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Oligopoly Power in the Food Industries Revisited: A Stochastic Frontier Approach

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  • Lopez, Rigoberto A.
  • Zheng, Hualu
  • Azzam, Azzeddine

Abstract

Since the late 1980s, the analysis of market power in the food industries has shifted from analyzing market concentration (structure) towards empirically measuring how far a market diverges from perfect competition (conduct). The New Empirical Industrial Organization (NEIO; usually offspring of the work of Appelbaum, 1982, or Bresnahan, 1982) has dominated the food economics literature on market power in the past 25 years (see Kaiser and Suzuki, 2006, for a summary of NEIO applications to food industries) and continues to do so (Cakir and Balagtas, 2012; Hovhannisyan and Gould, 2012; Cleary and Lopez, 2014). NEIO studies, in general, find a significant degree of oligopoly power in the food industries (Bhuyan and Lopez, 1997; Lopez, Azzam and Liron, 2002; Sheldon and Sperling, 2003). This study estimates mark-ups and oligopoly power for U.S. food industries using a stochastic frontier (SF; Kumbhakar, Baardsen and Lien, 2012; Baraigi and Azzam, 2014) approach, where mark-ups are treated as systematic deviations from a marginal cost pricing frontier. We apply the analysis to 36 U.S. food industries using NBER-CES Manufacturing Industry Database (2014), which covers a span of 31 years from 1979 to 2009. Empirical results show that all the food industries in the sample exercise at least some degree of oligopoly power, but most in a moderate manner. The estimated mean Lerner index is approximately 0.06, generally much lower than obtained using the conventional NEIO approaches. The SF model used provides a novel and promising framework to test and measure the degree of market power in agricultural and food markets.

Suggested Citation

  • Lopez, Rigoberto A. & Zheng, Hualu & Azzam, Azzeddine, 2015. "Oligopoly Power in the Food Industries Revisited: A Stochastic Frontier Approach," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205113, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea15:205113
    DOI: 10.22004/ag.econ.205113
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    References listed on IDEAS

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    1. Metin Cakir & Joseph V. Balagtas, 2012. "Estimating Market Power of U.S. Dairy Cooperatives in the Fluid Milk Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(3), pages 647-658.
    2. A. M. Azzam & E. Pagoulatos, 1990. "Testing Oligopolistic And Oligopsonistic Behaviour: An Application To The Us Meat‐Packing Industry," Journal of Agricultural Economics, Wiley Blackwell, vol. 41(3), pages 362-370, September.
    3. 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.
    4. Subir Bairagi & Azzeddine Azzam, 2014. "Does the Grameen Bank exert market power over borrowers?," Applied Economics Letters, Taylor & Francis Journals, vol. 21(12), pages 866-869, August.
    5. Subal Kumbhakar & Sjur Baardsen & Gudbrand Lien, 2012. "A New Method for Estimating Market Power with an Application to Norwegian Sawmilling," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(2), pages 109-129, March.
    6. Bresnahan, Timothy F., 1982. "The oligopoly solution concept is identified," Economics Letters, Elsevier, vol. 10(1-2), pages 87-92.
    7. Sanjib Bhuyan & Rigoberto A. Lopez, 1997. "Oligopoly Power in the Food and Tobacco Industries," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1035-1043.
    8. Vardges Hovhannisyan & Brian W. Gould, 2012. "A Structural Model of the Analysis of Retail Market Power: The Case of Fluid Milk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(1), pages 67-79.
    9. Rigoberto Lopez & Azzeddine Azzam & Carmen Lirón-España, 2002. "Market Power and/or Efficiency: A Structural Approach," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 20(2), pages 115-126, March.
    10. Appelbaum, Elie, 1982. "The estimation of the degree of oligopoly power," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 287-299, August.
    11. Greene, William, 2005. "Reconsidering heterogeneity in panel data estimators of the stochastic frontier model," Journal of Econometrics, Elsevier, vol. 126(2), pages 269-303, June.
    12. Ian Sheldon & Richard Sperling, 2003. "Estimating the Extent of Imperfect Competition in the Food Industry: What Have We Learned?," Journal of Agricultural Economics, Wiley Blackwell, vol. 54(1), pages 89-109, March.
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    Cited by:

    1. Nguyen Thi Tuoi & Nguyen Phu Son & Pham Le Thong, 2021. "Estimating the Market Power of Traders in the Arabica Coffee Value Chain in Lam Dong, Vietnam," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 7(3), pages 102-108, 09-2021.
    2. Rahman, Mohammad Chhiddikur, 2020. "Welfare Impact of Asymmetric Price Transmission on Bangladesh Rice Consumers," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 242248, October.
    3. 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.
    4. Dimitrios Panagiotou, 2019. "Market Power Effects of the Livestock Mandatory Reporting Act in the U.S. Meat Industry: a Stochastic Frontier Approach Under Uncertainty," Journal of Industry, Competition and Trade, Springer, vol. 19(1), pages 103-122, March.
    5. Rahman, Mohammad Chhiddikur, 2018. "Welfare Impact of Asymmetric Price Transmission on Bangladesh Rice Consumers," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 251114, October.
    6. 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.

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    More about this item

    Keywords

    Agricultural and Food Policy; Industrial Organization;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness

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