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Estimation of Cost Pass Through to Michigan Consumers in the ADM Price Fixing Case

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  • Ronald W. Cotterill
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    Abstract

    This report analyzes the economic impact of price fixing in the wet corn milling industry on consumers in the State of Michigan. Two of the companies who produce citric acid have pleaded guilty to fixing its price. In this report we assume that price fixing also occurred among HFCS producers. Given the structure of the corn wet milling industry and the direct purchaser industries, the overcharge is essentially uniform across buyers and selling arrangements. We develop an actual economic model of price transmission based upon the three facts: 1) The overcharge as a percent of the processed product value at wholesale and at retail is small, 2) Fixed proportion technology, and 3) consumers have imperfect information about prices so a small price change has no effect on their purchase behavior. These facts establish that 100 percent or more of the common overcharge will be passed through to consumers. In a more general economic model, we analyze pass through when consumer demand is not perfectly inelastic. For different strategies (profit maximization, sales maximization subject to a target level of profit, and loss leader strategies) and for different market structures (competitive, monopoly, oligopoly), the rate of pass through is 100 percent or greater given certain documented characteristics of the industries in this case. Given the prior points consumer damages are the common overcharges for each commodity times the amount of the commodity sold during the damage period. This is a lower bound estimate of consumer damages because pass through may well be greater than 100%.

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    File URL: http://fmpc.uconn.edu/publications/rr/rr39.pdf
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    Bibliographic Info

    Paper provided by University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy in its series Food Marketing Policy Center Research Reports with number 039.

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    Date of creation: 1998
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    Handle: RePEc:zwi:fpcrep:039

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    Related research

    Keywords: price fixing; overcharge; cost pass through; fixed proportion production technology; flexible demand specifications; competitive structure; Agribusiness; Crop Production/Industries; Demand and Price Analysis;

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