentiation are the relationship with the supply of raw materials and the other intermediate stages along the production process. On the other side, the problem of free riding does not show an horizontal dimension, even though some sort of opportunistic behaviours can still be a problem in vertical transactions. Collective and own brands/marks. In this case, the purpose is to position the product at a usually higher quality level with respect to the other products which benefit from the same collective reputation. For example, within a particular designation of origin, a firm could decide to develop a biological version of the product or could use its own umbrella brand to accrue reputation regarding particular quality aspects, i.e. food safety. Firms become mainly interested in the reputation built on their own brands, which gives non collective direct benefits independently from the behaviour of the other producers. Determinants of governance structures for quality The choice of a particular organisational arrangement to govern quality depends on three main factors: complexity of quality signals, which reflects the idea of quality that producers intend to signal to users/final consumers, asset specificity, which includes all those assets that allow producers to achieve the final quality, i.e. specific to a particular target product, degree of moral hazard resulting from the information asymmetries in relevant transactions.
2

Council Reg. (EEC) N. 2081/92, 14 July 1992.

Complexity of the quality signal(s). In all cases, the degree of complexity of the final quality level to be achieved could be thought to be responsible for the adoption of different governance structures. In particular, two will be the dimensions directly related to governance structures: - The degree of uncertainty of the quality attributes, for example how easy will be for buyers to observe and detect the level of effort that seller put in for assuring the pre-defined quality standards, which is directly related to the type of attributes involved in the definition of quality. If monitoring costs for relevant attributes are high, then stricter governance structures will be necessary. - Which parties are mainly in control of the relevant attributes: if the quality of raw materials is important, then the (external) governance of supplies becomes crucial, while if attributes are directly controlled within the buying company, the priority goes to internal governance. Asset specificity. This variable is directly related to the type of quality signals implemented. With collective institutional brands we basically have four types of specific assets: human, site physical and brand capital. The first refers to the knowledge of traditional production methods which represents a specific asset resulting from a learning by doing historical process inherited generation after generation. No other workers can guarantee the preservation of these traditional methods and therefore the quality of final products is strictly dependent on this specific asset. Site specificity refers to specific local conditions for production: usually, the quality of products with designations of origin cannot be replicated outside the area especially if origin itself is a quality indicator to final consumers. Moreover, following the original Williamsons idea, the nearby location of raw material suppliers and processors allows to economize in terms of transaction costs such as transportation costs. Physical specificity of the traditional production assets is another important constraint: these products are obtained using traditional techniques and equipment specifically developed for these products during the years: the possibility of transferring the same technology on other productions is very limited. With firm specific trademarks, asset specificity is mainly due to physical specificity and brand name capital. The adoption of technologies functional to the quality of final products may constraint companies to adopt governance structures which assure for example particular quality standards for raw materials. Heavy intangible investments on the trademark may also constrain the firm to adopt a proper structure for governing quality: the risk involved if the effective quality perceived by final consumers is not in line with the quality signalled is directly related to the amount of these investments. Moreover, in order for these costs to be recovered in the long run, the firm must be able to impose a price premium on the product, and this capability relies on the possibility of extracting a higher willingness to pay from consumers, which originates from a higher marginal utility, i.e. from a compatibility between signalled and perceived quality. In the third case, when both signals characterise the product, all the specific assets described above may be present at the same time. Task programmability and task separability. Also in this case there is a substantial difference in the three quality signalling situations. In the case of collective brands, there are two problems in the task programmability of those activities contributing to final quality. The first is related to the vertical transactions of raw materials and intermediate goods: the capability to observe the degree of effort that agents put in their activity can be rather low for those activities distant from the principal: a cheese maker may not be able to directly monitor and control the behaviour of milk suppliers simply relying on spot markets, i.e. without some sort of vertical contracting and proper control structures. Task separability could be possible if the relevant quality parameters of raw materials such as milk, which represent the outcome of suppliers, were measurable by buyers easily and at low cost. The second problem is related to the fact that task programmability within the group of companies using the collective brand is generally quite low and free-riding behaviours may emerge, due to the presence of a large number of producers using a collective mark with individual benefits not directly related with individual efforts. The relatively small size of producers generally prevents also the possibility of measuring individual outcomes, with the result of a low task separability. Also in this case a proper governance structure with a system of incentives is necessary to reduce transaction costs. With individual trademarks, the problem of task programmability for suppliers of raw materials is still present, and also worsened by the fact that suppliers may have more selling alternatives than in the collective brand case. In fact, milk producers within the area characterising the collective brand have an incentive to sell to producers in that area, because of the site specific asset, but this is not true for

trademarks not directly linked to geographical areas. Therefore, traditional markets may work only if the final quality signalled by the trademark depends mainly on the processing phase and not on the characteristics of raw materials. If this is the case, opportunistic behaviours leading to low task programmability may still be present within the processing phase: to avoid high transaction costs firms may have an incentive to adopt quality systems such as HACCP or ISO 9000 procedures. The empirical analysis The questionnaires used dealt directly with all the variables which represent the main characteristics of negotiations at the relevant stages for the definition of final quality, such as asset specificity and frequency of transactions. They also allowed to infer the degree of uncertainty affecting transaction, i.e. the possibility of gaps between contracts and effective specifications. As we mentioned before, the cases have been classified in three groups depending on the differentiation strategies adopted. Table 1 summarizes the characteristics of the 12 cases included in the analysis. First strategic group: organisations signalling quality with collective brands In the cheese sector collective brands refer essentially to Protected Designations of Origin (PDO). The five PDOs included are: Parmigiano Reggiano (Italy), Cantal (France), Comt (France), Stilton (UK) and Kourellas (Greece). In all cases the owner of the collective brand is an external non-commercial organisation with the following main activities: - quality control at all stages along the chain; - technical assistance to producers; - promote the product and facilitate demand/supply equilibrium. The existence of such a third party improves the coordination of the production chain and reduces the necessity of complex and burdensome governance structures. The attributes signalled refer to traditional methods, origin and specific sensorial quality. The idea of quality resulting from these attributes is not particularly complex, but its variability may represent a problem. Stage 1: relationship between milk suppliers and processors. Milk producers are often members of processing cooperatives. The governance structure can be referred to a bilateral relational contract, but in most cases with the supervision of the external organisation. Contractual clauses include the specification and respect of a quality protocol, the definition of prices and a system of penalties-incentives as well as a system of controls. This contractual form allows to reduce moral hazard problems especially for those attributes which cannot be directly measured on the milk delivered and the technical assistance provided by the organisation helps farmers to keep up with the evolving characteristics of final products. Systematic on-farm controls operated both by the processing coops and the organisation make sure that farmers follow the production protocol especially in terms of animal feeding. The membership to the coop is usually a long-run relationship, and the trust built between farmers and cooperative reduces the necessity to resort to penalties or exclusion. This is particularly true for small cooperatives relying on milk producers located in a very narrow area and therefore with high site specificity, which obliges farmers to fulfil the processors requirements. When particular quality attributes are required, formal certification procedures guarantee that farmers followed proper production techniques: a common example is the organic version of a PDO product, where an external certification body defines the production protocol and the necessary controls and often defines also contracts with animal feed producers, a critical input in the organic milk production. Stage 2: relationships among processing phases The problem of free riding becomes crucial at this stage: the governance structure has the objective of minimising these problems. The high variability of final quality, the high value of asset specificity, especially in terms of collective name capital impose the adoption of complex governance structures, either bilateral contracts or vertical integration (VI). In the first case contract specifications include price/quality incentive grids, buying/selling commitments. These contractual schemes characterise the relationships for example between first level processors and second level processors/ripeners. Controls at all stages are operated by the external organisation. The presence of the external organisation allows the coexistence of bilateral contracts and VI. Clearly, without an overall quality and coordination control system the extremely high transaction costs for the assurance of the target quality would probably lead to market failures and therefore to adverse selection.

One case, Veenweide/Wildeweide (The Netherlands), refers to a collective brand not related to the geographical origin of the product. The relationship of processors with suppliers is characterised by implicit (oral) contracts: control on milk quality is a sufficient mechanism to limit opportunistic behaviours. Moreover, site specificity is also an incentive for farmers to adhere to the processors specifications. Only for organic producers a written contract with an external certification body specifies the production protocol. In this case milk production becomes crucial for the definition of organic cheese quality and the external certification body solves the moral hazard problem. At the farm level, animal feeding is the critical transaction for the production of organic milk and therefore the certification body defines contracts with feed suppliers. In the other cases the relevant stage for the assurance of final quality is the processing phase. The supervising organisation in charge of the collective brand management defines licenses individual processors to use the brand under strict control procedures, with contracts tacitly renewed every year. In this case, asset specificity mainly refers to collective brand capital but also site specificity in terms of location nearby the processing plants plays an important role. The contractual relationship governing the relevant stages is comparable to the PDO case: also in this case the organisation in charge of the collective brand offers an efficient quality control system in order to avoid free-riding behaviours which characterise collective reputation. Second strategic group: producers signal quality with individual brands Three cooperatives, Alfuegal Pitu (Spain), Bauermarkt Chiemgau (Germany) and Molkereigenosssenschaft (Germany) base their differentiation strategies on own brands. The main attributes signalled to consumers usually refer to superior overall sensorial quality, safety (organic production), regional origin. The main quality signal is an umbrella brand, but further certification marks are added in order to signal credence attributes such as safety or organic production. Stage 1: relationship between milk suppliers and processors Generally, milk quality specifications are achieved through membership of farmers in a cooperative: they agree to produce according with protocols defined on the basis of a quality target. Penalties represent an incentive to respect the contract. Whenever particular quality attributes are required in the milk supplies, for example organic production or other ecological techniques, external bodies provide the necessary certification and the possible moral hazard problem is therefore solved through in-field control. Stage 2: relationships among processing phases Processing phases are usually linked to each other with strict relational contracts, which define the processing techniques and specifications. The relationship between cooperatives at different levels is very close to a completely vertically integrated system: such a governance structure allows a substantial reduction of transaction costs in presence of high asset specificity and potential opportunistic behaviours, i.e. with low task separability and task programmability. Moreover, cooperation offers a very flexible instrument for coordination when the size of production units is very different at different stages along the chain, i.e. when the minimum efficient scale of production is different. Whenever internal control of production phases causes transaction costs to increase, external certification bodies are involved, such as in the case of HACCP adoption for safety and ISO 9000 procedures for quality system certification. Third strategic group: producers signal quality with both collective and individual brands Sometimes processors add further asset specificity on brand capital in order to individually differentiate the product: in this case two quality signals coexist, one indicating a sort of minimum quality standard common to all PDO products, the other signalling some above average characteristics of the product. In this group we include three cases, Epirus Dodoni SA (Greece), West Country Farmhouse Cheddar (UK), North Holland Gouda cheese (Netherlands), all cooperatives, where a registered trademark and a PDO are both signalling quality at the same time, but apparently with the prevalence of the first one. In other words, producers differentiate their product from the collective reputation resulting from the geographical location. Individual reputation is obtained with promotional intangible investments on the trademark which increase asset specificity. This implies that final products must have a quality specificity compared to the rest of PDO products. Stage 1: relationship between milk suppliers and processors In order to achieve such a specificity producers usually control very carefully the quality of raw milk. Milk supplies are regulated through written long-medium run contracts or vertical integration. Compared to the previous strategic groups, the definition of more complex quality specifications can be supported only with strict relational contracts and sometimes with vertical integration: a detailed system of

penalties/incentives allows to control the milk standards and external bodies may provide certification for those quality characteristics regulated by law, such as organic production. Stage 2: relationships among processing phases The processing phase is also critical: processing cooperative are usually vertically integrated within the commercial cooperative. Particular attributes such as safety are guaranteed through external bodies. Certification of the quality system includes adoption of HACCP and ISO certification in order to avoid opportunism, problems from bounded rationality and also other technical inefficiencies. Overall, this group seems to adopt more integrated governance structures with respect to the previous one, and the main reason is probably the higher degree of asset specificity and complexity of the quality signal. In order to position their production differently from the PDO definition the owners of the trademark must increase the standards. This implies complex contractual arrangements, and the risk of market failure is reduced through vertical integration. If a market failure should happen, it would be for example difficult for a firm to recover from the heavy loss caused by the use of very specific assets.

References Coase, R. 1960. The problem of social cost, Journal of Law and Economics, vol. 3, n. 1. Dasgupta, P. 1988. Trust as a commodity, in: Gambetta D. ed., Trust, Making and Breaking of Cooperative Relations, Oxford, Blackwell. Eisenhardt, K. 1989. Agency theory: An assessment an review, Academy of Management Review, vol. 14, n. 1, pp. 57-74. Hart, O. and Moore, J. 1988. Incomplete contracts and renegotiation, Econometrica, vol. 56, pp. 755-786. Heide, J.B. and John, G. 1990. Alliances in industrial purchases: the determinants of joint action in buyersupplier relationship, Journal of Marketing Research, vol. 27, pp. 24-36. Klein, B., Crawford, R. and Alchian, A. 1978. Vertical integration, appropriable rents, and the competitive contracting process, Journal of Law and Economics, vol. 21, pp. 297-326. Mahoney J.T., 1992. The choice of organizational form: Vertical financial ownership versus other methods of vertical integration, Strategic Management Journal, vol. 13, pp. 559-584. Milgrom, P. and Roberts, J. 1992. Economics, Organisation and Management, Englewood Cliffs, Prentice Hall. Nelson, P. 1970. Information and consumer behavior, Journal of Political Economy, vol. 78, pp. 311-329. Streeter, D., Sonka, S. and Hudson, M. 1991. Information technology, coordination, and competitiveness in the food and agribusiness sector, American Journal of Agricultural Economics, vol. 73, n.5, pp. 1465-1471. Williamson. O.E. 1985. The economic institutions of capitalism, New York, The Free Press. Williamson O.E. 1986. Economic Organisation: Firms, markets, and Policy Control, New York, Harvester Wheatsheaf. Williamson, O.E. 1989. Transaction cost economics, in: Handbook of Industrial Organisation, Schmalensee R. and Willig R.D. eds., North Holland, pp. 135-182.

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Table 1 Summary of cases

Quality signal - Legal form of the owner - Main activity of the organization Cantal Union of denomination Guaranty of quality; list of specification ; rpomotion and protection ; monitoring ; Conflicts'resolution Cantal cheese 1980 700 Millions FF 17735 T en 1997 Official quality signal AOC, AOP Yes (National level : AOC ; European level : AOP) - Geographical origin - Transformation methods Comt Union of denomination Guaranty of quality; list of specification ; rpomotion and protection ; monitoring ; Conflicts'resolution Comt cheese 1976 43000 T en 1997 Official quality signal AOC, AOP Yes (National level : AOC ; European Level : AOP) - Geographical origin - Transformation methods 78.000.000 euro (1998) Private brand name Yes: PDO Traditional production of milk Certain processing method Organoleptic characteristics of final product Geographical mountainous origin Certain taste Cooperative organisation and State Cooperative organisation International International 8% of feta cheese in Greece 10% of feta cheese in EU Market share has increased 5% There is no formal evaluation 1.382.353 euro (1998) Private brand name KOURELLAS Yes: PDO Transformation process Geographical mountainous origin Defined organoleptic quality BIOVERDE YES: agricultural biological certification - absence of pesticide residuals - transformation process - health quality according to biological production method Dodoni Cooperative organisation Feta cheese production Kourellas Private S.A. firm Processing of milk

- Main product(s) - Date of creation of the organization - Size of the organization (turnover) - Type of quality signal(s) - Has the signal been homologated ? - What does the quality sign intend to guarantee ?

Feta cheese

Feta cheese (75%) and biological feta cheese (25%)

- Who is/are the owner(s) of the quality signal ? - Who is/are the user(s) of the quality signal - At what scale is the product know ? - At what scale is the product distributed ? - What are the market shares of the main products? - Growth of the market share in the past 5 years - Evaluation of the quality signal

State "Association" of producers National level National level 8,9% of PDO cheese 8,4% of uncooked cheese Yes

State "Association" of producers National level National level 15 % cooked cheese 40 % PDO Cheese + 19,2 % Yes

Firm and State Firm European European Market share has increased 5% There is no formal evaluation

ISANA(German distributor) and Firm ISANA(German distributor) and Firm European European Market share has increased 10-15% There is no formal evaluation

Table 1 (contn)
Quality signal - Legal form of the owner - Main activity of the organization Molkereigenosssenschaft cooperative marketing association production of cheese Bauernmarkt Chiemgau cooperative production and marketing of organic cheese products several kinds of cheese 1988 ? Individual brand name No - geographic origin - farming methods Consortium of Protection of Parmigiano Reggiano Consortium (voluntary association) of producers Guarantee product quality, protection and promotion of the Parmigiano-Reggiano PDO Hard cheese 1934 1500 billions LIR Collective brand name (official PDO certification) Yes (PDO) - Geographic origin - Specific quality attributes (production methods) NH Gouda Veenweide/Wildeweide Afuegal Pitu Producers association (suppliers, producers) List of specifications, monitoring, disciplinary measures and promotion Fresh cheese 1991 1,000,000 Collective brand name No

Co-operative Production of cheese

Producers association/Foundation Production of regional products Gouda (Farm) Cheese 1991 5 million guilders Collective brand name Yes (national) Geographical origin Environment

- Main product(s) - Date of creation of the organization - Size of the organization (turnover) - Type of quality signal(s) - Has the signal(s) been homologated ? - What does the quality sign intend to guarantee ?

Tilsister cheese 1938 45 millions DM (1991) - Individual Brand Name - CMA quality label - Label of regional origin Yes at the national level (for label of regional origin - geographic origin - regional speciality premium product

Cheese 1913 300 million guilders PDO and private brand Yes (national: PDO) Geographical origin Characteristic taste

Satisfaction (organoleptic features)

- Geographical origin controlled - Transformation process controlled State Producers and distributors National level National level 0.37% (out of fresh cheese) 0.10% (out of cheese) 300% -

- Who is/are the owner of the quality signal ? - Who is/are the users of the quality signal - At what scale is the product know ? - At what scale is the product distributed ? - What are the market shares of the main products? - Growth of the market share in the past 5 years - Evaluation of the quality signal

- processor - "association" of producers (10 dairies) - processor - "association" of producers regional level mainly local and national

"Association" of producers (70 organic farmers) "Association" of producers local level local level

Consortium Processors International level International level 51 % of total Italian parmesan market 0-5 % Yes (market research)

Co-operative Co-operative International level International 1-3% (of the total cheese market) 5% Consumer and market research done by the cooperative

Producers' association/Foundation Producers' association and producers International level International <1% <5% Consumer and market research by Wageningen University

20% (Tilsiter) 0-5 % yes

0-5 % 5-10 % No

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Table 1 (contn)
Quality signal Legal form of the organisation Main activity of the organisation Main products Size of the organisation (turnover) Type of quality signal Is the product awarded formal quality certification? What does the quality signal intend to guarantee Stilton cheese Producers association (Stilton Cheese Makers Association) Promotion of Stilton cheese Stilton cheese 6 producers Collective trade mark Yes: PDO Geographic origin Production methods Distinctive organoleptic characteristics Producers association and State Producers part of the association International International, with largest market in the UK, but export to EU, USA, Canada, Soth Africa, Australia and New Zealand 1.5-2% of total UK cheese market Market share has remained fairly stable Consumer and market research are responsibility of the producers association West Country Farmhouse Cheddar Producers association (Farmhouse Cheesemakers Ltd) Marketing of farmhouse cheddar Farmhouse cheddar 11 producers Collective brand Yes: PDO Geographic origin Production methods Distinctive organoleptic characteristics Producers association and State Producers associated to Farmhouse Cheesemakers Ltd. National National (little export to EU)

Who is the owner of the quality signal? Who is the user of the quality signal? At what scale is the product known? At what scale is the product distributed?

What is the market share of the main product/s? Change in the market share during past 5 years Evaluation of the quality signal

Appx. 3% of total UK cheese market Market share has decreased Research commissioned to Mendip Dairy Crest (large UK creamery)

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