Vertical Integration in the Food Manufacturing Industry, 1967-1992

Abstract

This study uses Ordinary Least Squares (OLS), fixed effects, and random effects models to test the relationship between vertical integration and concentration ratios, demand growth, average firm size, and total factor productivity. The data set contained forty-one different food industries. Data at the four-digit industry level were from 1967 to 1992. The industries are those defined in the Standard Industrial Classification (SIC) and cover virtually the entire food manufacturing sector with the exception of a few excluded industries because of the unavailability of particular variables due to changes in industry classification. The objective of this study was to replicate the Levy (1984) model for the food manufacturing industry. The model presented in this study examines the quantitative relationship of concentration, industry growth, firm size, and total factor productivity on vertical integration in forty-one food manufacturing industries with data from 1967 through 1992. The fixed effects model was found to be a better prediction of vertical integration than the random effects model according to the Hausman test, whereas Levy’s study favors the random effects model. The results indicate that only total factor productivity is significant in both the fixed effects and the random effects models. Selected subsets of the food manufacturing industry also produced different results. While the vertical integration model of Levy (1984) should be applicable to all manufacturing industries, the present results suggest that it is not. The empirical results found here in the analysis of vertical integration in food manufacturing industries do not follow a common path. This finding calls into question Levy’s pooled data results. Levy’s results cannot be replicated with newer data and different industries. Finally, industry by industry analysis shows that there is considerably greater diversity in results than is even suggested by the fixed effects model. These results were not consistent with Stigler’s assertion that “the division of labor is limited by the extent of the market”.