Empirical Analysis of Potential Oligopsony Power and Production Technology in the Ukrainian Milk Processing Industry under Conditions of Economic Transition

The objective of this study is to provide an empirical analysis of potential market power of the Ukrainian milk processing industry in the market for raw milk. The article is based on the New Empirical Industrial Organization (NEIO) approach and pays special attention to the production technology of the sector. In NEIO studies of market power in the food processing industry the production technology is typically assumed to be of a neoclassical type with simple properties like, e.g., constant returns to scale. Properties of this kind, however, are likely not to prevail in most transition countries of Eastern Europe because of serious distortions in factor usage mainly due to institutional deficiencies. Therefore, the analysis of this study is based on the more general representation of the production technology by a translog production function. The econometric model used to measure the degree of oligopsony power of the Ukrainian milk processing industry is estimated on the basis of monthly data. The model did not produce any evidence suggesting the exercise of market power by the milk processing industry in the estimation period from January 1996 to December 2003. This empirical result is consistent with the low operating rate of the Ukrainian milk processing industry and relatively small concentration ratio at the national level. However, it may be appropriate to conduct similar analyses on a regional level, since the concentration of milk processing plants and the structure of agricultural farms in the regions of Ukraine are quite different.