Sustainability Standards and the Reorganization of Private Label Supply Chains: A Transaction Cost Perspective

Private standards are among the main measures that can be implemented to differentiate food production. Retailers have been particularly active in setting food safety and quality systems for the development of their private labels. The purpose of this paper is to identify the effects of introducing measures that guarantee the environmental sustainability of food production on vertical dyadic relations. We focus our attention on the adoption of integrated pest management (IPM) systems that are designed by retailers to support private label products, with the aim of studying how these systems affect the governance structure of transactions between retailer and farmer/processor. Transaction cost analysis is used as theoretical framework to assess changes in vertical coordination after the adoption of an IPM system. Four case studies related to food retailers in Italy were analyzed to identify changes in transaction characteristics, costs, and governance that are related to the adoption of this system. The results show that the introduction of an IPM system leads to an increase of transaction asset specificity (i.e., especially of human and material asset specificity) among the agents of the supply chain, and a decrease of the degree of transaction uncertainty. The variations in transaction characteristics determine changes in transaction costs. These changes lead to new hybrid forms of transaction governance, namely dyadic contracts, and a centralized organization of vertical relationships.