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Vertical coordination in the agro-food sector is defined to include all transactional practices that tie price and output decisions among enterprises at the various stages from upstream basic producers, downstream to final consumers. These practices are typed by governance structure and ranked by the extent to which vertically interdependent entities behave independently or in concert. Vertical coordination within the sector appears to be trending toward structures with greater degrees of vertical control and proportionately less use of arm's length spot market transactions. Vertical control can be motivated by high transactions costs and intra-sector externalities such as double marginalization. Under a variety of imperfectly competitive market conditions, vertical ties can result in welfare-enhancing market impacts. Further, vertical ties can mitigate the diminishing effects of imperfect competition on agricultural policy reform. However, the choice between vertical contract or integration may depend upon the nature of strategic interaction between rival firms. In the light of this analysis, it may be appropriate to reexamine the rationale for competition policies that restrict vertical integration and the use of vertical contracts.


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