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Regime Switching and Oligopsony Power: The Case of U.S. Beef Processing

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  • Cai, Xiaowei
  • Stiegert, Kyle W.
  • Coonz, Steven R.

Abstract

In this article, we estimate a Green and Porter (GP 1984) trigger pricing model to analyze weekly marketing margin data for the U.S. beef packing industry from 1992-2000. Oligopsonists are hypothesized to follow a discontinuous pricing strategy in equilibrium, and we focus on shocks in the normal throughput of supply as a potential catalyst for regime switching between cooperative and noncooperative phases. We use an algorithm developed by Bellone (2005) that relies on Hamilton's (1989) multivariate first-order Markov process to test for the cooperative/noncooperative switching behavior. We find strong evidence that links switching conduct by packers to disruptions in coordinating the derived demands for processed beef with the supply of live cattle. Once switched, cooperative regimes lasted an average of 21 weeks, while noncooperative regimes averaged 33 weeks. The average marketing margin for processed beef was 66% higher in the cooperative regimes compared to the noncooperative regimes. This implies an annual average increase in profits of 491 million dollars to the beef packing industry.

Suggested Citation

  • Cai, Xiaowei & Stiegert, Kyle W. & Coonz, Steven R., 2010. "Regime Switching and Oligopsony Power: The Case of U.S. Beef Processing," Working Papers 201442, University of Wisconsin-Madison, Department of Agricultural and Applied Economics, Food System Research Group.
    • Handle: RePEc:ags:uwfswp:201442
    DOI: 10.22004/ag.econ.201442
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    References listed on IDEAS

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    1. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
    2. Richard J. Sexton, 2000. "Industrialization and Consolidation in the U.S. Food Sector: Implications for Competition and Welfare," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(5), pages 1087-1104.
    3. Whinston, Michael D., 2007. "Antitrust Policy toward Horizontal Mergers," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 36, pages 2369-2440, Elsevier.
    4. Stephen R. Koontz & Philip Garcia & Michael A. Hudson, 1993. "Meatpacker Conduct in Fed Cattle Pricing: An Investigation of Oligopsony Power," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(3), pages 537-548.
    5. Kyle W. Stiegert & Azzeddine Azzam & B. Wade Brorsen, 1993. "Markdown Pricing and Cattle Supply in the Beef Packing Industry," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(3), pages 549-558.
    6. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    7. Benoit Bellone, 2004. "MSVARlib: a new Gauss library to estimate multivariate Hidden Markov Models," Econometrics 0406004, University Library of Munich, Germany.
    8. Koontz, Stephen R. & Garcia, Philip, 1997. "Meat-Packer Conduct In Fed Cattle Pricing: Multiple-Market Oligopsony Power," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 22(1), pages 1-17, July.
    9. Benoit Bellone, 2005. "Classical Estimation of Multivariate Markov-Switching Models using MSVARlib," Econometrics 0508017, University Library of Munich, Germany.
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    Cited by:

    1. Dimitrios Panagiotou & Athanassios Stavrakoudis, 2018. "A stochastic frontier estimator of the aggregate degree of market power exerted by the US meat packing industry," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 45(3), pages 387-401, September.
    2. Xiaowei Cai & Kyle W. Stiegert, 2013. "Economic analysis of the US fluid milk industry," Applied Economics Letters, Taylor & Francis Journals, vol. 20(10), pages 971-977, July.
    3. Tian Xia & John M. Crespi & Kevin C. Dhuyvetter, 2019. "Could packers manipulate spot markets by tying contracts to futures prices? And do they?," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 67(1), pages 85-102, March.
    4. Stavrakoudis, Athanassios & Panagiotou, Dimitrios, 2016. "A stochastic frontier estimator of the aggregate degree of market power exerted by the U.S. beef and pork packing industries," MPRA Paper 75997, University Library of Munich, Germany.
    5. Dimitrios Panagiotou & Athanassios Stavrakoudis, 2017. "A Stochastic Production Frontier Estimator of the Degree of Oligopsony Power in the U.S. Cattle Industry," Journal of Industry, Competition and Trade, Springer, vol. 17(1), pages 121-133, March.
    6. Joseph, Kishore & Garcia, Philip & Peterson, Paul E., 2016. "Does the Boxed Beef Price Inform the Live Cattle Futures Price?," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 236166, Agricultural and Applied Economics Association.
    7. Ryo Sakamoto & Kyle Stiegert, 2018. "Comparing competitive toughness to benchmark outcomes in retail oligopoly pricing," Agribusiness, John Wiley & Sons, Ltd., vol. 34(1), pages 44-60, December.
    8. Melissa G.S. McKendree & Tina L. Saitone & K. Aleks Schaefer, 2021. "Oligopsonistic Input Substitution in a Thin Market," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(4), pages 1414-1432, August.
    9. Leslie J. Verteramo Chiu & Loren W. Tauer & Yrjo T. Gröhn, 2022. "Pricing efficiency in livestock auction markets: A two‐tier frontier approach," Agricultural Economics, International Association of Agricultural Economists, vol. 53(S1), pages 139-151, November.

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