Vertically related chains are characterised by the fact that upstream and downstream firms sell the same amount of output. Coca-Cola does not sell more than its distributors do. This characteristic causes vertical externalities. The health and safety measures performed in one link raise output and profits in other links as well. Since self-interested companies do not take these positive externalities into account, there is a tendency to underinvest in health and safety efforts from the chain's point of view (apart from the consumer's point of view).

The tendency to underinvest in health and safety measures may be overcome by quality arrangements between vertically related companies. However, whenever companies are able to shirk, quality arrangements are not uphold. Shirking is possible when monitoring occurs infrequently due to monitoring costs or when bad performance may be blamed on other factors, such a the weather, the quality of catches or the state of consumer demand. When bad performance may be successfully imputed to other factors, quality arrangements cannot be uphold before court, which reduces their impact to nil.

Vertical externalities may be overcome by (combinations of) coordination devices such as multi part tariffs, resale price maintenance, quantity forcing or even vertical integration. Given their positive impact on health and safety measures, these devices should be evaluated benevolently from an antitrust perspective. Take a simple franchise arrangement between an upstream manufacturer and a downstream retailer in which a wholesale price and a franchise fee are specified. This arrangement is able to raise both upstream and downstream profits above the levels obtained when only the wholesale price is specified. A decrease in the wholesale price increases the incentives to invest in health and safety downstream which is related to the downstream profit margin. Chain (and downstream) profits rise with the increase in health and safety measures. The upstream manufacturer may capture part of the increase in chain profits through the franchise fee.

Coordination devices such as multipart tariffs change the incentive structure in the chain. This may foster health and safety efforts in other links and hereby chain output and profits. Firms which are harmed at first sight - by an adverse change in the wholesale price e.g. - benefit through the increase in output or the introduction of additional tariffs such as a franchise fee.

The incentives of both cooperative and non-cooperative companies depend on market structure characteristics. These characteristics determine the company's and the chain's profit margin. The profit margin determines the profitability of health and safety measures. The profit margin and health and safety efforts are high when the price elasticity of demand is low, industry concentration is high and returns to scale are increasing. We expect product health and safety to be high in links and chains satisfying these conditions. Dutch experience accords with these predictions: HACCP is first introduced and implemented in concentrated industries characterised by economies of scale.

Policy makers should be aware that health and safety efforts are low when industries and chains are competitive, especially when perceived quality depends on the general quality level in an industry. Coordination is necessary in competitive industries and less so in concentrated industries. The usual antitrust considerations apply to the latter industries. Food industry managers should realise that they may manipulate the incentives to invest in health and safety in other links by coordination devices such as franchise agreements. They may also decide to finance the necessary investments themselves.

HACCP hardly takes account of vertical interrelations. HACCP is performed at the firm level. The above summary and the adjoined paper show that important improvements in health and safety may be expected when vertical coordination is intensified. HACCP may be used in order to accommodate vertical cooperation. Quality arrangements between vertically related firms may be combined with HACCP requirements. HACCP certificators may act as monitor for vertically related firms. The monitoring system may also be used by vertically related firms if further monitoring is necessary. The HACCP concept may even be extended to food chains.

We end with a discussion of the relationship between Dutch food law, HACCP and Good Manufacturing Practices (Hygiene Codes). HACCP requires relatively large efforts at the company level compared with Hygiene Codes. Hygiene Codes are drafted by industry organisations and, not surprisingly, reflect economic viability more than health and safety demands. The presence of a cheap alternative may inhibit the introduction of a more far reaching system such as HACCP at a large scale. The Dutch Ministries of Health, Economic Affairs and Agriculture should be aware that the cheap alternative offered by Hygiene Codes may indeed lead to a low overall level of health and safety efforts. This indeed happens if firms stick to the lowest certification level indicating safety. This may also have trade implications when one considers the wide availability of Hygiene Codes in the Netherlands compared to other West-European countries. When there is tight vertical coordination in food chains, the benefits of health and safety efforts in other links are taken into account as well. Since additional benefits are taken into account, more health and safety measures are taken, one of which is the introduction of HACCP. In this way, chain performance is fostered. For this reason, we strongly advise policy makers to foster vertical coordination.

Considering the vertical externalities between agricultural production and the other links in food chains, the division of responsibilities between the Dutch Ministries of Health and Agriculture with respect to food safety is not likely to be favourable. The Ministry of Agriculture, in particular, is heavily focused on the economic viability of Dutch Agriculture. The negative externalities arising from this attitude for the Dutch food processing and trading industries as well as for Dutch consumers are not her prime concern. The integration of the Commodity Act and the Agriculture Quality Act under the responsibility of the Health Ministry would probably be a major improvement from the food chains' perspectives, since this might break down the particularist view of the agricultural sector. This attitude has, for instance, plagued the Dutch pork chain.

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