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Oligopsony Power: Evidence from the U.S. Beef Packing Industry

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  • Cai, Xiaowei
  • Stiegert, Kyle W.
  • Koontz, Stephen R.

Abstract

Based on Green and Porter's (GP) noncooperative game theoretic model, oligopsonists are hypothesized to follow a discontinuous pricing strategy in equilibrium. The model allows for low procurement prices during cooperative phases and high procurement prices (i.e. aggressive purchasing) during noncooperative phases. In this paper, the GP model is applied to the U.S. beef packing industry. Anecdotal evidence of beef packer margins and relevant processing costs suggest part of the margin variability could be attributed breakdowns and returns to cooperative phases. To operationalize the GP framework, we applied Hamilton's regime switching model assuming first order Markov process to test for the cooperative/noncooperative behavior of beef packers in three main fed cattle markets in the central United States and the whole U.S. market. We found that the evidence of cooperative/noncooperative conduct among the beef packers is present in all the markets examined, but the conduct varies across markets.

Suggested Citation

  • Cai, Xiaowei & Stiegert, Kyle W. & Koontz, Stephen R., 2009. "Oligopsony Power: Evidence from the U.S. Beef Packing Industry," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49364, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea09:49364
    DOI: 10.22004/ag.econ.49364
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    File URL: http://ageconsearch.umn.edu/record/49364/files/613372-3.pdf
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    References listed on IDEAS

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    1. MacDonald, James M. & McBride, William D., 2009. "The Transformation of U.S. Livestock Agriculture: Scale, Efficiency, and Risks," Economic Information Bulletin 58311, United States Department of Agriculture, Economic Research Service.
    2. Schroeter, John R, 1988. "Estimating the Degree of Market Power in the Beef Packing Industry," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 158-162, February.
    3. Azzam, Azzeddine M. & Schroeter, John R., 1991. "Implications Of Increased Regional Concentration And Oligopsonistic Coordination In The Beef Packing Industry," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 16(2), pages 1-8, December.
    4. Azzam, Azzeddine M, 1997. "Measuring Market Power and Cost-Efficiency Effects of Industrial Concentration," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 377-386, December.
    5. 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.
    6. Schroeter, John R. & Azzam, Azzeddine M., 1990. "Measuring Market Power in Multi-Product Oligopolies: The U.S. Meat Industry," Staff General Research Papers Archive 11112, Iowa State University, Department of Economics.
    7. James M. MacDonald & Michael E. Ollinger, 2005. "Technology, Labor Wars, and Producer Dynamics: Explaining Consolidation in Beefpacking," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(4), pages 1020-1033.
    8. Schroeter, John R. & Azzam, Azzeddine M., 1999. "Econometric Analysis of Fed Cattle Procurement in the Texas Panhandle," Staff General Research Papers Archive 11365, Iowa State University, Department of Economics.
    9. 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.
    10. A. M. Azzam & E. Pagoulatos, 1990. "Testing Oligopolistic And Oligopsonistic Behaviour: An Application To The Us Meatā€Packing Industry," Journal of Agricultural Economics, Wiley Blackwell, vol. 41(3), pages 362-370, September.
    11. Azzeddine M. Azzam & John R. Schroeter, 1995. "The Tradeoff between Oligopsony Power and Cost Efficiency in Horizontal Consolidation: An Example from Beef Packing," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(4), pages 825-836.
    12. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
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    Cited by:

    1. 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.
    2. Panagiotou, Dimitrios & Stavrakoudis, Athanassios, 2017. "Vertical price relationships between different cuts and quality grades in the U.S. beef marketing channel: A wholesale-retail analysis," The Journal of Economic Asymmetries, Elsevier, vol. 16(C), pages 53-63.

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