QUALITY ASSURANCE MECHANISMS IN THE AGRIFOOD SECTOR

31 Pages·2001·0.55 MB·English

by  Carmen Menendez Lopez

QUALITY ASSURANCE MECHANISMS IN THE AGRIFOOD SECTOR: THE
MEAT SECTOR CASE (cid:1)
Marta Fernández Barcala (UNIVERSITY OF OVIEDO)
Manuel González Díaz (UNIVERSITY OF OVIEDO)
Economics Faculty, Avda. del Cristo s/n, 33071 Oviedo
[email protected]
[email protected]
Benito Arruñada Sánchez (POMPEU FABRA UNIVERSITY)
Economics Faculty, C/Ramon Trias Fargas, 25-27, 08005 Barcelona
[email protected]

ABSTRACT
This research studies the organization of quality brand names —both private and
geographical indicators— in Agri-food. In order to do that, six# of the biggest fresh meat
brand names, representing the #65% of high quality fresh meat, were analyzed in depth.
The main conclusions drawn from this are, on the one side, that the coexistence of several
quality indicators for the same product is not redundant. They are complementary due to
each one’s specialization in guaranteeing different attributes of the product. On the other
side, the organizing method varies according to the kind of brand. Thus, the geographical
indicators are based more on the market since they offer more intensive incentives, whereas
the private brands are similar to a hierarchy in order to take advantage of their superiority in
solving specific coordination problems (design attributes).

Key words: quality, brands, fresh meat, organizational structures, contracts.

(cid:1)
The authors thank the collaboration of Eduardo Melero, Neus Palomeras, Roberto Sánchez and Luis
Vázquez in gathering part of this information. Furthermore, we also thank the financing obtained from the
European Union and the Dirección General de Investigación (General Research Department) through the
FAIR PL98-4404 and the SEC-99-1191-C02-02 projects, respectively.
QUALITY ASSURANCE MECHANISMS IN THE AGRIFOOD SECTOR:
THE MEAT SECTOR CASE
1. Introduction
Although fresh meat has traditionally been sold mainly without a brand, nowadays
we see that some products have as many as three indicators referring to their origin and
quality. It seems, therefore, that brands have replaced the traditional butcher’s role in
guaranteeing meat quality with his own reputation. That reference loss is probably due to
the increase in the cost of opportunity of the traditional housewife (owing to her
incorporation to the labor market) and to the consequent change in shopping habits. Thus,
consumers now concentrate their shopping more in a temporal as well as spatial sense,
adapting more to the supermarket and hypermarket model than to the traditional butcher1.
As a consequence, brands has become the only available reference for the consumer in
guaranteeing meat’s origin and quality, starting a real movement toward the establishment
of new brands.
Likewise, the creation of brands has been accelerated by the events occurring during
the last few years in the sales sector of fresh meat. The “mad cows”, the “Belgiam
chickens” or the “foot-and-mouth disease fever” are just some of the terms which Spanish
consumers associate with fraud in meat products in the last five years. The economic effect
in Spain has been a progressive reduction in the consumption of meat of certain species
since the beginning of the nineties. Thus, from 1994 to 1999, the total fresh meat
consumption has increased by 1.4%, but the beef (9%) and the chicken (7%) consumption
have significantly decreased2.

1 In 1994, purchases of fresh meat in major retail outlets (supermarkets and hypermarkets) were at 47.85%,
rising to 49.19% in 1999. Likewise, shopping in traditional shops decreased in the same period from 41.26%
to 38.27% (MAYPA, 2000, p. 207). The same tendencies have been maintained since the eighties.
2 MAPYA (2000, pages 59-60).
1
The movement of brand establishment has basically given rise to the development
of two brands in the fresh meat sector. On the one side, companies of a certain size have
developed their own brands (private), guaranteeing the marketed product with their own
reputation. On the other, the use of geographical indicators has spread. Protected by a
“public” guarantee, these brands refer to specific geographical spheres and/or production
methods related to a superior product quality. Such is the case of the Protected
Denominations of Origin (PDO), the Protected Geographical Indicators (PGI), the
Guaranteed Traditional Specialties (GTS) and the Guarantees of Quality. Except for the
GTS, all of them refer to a certain extent, to the geographical origin of the product. The
European Union recognizes those products that have some kind of geographical name at a
national level as Registered Denomination products3.
After this initial introductory section, this study is organized as follows: first we
describe the typical problems and solutions involved in guranteeing the quality of products.
The hypotheses of the study are then established, focusing on complementarities and
specialization of different brands, as well as on the coherence between the mechanisms of
governance and the types of brands. The third section describes the cases used to contrast
the hypotheses presented, two of them referring to geographical indicators and another
focusing on a private brand. The hypotheses are discussed in a fourth section from a
perspective based on the New Institutional Economics, emphasizing the extent to which the
analyzed cases are coherent with them. Finally, we present some brief conclusions.

3 The process undergone by a hypothetical product with denomination could be as follows: an Autonomous
Region grants the Quality Denomination. The product is therefore accepted within the regional territory. As
long as the product is suitable, the Autonomous Region proposes it as a Specific Denomination or as
Denomination of Origin, depending on the nature of the product, being confirmed by the Ministerio de
Agricultura, Pesca y Alimentación (Ministry of Agriculture, Fisheries and Food). In this case, the product is
accepted at both the national and international levels. To be a product with a Specific Denomination or
Denomination of Origin, the product does not have to have first been a product with a Quality Denomination.
The products recognized by the Spanish nation are also recognized by the EU as products with a Protected
Geographical Indicator, Protected Denomination of Origin or Guaranteed Traditional Specialty.
2
2. Quality Guarantee Problems
The problem of quality lies in the fact that the consumer cannot always determine
the quality level of a product before purchasing it. This information asymmetry gives rise to
the risk of opportunism or deception on the part of the salesman and makes the consumer
distrust the product, which can even prevent the transaction from taking place4. The
intensity of this problem depends on the characteristics of the product. On this subject, we
have identified three types of product attributes that determine their potential controversial
nature5. Search attributes are those that the consumer can determine before purchasing
(observing if the product has them or not), by means of a process of searching for and
comparing the necessary information (for example, meat color). Experience attributes are
those with which the consumer can determine the product’s real quality only once he has
used or consumed it (for example, meat tenderness). Finally, there is a third category,
credence attributes, which are those in which the consumer cannot determine the real
quality level or, at the very best, can do so in the long run (for example, the effect that meat
consumption has on one’s health). Of course, the larger the proportion of attributes of the
last two categories is to the total attributes the consumer considers, the bigger will be the
information asymmetry problem as regards quality and the more interested the producer
will be in demonstrating the product’s real quality.
On the other hand, the information asymmetry of a product’s quality presents two
possible origins or dimensions: the average or expected quality of a producer or brand and
the deviation of each product from that average value. The first one refers to the qualities
consumers notice in the different attributes that form the product and the way they value
them. This is the so-called subjective or design quality and is related to the degree to which
they satisfy the customer’s preferences6. They usually coincide with the more limited and
difficult-to-obtain attributes, at least among regular or experienced consumers. Agrifood
products are no exception, and although it is commonly said that “there is no accounting for

4 See, for example, Akerlof´s classic work (1970).
5 See Nelson (1970) and Darby and Karni (1973)
6 See Edwards (1968)
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taste”, consumer preferences are far from being by chance, usually concentrating on well
known and defined organoleptic characteristics.
The second dimension refers to the heterogeneity between products of the same
producer, or protected by the same brand. It is a quality related to the degree to which the
preestablished design conditions are observed, which is called objective or accordance
quality7. In the agrifood sector, these aspects are not traditionally of concern, and are more
typical of industrial products than of agricultural or cattle products. However, the success
of products considered as low-quality at first but very homogeneous, such as hamburgers
and sausages, show the importance that the consumer of foodstuffs gives to being sure
about the quality of the products purchased, regardless of the organoleptic attributes.
Nevertheless, this difficulty has a technological origin since we do not know how the
different variables affect the final quality of the product. This makes heterogeneity one of
the main concerns for producers.
2.1. A Solution Based on Reputation
The most frequent solution in solving the problems caused by the informational
asymmetry on quality is that the informed party (the producer) signals its private
information by adopting a behavior (the launching of a brand name) that, properly
interpreted, reveals their information to the non informed party (the consumer). In this
particular case, signaling involves committing the quasi-rent from his reputational capital in
every exchange8. In this sense, the producer must first create that reputation in order to be
able to use it later. For that purpose, he must offer high quality in repeat transactions. Only
in that way, after repeated purchases of experimented or confidence goods will consumers
gradually realize that the quality offered is suitable and consistent with the passing of time,
being confident that they will not be deceived. In exchange for that superior quality,
consumers are willing to gradually pay a price increase or premium with regard to other
products that do not offer these guarantees.

7 See Crosby (1979, p.15)
4
In perfect competitive markets, this premium represents the normal profitability of
the investment made by the company in its reputational capital, and will depend on the
problems it resolves for the consumer. Thus, it is probable that the consumer negatively
values both a low average quality of the products and a high deviation of products from that
mean (a purchaser cannot be sure about what he is buying). Thus, a high average quality
would imply that the consumer is willing to pay a positive “quality premium”, whereas the
possibility of a high deviation would give rise to a negative “heterogeneity premium” (see
Table 1).
Table 1: Quality Premiums in Agrifood Products
SUBJECTIVE QUALITY (ORGANOLEPTIC ATTRIBUTES)
SUPERIOR STANDARD
Ideal situation: “quality premium” No “quality premium” but no “heterogeneity
High
without “heterogeneity premium” premium” either.
Objective Quality
(homogeneity)
“Quality premium” with The worst situation: no “quality premium” with
Low
“heterogeneity premium” “heterogeneity premium”

The combination of quality premiums, the specificity of reputational capital and
repeated transactions make the producer’s signaling credible. Consumers know (and
producers subtly make them see it) that if they are deceived, the present value of the
company’s reputational capital decreases because its future transactions would be
compromised if the customers do not trust them. The business of the producer is not to
take advantage in a short-run, but to obtain “normal” profits from his investments from
many long-run exchanges. In other words, the company would lose the value of its quasi-
rent generated from the investment made to create its reputation.

8 See Klein and Leffler (1981) and Shapiro (1983)
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2.2. Creation of a Reputation and Brand Types.
The creation of a reputation, like many other investments, presents certain
economies of scale. Therefore, producers and their brands must reach certain dimensions to
achieve a return on this situation. The possibilities that producers consider are basically
three:
a) Business Concentration. A company reaches the size necessary to launch a brand
with some success guarantee due to its growth, the takeover of another company or
a merger with other producers. In the field of agrifood products, it is frequent that
the distribution companies, usually the larger ones, launch their own brands,
guaranteeing product quality themselves. This is a solution that attempts to take
advantage of scope economies as regards the distributor’s name (for example:
Hipercor or Carrefour).
b) Hybrid Solution. A group of entrepreneurs come together under some kind of
association or cooperative to produce all those activities subject to economies of
scale, such as brand usage. The final result is similar to the previous one: a private
brand that guarantees consumers the product quality. The difference lies in the
collective ownership of that brand.
c) Guarantee by a Third Party. A prestigious company or institution is hired to
guarantee consumers the quality of the product. The solution can be public or
private. The first takes place when a company markets its product sheltered by the
prestige of some geographical name using its inputs or production process. In these
cases, a public or semipublic organization frequently guarantees the quality of all
the producers who use that name, establishing a control process of the producers
and/or distributors of a specific guaranteed brand or guaranteed quality. The private
solution involves using the name or brand of a third company (usually a certifying
entity), which guarantees consumers or customers that the products of a particular
company really have an appropriate quality level.
These three solutions are not mutually exclusive. This means that an individual
producer can use his own brand together with that of a cooperative, a guaranteed brand or
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denomination of origin and a quality certificate. Therefore, the consumer can receive three
types of quality signs. Firstly, a private brand is normally received from the producer or
distributor, whether individual or collective in nature, to which another can be added or not,
based on a public guarantee of quality, such as a PDO or a PGI. Finally, quality certificates
have always complemented one of the other two. There are no cases of products having
only this type of quality sign. Our study focuses, therefore, on the first two signs of quality
or brands, which are the only ones that can exclusively accompany a product.
2.3. Brand Specialization and Complementarities
The question one can raise from the coexistence of various types of brands for the
same product is its economic rationality. We could consider the redundancy of investments
made by the owners in those brands, missing out on the possibility of taking advantage of
the economies of scale that could potentially exist. In fact, among the more important
benefits of the so called “brand extension” —i.e., when an established brand name is used
to introduce a new product— against the decision to launch a new brand are the lower cost
to build-up its awareness, the lower cost to achieve the target trial levels and
communication efficiencies.9 Consequently, why do we observe several brands for the
same product?
The first hypothesis is that the different brands we observe are complementary in
assuring quality and, therefore, are not redundant. On the contrary, an investment in one of
the brands increases the value of the others. Then, following many other works, we use the
term “complementarity” not only in its traditional sense of a relation between pairs of
inputs, but also in a broader sense as a relation among groups of activities.10 The reason for
this complementary feature lies in the specialization of functions, which gives rise to an
ideal assignment of property rights between geographical indicators and private brands and
makes up for the potential advantages of using only one brand.

9 See Keller (1998, p. 455) and Ambler and Styles (1997, p. 224) and several empirical studies quoted there.
10 See Milgrom and Roberts (1990, and 1995) and Milgrom, Qian and Roberts (1991).
7
Although the use of a geographical name as a brand name of a specific producer
could seem interesting, it is highly problematic. The benefit is that the producer takes
advantage of the historical reputation and awareness of that name. However, any other
producer can also use the same geographical name because its property rights remain in the
public domain. This rises the risk of expropriation of any producer’s investment in
improving the reputation capital of the geographical name. Consequently, no producer
would invest under this situation, even on new brand names based on the geographical
name. These additional investments are specific to the continuity of the geographical
indicator on which they are based and, therefore, can be expropriated if the reference brand
is not protected.. The creation of a new and independent legal entity (a guaranteed brand or
a denomination of quality) can be seen as a defense on the part of the producers who use
that brand as the basis of their own reputation. On the one hand, they are interested in
creating an institution that enforces them in case they do not abide by the quality standards.
Thus, the value of the geographic name is guaranteed from damage and the investments of
the producers cannot be expropriated freely. This problem does not exist for products that
are marketed only under a private brand, which is not generally allowed to use any
geographical reference in its name. By using a particular name, their investments in
developing their reputational capital are specific only to the customers and do not usually
run any real risk for a company that does not have opportunistic practices.
On the other hand, producers are also interested in separating the control from the
management of the geographical indicator, specializing both functions. On this subject,
Fama and Jensen (1983) claim the existence of a division between the agents in charge of
the control aspects and those in charge of management aspects is ideal, showing the success
of the division between ownership and control in open corporations. Thus, the decision
makers will be in charge of generating different procedure alternatives and of putting those
that have been approved into practice. However, the decision controllers will be in charge
of choosing from among the available alternatives, and of evaluating the results of the
decision. The advantage of this division of functions is to avoid the opportunism derived
from an agency relationship: managers are monitored by decision controllers and decision
controllers are motivated because they own the residual income.
8
The new legal entity (a guaranteed brand or a denomination of quality) would play
the role of decision controllers, whereas private brands adhering to it would be equivalent
to managers. Thus, the owners (mainly a local government) would monitor that the private
producers did not expropriate the investments have been made historically the producers of
an area in the reputational capital of a particular geographical name or indicator.
Individually, producers would be interested in doing so because they would not have to
totally sustain the cost of their decisions. For example, when selling under the same
geographical name, if a private brand lowers the quality of its product, it would totally
benefit from the cost savings. The negative consequences, however, would be shared
among all the producers who used that geographical name.
2.4. Specialization and Contract Design
The second hypothesis in our paper argues that the specialization of brands in
solving one kind of informational asymmetry about quality or another (average level or
heterogeneity) affects the mechanisms of governance selected and the contract design.
Brands that place more emphasis on the homogeneity of the product present governance
mechanisms similar to hierarchies. Conversely, those that attempt to guarantee a high level
of average organoleptic characteristics are more likely to be based on the market. The
theoretical explanation is based on the fact that some governance mechanisms are more
appropriate for solving coordination problems (hierarchies) while others are for solving
motivation problems (markets). First, when the aim is to obtain a homogeneous product,
the most important aspect is to achieve a correct relationship between all the inputs, even
more than having a perfectly designed product or the existence of small local imbalances in
the inputs. For this kind of decision where the main problem is the correct synchronization
of activity and resource designations, the Transaction Cost Theory anticipates that it is
more expensive to coordinate activities through the market than through a hierarchy or by
planning11. The reason is that setting prices among the different parties would be expensive
and slow. On the one hand, probably the best information about coordination is available

11 See Milgrom and Roberts (1992, p. 91-92).
9