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Strategic Trade Policies in the U.S. Orange Juice Market: Competition between Florida and São Paulo

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  • Luckstead, Jeff
  • Devadoss, Stephen
  • Mittelhammer, Ron C.

Abstract

The U.S. frozen concentrated orange juice (FCOJ) market is dominated by a small number of processors in Florida and São Paulo (Brazil), while the European FCOJ market is dominated by São Paulo FCOJ processors. Both the U.S. and European governments impose a tariff on FCOJ imports. We develop a strategic trade model to analyze the oligopolistic competition between Florida and São Paulo processors in the U.S. FCOJ market and São Paulo processors in the European FCOJ market. We analyze the effect of a change in the U.S. and European tariff on FCOJ sales and welfare. The analytical results show that a reduction in the U.S. tariff increases São Paulo's exports to the United States while decreasing their exports to Europe, which causes a decrease in Florida's sales in the United States. The results of a reduction in the European tariff indicate that São Paulo diverts its exports from the United Sates to Europe, which augments Florida's sales in the United States. Based on the strategic trade model, the structural empirical model is derived and the New Empirical Industrial Organization literature is implemented to estimate the econometric model and compute the market power of Florida and São Paulo producers. The Lerner Index calculation suggests that both Florida and São Paulo processors exert market power, but São Paulo have a higher markup over their marginal costs because of lower input costs. The parameterized model is used to simulate a 25% reduction in both the U.S. and European tariffs. A 25% reduction in the U.S. tariff results in an 8% decrease in Florida's market share and a 27% increase in São Paulo's market share in the U.S. FCOJ market. While a 25% reduction in the European tariff causes Florida's U.S. market share to increase by 2% and São Paulo's U.S. market share to reduce by 6%. The simulation results are consistent with the analytical results.

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Bibliographic Info

Paper provided by Agricultural and Applied Economics Association in its series 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. with number 149668.

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Date of creation: Aug 2013
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Handle: RePEc:ags:aaea13:149668

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Related research

Keywords: strategic trade policy; NEIO; market power; FCOJ; Agricultural and Food Policy; Industrial Organization; International Relations/Trade; F12; F13; L13;

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  1. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
  2. Nathalie Lavoie, 2005. "Price Discrimination in the Context of Vertical Differentiation: An Application to Canadian Wheat Exports," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(4), pages 835-854.
  3. Spreen, Thomas H. & Brewster, Charlene & Brown, Mark G., 2003. "The Free Trade Area of the Americas and the Market for Processed Orange Products," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 35(01), April.
  4. Wang, Honglin & Xiang, Qing & Reardon, Thomas, 2006. "Market Power and Supply Shocks: Evidence from the Orange Juice Market," Staff Papers 11508, Michigan State University, Department of Agricultural, Food, and Resource Economics.
  5. Brown, Mark G. & Spreen, Thomas H. & Lee, Jonq-Ying, 2004. "Impacts On U.S. Prices Of Reducing Orange Juice Tariffs In Major World Markets," Journal of Food Distribution Research, Food Distribution Research Society, vol. 35(02), July.
  6. Davis, Andrew & Gunderson, Michael A. & Brown, Mark G. & House, Lisa, 2008. "The Effect Demographics Have On The Demand For Orange Juice," 2008 Annual Meeting, February 2-6, 2008, Dallas, Texas 6794, Southern Agricultural Economics Association.
  7. Brown, Mark G., 2010. "European Demand for Orange Juice," Research Papers 2010 104349, Florida Department of Citrus.
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