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

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  • Cotterill, Ronald W.

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%.

Suggested Citation

  • Cotterill, Ronald W., 1998. "Estimation of Cost Pass Through to Michigan Consumers in the ADM Price Fixing Case," Research Reports 25148, University of Connecticut, Food Marketing Policy Center.
  • Handle: RePEc:ags:uconnr:25148
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    References listed on IDEAS

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    1. repec:adr:anecst:y:1994:i:34 is not listed on IDEAS
    2. Gerstner, Eitan & Hess, James D, 1991. "A Theory of Channel Price Promotions," American Economic Review, American Economic Association, vol. 81(4), pages 872-886, September.
    3. Jerry Hausman & Gregory Leonard & J. Douglas Zona, 1994. "Competitive Analysis with Differentiated Products," Annals of Economics and Statistics, GENES, issue 34, pages 143-157.
    4. Cotterill, Ronald W. & Franklin, Andrew W. & Ma, Li Yu, 1996. "Measuring Market Power Effects in Differentiated Product Industries: An Application to the Soft Drink Industry," Research Reports 25229, University of Connecticut, Food Marketing Policy Center.
    5. Hay, George A & Kelley, Daniel, 1974. "An Empirical Survey of Price Fixing Conspiracies," Journal of Law and Economics, University of Chicago Press, vol. 17(1), pages 13-38, April.
    6. Cotterill, Ronald W, 1986. "Market Power in the Retail Food Industry: Evidence from Vermont," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 379-386, August.
    7. Fraas, Arthur G & Greer, Douglas F, 1977. "Market Structure and Price Collusion: An Empirical Analysis," Journal of Industrial Economics, Wiley Blackwell, vol. 26(1), pages 21-44, September.
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    Cited by:

    1. Ronald Cotterill & Leonard Egan & William Buckhold, 2001. "Beyond Illinois Brick: The Law and Economics of Cost Pass-Through in the ADM Price Fixing Case," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 18(1), pages 45-52, February.
    2. Ronald W. Cotterill, 2001. "Neoclassical explanations of vertical organization and performance of food Industries," Agribusiness, John Wiley & Sons, Ltd., vol. 17(1), pages 33-57.
    3. William P. Putsis, 1999. "Empirical analysis of competitive interaction in food product categories," Agribusiness, John Wiley & Sons, Ltd., vol. 15(3), pages 295-311.
    4. Cotterill, Ronald W., 2005. "Antitrust Analysis of Supermarket Retailing: Common Global Concerns that Play Out in Local Markets," Research Reports 25184, University of Connecticut, Food Marketing Policy Center.
    5. Ronald W. Cotterill, 2010. "Antitrust economic analysis in food marketing channels: a global perspective," Agricultural Economics, International Association of Agricultural Economists, vol. 41(s1), pages 83-91, November.
    6. Anonymous, 2005. "Antitrust Analysis of Supermarket Retailing: Common Global Concerns that Play Out in Local Markets," 2005 Conference (49th), February 9-11, 2005, Coff's Harbour, Australia 137831, Australian Agricultural and Resource Economics Society.
    7. Putsis, William P., Jr., 1998. "Empirical Analysis of Competitive Interaction in Food Product Categories," Research Reports 25221, University of Connecticut, Food Marketing Policy Center.

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